SCIE SpectraScience Inc (CE)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

Commission file number 0-13092

 

SPECTRASCIENCE, INC.

 

(Exact name of registrant

as specified in its charter)

 

Minnesota		41-1448837
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

  

11568 Sorrento Valley Rd., Suite 11

San Diego, California 92121

(Address of principal executive offices, including zip code)

(858) 847-0200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES ☒     NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files). YES  ☒    NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer        ☐	Accelerated filer                  ☐
Non-accelerated filer           ☐	Smaller reporting company        ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐  NO ☒

 

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on August 14, 2015 was 198,039,192.

 

 

SPECTRASCIENCE, INC.

 

FORM 10-Q

For the Six Months Ended June 30, 2015

 

TABLE OF CONTENTS

 

PART I		FINANCIAL INFORMATION:
Item 1.		Financial Statements (Unaudited)		3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.		Controls and Procedures		24
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings		24
Item 1A.		Risk Factors		24
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3.		Defaults Upon Senior Securities		25
Item 4.		Mine Safety Disclosures		25
Item 5.		Other Information		25
Item 6.		Exhibits		26
SIGNATURES				26

 

 

PART I     FINANCIAL INFORMATION:

 

Item 1. Financial Statements

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets 

		June 30,				December 31,
		2015				2014
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash		$	42,235			$	223,529
Inventory			289,223				283,624
Deferred debt issuance costs			84,315				107,636
Prepaid expenses and other current assets			203,597				244,173
Total current assets			619,370				858,962
Fixed assets, net			1,990				3,665
Patents, net			1,266,682				1,347,894
		$	1,888,042			$	2,210,521
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	944,889			$	836,136
Note payable			115,000				100,000
Convertible debt, net of discounts of $534,726 as of June 30, 2015 and $576,502 as of December 31, 2014			4,705,738				3,920,100
Derivative liability			1,786,154				1,061,839
Accrued expenses			850,611				673,012
Total current liabilities			8,402,392				6,591,087
COMMITMENTS AND CONTINGENCIES
Stockholders’ deficit
Series A Convertible Preferred Stock, $.01 par value; 0 shares authorized, issued and outstanding as of June 30, 2015 and December 31, 2014			—				—
Series B Convertible Preferred Stock, $.01 par value; 2,585,000 shares authorized, issued and outstanding as of June 30, 2015 and December 31, 2014; liquidation value of $517,000 plus accumulated and unpaid dividends of $106,931 as of June 30, 2015 and December 31, 2014			25,850				25,850
Series C Convertible Preferred Stock, $.01 par value; 1,000,000 shares authorized; 500,000 shares issued and outstanding as of June 30, 2015 and December 31, 2014; liquidation value of $100,000 as of June 30, 2015 and December 31, 2014			5,000				5,000
Common stock, $.01 par value; 746,915,000 shares authorized; 198,039,192 and 194,355,277 shares issued and outstanding as of June 30, 2015 and December 31, 2014			1,980,392				1,943,553
Additional paid in capital			39,791,443				39,509,115
Accumulated deficit			(48,317,035	)			(45,864,084	)
Total stockholders’ deficit			(6,514,350	)			(4,380,566	)
		$	1,888,042			$	2,210,521

