SCIE New Financing

Brian Marckx, CFA

Recent Financing
In an 8-K filing this morning (1/31/12) SpectraScience (SCIE) announced that they sold $600k ($570k gross adjusted for the discount) principal amount of 5% OID convertibles, due July 2012. The bonds are convertible at $0.0573 per share. Buyers of the bonds also received five-year warrants to buy up to 50% of the number of shares issuable upon conversion of the bonds at $0.0745 per share. Net proceeds of the sale were not disclosed – we ballpark ~$550k. Along with being issued at a 5% discount, the bonds pay annual interest of 20% upon any voluntary conversion to equity and at maturity – SpectraScience has the option of paying interest in cash or stock.

As of their most recent reporting period (9/30/2011) SpectraScience had $1.38 million in cash and equivalents. Cash used in operations was $1.04 million and $2.23 million through the three and nine months ending 9/30/2011. At this burn rate, the company had enough cash to operate for approximately 4 months. We, however, anticipate the cash burn rate to continue to increase in the near-term as SpectraScience ramps up production, manufacturing and other activities related to the European launch.

This new short-term financing gives the company only a minimal amount of additional breathing room before they will need to raise additional cash. On their November 2011 business update call the company noted that they were evaluating financing options and that their plan may involve a short-term bridge-type financing (i.e. – loan) for ~ $1MM – $1.5MM (within the next few months), followed by an additional $4.5MM – $5MM – which management hopes to have in place by mid-2012 and would potentially come from the sale of equity or debt. We expect the company continues to look for a more substantial capital raise in the near future.

European Launch
On January 3rd the company announced that during December 2011 they had begun shipments of WavSTAT 4 to European distributors. This initial launch, as we expected, is through a select number of small distributors and is not anticipated to result in significant sales (at least in the near-term). Nonetheless it is meaningful, especially given that these small distributors likely do not have the financial resources (or desire) to carry inventory – meaning they already have a buyer on the other end – i.e. – there is pull-through demand for WavSTAT 4. SpectraScience’s game plan remains to continue to bring on additional distributors – and once they can show more meaningful demand, hopefully sign a deal with a bigger organization with more substantial reach.

Maintaining Outlook, Recommendation, Price Target
Our outlook, Outperform rating and $0.40/share price target all remain intact.

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