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Operation

(Unaudited) 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Revenue		$	—			$	—			$	—			$	—
Cost of revenue			(6,000	)			—				(12,000	)			(6,000	)
Gross profit			6,000				—				12,000				6,000
Operating expenses:
Research and development			157,329				276,188				332,009				534,368
General and administrative			344,811				292,858				726,265				812,689
Sales and marketing			94,098				140,791				133,960				230,351
			596,238				709,837				1,192,234				1,577,408
Loss from operations			(590,238	)			(709,837	)			(1,180,234	)			(1,571,408	)
Other income (expense)
Interest expense			(147,041	)			(116,770	)			(291,543	)			(215,741	)
Change in fair value of derivative and warrant liabilities			277,361				30,880				(400,223	)			(2,051,760	)
Amortization of derivative and warrant liabilities discount			(233,187	)			(303,105	)			(523,296	)			(453,838	)
Amortization of deferred debt issuance costs and original issue discount			(84,576	)			(65,450	)			(172,390	)			(112,574	)
Gain on extinguishment of debt			36,641				—				119,369				—
Other income (expense), net			(2,221	)			(6,061	)			(4,634	)			(15,179	)
			(153,023	)			(460,506	)			(1,272,717	)			(2,849,092	)
Net loss		$	(743,261	)		$	(1,170,343	)		$	(2,452,951	)		$	(4,420,500	)
Basic and diluted loss per share		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.03	)
Weighted average common shares outstanding:
Basic and diluted			197,124,162				167,953,254				195,747,368				167,583,031

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Deficit

For the six months ended June 30, 2015

(unaudited)

																										Additional								Total
		Series B Preferred Stock								Series C Preferred Stock								Common Stock								Paid-In				Accumulated				Shareholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance December 31, 2014			2,585,000			$	25,850				500,000			$	5,000				194,355,277			$	1,943,553			$	39,509,115			$	(45,864,084	)		$	(4,380,566	)
Conversion of convertible debt			—				—				—				—				3,233,915				32,339				63,863				—				96,202
Exercise of stock options			—				—				—				—				450,000				4,500				—								4,500
Non cash issuance of stock options			—				—				—				—				—				—				97,521				—				97,521
Non cash issuance of warrant for consulting services			—				—				—				—				—				—				2,848				—				2,848
Warrant valuation on issuance of convertible debt			—				—				—				—				—				—				118,096				—				118,096
Net loss			—				—				—				—				—				—				—				(2,452,951	)			(2,452,951	)
Balance June 30, 2015			2,585,000			$	25,850				500,000			$	5,000				198,039,192			$	1,980,392			$	39,791,443			$	(48,317,035	)		$	(6,514,350	)

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited) 

		Six Months Ended June 30,
		2015				2014
Operating activities:
Net loss		$	(2,452,951	)		$	(4,420,500	)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization and depreciation			82,887				97,699
Non-cash issuance of stock options and warrants			100,369				308,095
Amortization of derivative and warrant liabilities discount			523,296				453,838
Amortization of deferred debt issuance costs and original issue discount			172,390				112,574
Change in fair value of derivative and warrant liabilities			400,223				2,051,760
Gain on extinguishment of debt			(119,369	)			—
Fair market value of common stock issued for services			—				50,000
Changes in assets and liabilities:
Accounts receivable			—				60,000
Inventory			(5,599	)			(68,729	)
Prepaid expense and other assets			40,576				39,211
Accounts payable			108,753				(31,894	)
Accrued expenses			219,661				196,412
Net cash used in operating activities			(929,764	)			(1,151,534	)
Investing activities:
Purchases of fixed assets			—				(6,275	)
Net cash used in investing activities			—				(6,275	)
Financing activities:
Proceeds from issuance of convertible notes payable			820,750				1,506,376
Payments against note payable to affiliate			—				(30,000	)
Proceeds from exercise of stock options			4,500				18,624
Debt issuance costs			(76,780	)			(130,000	)
Net cash provided by financing activities			748,470				1,365,000
Net increase (decrease) in cash			(181,294	)			207,191
Cash, beginning of year			223,529				236,597
Cash, end of period		$	42,235			$	443,788
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	—			$	—
Income taxes		$	—			$	—
Non Cash Investing and Financing Activities:
Conversion of convertible notes and accrued interest to common stock		$	157,839			$	—
Conversion of accrued interest to note payable		$	15,000			$	—

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements

 

1.      Nature of Business and Basis of Presentation

 

Description of Business

 

SpectraScience, Inc. was incorporated in the State of Minnesota on May 4, 1983 as GV Medical, Inc. In October 1992, GV Medical discontinued its prior business, refocused its development efforts and changed its name to SpectraScience, Inc. The “Company,” hereinafter, refers to SpectraScience, Inc. and its wholly owned subsidiaries Luma Imaging Corporation (“LUMA”), Spectra Science International, Inc. (“International”) and SpectraScience (UK) Limited (“SpectraUK”). Since 1996, the Company has focused primarily on developing the WavSTAT Optical Biopsy System (the “WavSTAT System”).

 

The Company has developed and received the European CE mark approval to market a proprietary, minimally invasive technology that optically illuminates tissue in real-time to distinguish between normal, pre-cancerous or cancerous cells without the need to remove the subject cell tissue from the body to make such determinations. The WavSTAT System operates by using cool, safe laser light to optically illuminate and analyze tissue, enabling the physician to make an instant diagnosis during endoscopy when screening for cancer, and if warranted, to begin immediate treatment during the same procedure. Beginning in December 2011, the WavSTAT 4 version of the product began to be sold in the European Union for colon cancer detection. In June 2012, the Company entered into a distribution agreement with PENTAX Europe, GmbH, for the sale of its systems internationally.

 

On November 6, 2007, the Company acquired the assets of LUMA in an equity transaction accounted for as an acquisition of assets and now operates LUMA as a wholly-owned subsidiary of the Company. LUMA had acquired the assets from a predecessor company that had developed, and received FDA approval for, a non-invasive diagnostic imaging system that can detect cervical cancer precursors and which utilizes an underlying technology that is similar to that of the WavSTAT System. The addition of the LUMA technology to the Company’s existing WavSTAT System technology provides the Company with a broad suite of fluorescence-based intellectual property and know-how. During the fiscal year ended December 31, 2010, the Company wrote off the remaining fair value of the LUMA inventory in order to focus on the continued development and marketing of the WavSTAT System. The Company retained the intellectual property of LUMA for use in the development of future generations of the WavSTAT System.

 

The transaction was accounted for as an acquisition of assets that included intellectual property, inventory and equipment. The intellectual property consisted of a total of 34 issued U.S. patents and 28 additional patent applications.

 

Basis of Presentation

 

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q as they are prescribed for smaller reporting companies. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These statements should be read in conjunction with the financial statements and related notes, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

Going Concern

 

Historically, the Company’s sources of cash have come from the issuance and sales of equity securities and convertible debentures. The Company’s historical cash outflows have been primarily used for operating activities including research, development, administrative and sales activities. Fluctuations in the Company’s working capital due to timing differences of its cash receipts and cash disbursements also impact its cash flow. The Company expects to incur significant additional operating losses through at least the end of 2015, as it completes proof-of-concept trials, conducts outcome-based clinical studies and increases sales and marketing efforts to commercialize the WavSTAT4 Systems in Europe. If the Company does not receive sufficient funding, there is substantial doubt that the Company will be able to continue as a going concern. The Company may incur unknown expenses or may not be able to meet its revenue forecast, and one or more of these circumstances would require the Company to seek additional capital. The Company may not be able to obtain equity capital or debt funding on terms that are acceptable. Even if the Company receives additional funding, such proceeds may not be sufficient to allow the Company to sustain operations until it becomes profitable and begins to generate positive cash flows from operations.

 

As of June 30, 2015, the Company had a working capital deficit of $7,783,022 and cash of $42,235, compared to a working capital deficit of $5,732,125 and cash of $223,529 as of December 31, 2014. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two year period from the date of the Engagement Agreement. Subsequent to March 31, 2013, the Company has engaged other agents to assist the Company with raising capital and has commenced raising capital on its own. During the six months ended June 30, 2015, the Company raised $743,970, net of transaction costs of $76,780, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

 

The holders of Convertible Debentures control the conversion of the Convertible Debentures and certain of the Convertible Debentures were not converted at their maturity constituting a potential default on the matured, but unconverted, Convertible Debentures. In the event of such default, principal, accrued interest and other related costs are immediately due and payable in cash. As of June 30, 2015, Convertible Debentures with a face value of $3,282,497 held by 55 individual investors are in default. None of these investors have served notice of default on the Convertible Debentures held by them.

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

2.      Summary of Significant Accounting Policies

 

Revenue recognition

 

The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue from the sale of the Company’s products is generally recognized when title and risk of loss transfers to the customer, the terms of which are generally free on board shipping point. The Company uses customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and third-party proof of delivery to verify that title has transferred. The Company assesses whether the price is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

Consolidation

 

The accompanying consolidated financial statements include the accounts of SpectraScience, Inc. and its wholly-owned subsidiaries LUMA, International and Spectra UK. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Risks and Uncertainties

 

The Company operates in an industry that is subject to intense competition, government regulation and rapid technological change. The Company’s operations are subject to significant risk and uncertainties, including financial, operational, technological, regulatory and other risks associated with a short history of product sales, including the potential risk of business failure.

 

Use of Estimates

 

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Significant estimates made by management include, among others, realization of long-lived assets including intangible assets, assumptions used to value stock options, assumptions used to value the common stock issued and assumptions related to the determination of the fair value of the derivative components associated with the Company’s Convertible Debentures. Actual results could differ from those estimates.

 

Inventory Valuation

 

The Company states its inventory at the lower of cost or market value, determined on a specific cost basis. The Company provides inventory allowances when conditions indicate that the selling price could be less than cost due to obsolescence and reductions in estimated future demand. The Company balances the need to maintain strategic inventory levels with the risk of obsolescence due to changing technology and customer demand levels. Unfavorable changes in market conditions may result in a need for additional inventory reserves that could adversely impact the Company’s gross margins. Conversely, favorable changes in demand could result in higher gross margins when the Company sells products.

 

Valuation of Long-lived Assets

 

The Company’s long-lived assets consist of property and equipment and intangible assets. Equipment is carried at cost and is depreciated over the estimated useful lives of the assets, which are generally two to three years, and leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. The straight-line method is used for depreciation and amortization. Intangible assets consist of patents, which are amortized using the straight-line method over the estimated useful lives of the patents. The Company does not capitalize external legal costs and filing fees associated with obtaining patents on its new discoveries. Acquired intellectual property is recorded at cost and is amortized over its estimated useful life. The Company believes the useful lives assigned to these assets are reasonable. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in management’s estimate of future cash flows to determine recoverability of these assets. If management’s assumptions about these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation   (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company adopted ASC 718 on January 1, 2006. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option-pricing model (the “Black-Scholes Model”). The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. The Company estimates forfeitures at the time of grant and revises its estimate in subsequent periods if actual forfeitures differ from those estimates.

 

The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

All issuances of stock options or other equity instruments to employees and non-employees as the consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Any stock options issued to non-employees are recorded in expense and additional paid-in capital in shareholders’ equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each reporting period.

 

As of June 30, 2015, the Company had one stock-based employee compensation plan under which it makes grants, the 2011 Equity Incentive Plan (the “EIP”). The EIP provides for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”) and restricted stock awards to full-time employees (who may also be directors) and NQSOs and restricted stock awards to non-employee directors, consultants, customers, vendors or providers of services. The exercise price of any ISO may not be less than the fair market value of the common stock on the date of grant and the term shall not exceed ten years. The amount reserved under the 2011 EIP is 40,000,000 shares of common stock.  At June 30, 2015, the Company had options outstanding exercisable into up to 39,718,802 shares of stock under the EIP and the Company’s prior Amended 2001 Stock Plan of which up to 18,454,489 shares were exercisable. Awards under the Company’s EIP generally vest over four years.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

The fair value of options granted are estimated at the date of grant using a Black-Scholes Model which includes several variables including expected life, risk free interest rate, expected stock price volatility, stock option exercise patterns and expected dividend yield. The Company also must estimate forfeitures for employee stock options. Management used the following weighted average assumptions to value stock options granted during the three and six month periods ended June 30, 2015 and 2014: 

		Three months ended June 30,				Six months ended June 30,
		2015		2014		2015		2014
Expected term		None		None		5 years		5 years
Exercise price		None		None		$0.01		$0.02
Expected volatility		None		None		210%		187%
Expected dividends		None		None		None		None
Risk-free interest rate		None		None		1.48%		1.64%
Forfeitures		None		None		None		None

 

Earnings (Loss) Per Share

 

Basic loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.

 

For the six month periods ended June 30, 2015 and 2014, the following common equivalent shares were excluded from the computation of loss per share since their effects are anti-dilutive.

 

		June 30,				June 30,
		2015				2014
Preferred Stock			3,085,000				3,085,000
Convertible debentures			101,009,574				90,505,370
Options			39,718,802				35,468,800
Warrants			99,995,693				105,719,939
Total			243,809,069				234,779,109

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

The following table sets forth the computation of basic and diluted loss per share for the three and six month periods ended June 30, 2015 and 2014:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Numerator:
Net loss for basic earnings per share		$	(743,261	)		$	(1,170,343	)		$	(2,452,951	)		$	(4,420,500	)
Net loss for diluted earnings per share		$	(743,261	)		$	(1,170,343	)		$	(2,452,951	)		$	(4,420,500	)
Denominator:
Weighted average basic shares outstanding			197,124,162				167,953,254				195,747,368				167,583,031
Denominator for diluted earnings per share- Adjusted weighted average shares			197,124,162				167,953,254				195,747,368				167,583,031
Income (loss) per share
Basic		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.03	)
Diluted		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.03	)

 

Inventory

 

Inventory consisted of the following at June 30, 2015 and December 31, 2014:

 

		June 30,				December 31,
		2015				2014
Raw materials		$	238,959			$	238,441
Finished goods			50,264				45,183
			289,223				283,624
Reserve for obsolescence			—				—
		$	289,223			$	283,624

 

3.      Liabilities

 

Note Payable

 

In November 2014, the Company issued for cash of $100,000 an unsecured note payable and a five year warrant with an exercise price of $0.09 per share for the purchase of up to 50,000 shares of common stock. The terms of the note were a repayment of $115,000 if paid by February 18, 2015 and, if paid thereafter, the principal balance of the note was to be increased to $115,000 and interest will accrue at 20% from February 18, 2015 until paid. The note remained outstanding at June 30, 2015 and is accruing interest at 20%. The warrant was valued at $1,659 using the Black-Scholes Pricing Model and was recorded as additional paid-in capital and expensed to non-cash interest in 2014.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

Convertible Debentures

 

As of June 30, 2015, the Company has issued and outstanding Convertible Debentures (“Debentures”) with original terms of six months to one year, an interest rate ranging from 10-20% per year and an original issue discount ranging from 5% to 10% which, at the option of the holder, may convert into common stock at an initial conversion price ranging from $0.03 to $0.099 per share. The Debentures were issued with detachable five year cashless Holders Warrants that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.06 to $0.1287 per share. In addition, the Company issued five year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price ranging from $0.0745 to $0.1287 per share. For debentures issued through March 31, 2013, at the option of the Debenture holder, the terms of the Debentures and Holders Warrants are subject to an exchange feature in the event that the Company issues securities with terms more favorable than those of the then outstanding Debentures and Holders Warrants. Debentures issued subsequent to March 31, 2013 do not contain such an exchange clause. The gross amount of Debentures outstanding is $4,818,603 as of June 30, 2015.

 

During the three months ended June 30, 2015, the Company has issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year, an interest rate ranging from 0-10% per year and original issue discount rate ranging from 0-10% which contain variable conversion rates ranging from discounts of 40-50% of the Company’s common stock based on the lowest trading prices ranging from 10-25 days previous to conversion. The Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods of 0-180 days subsequent to issuance at premiums ranging from 0-50%. The gross amount of Variable Debentures outstanding is $421,861 as of June 30, 2015.

 

As of June 30, 2015 and December 31, 2014, the balances of the Debentures are as follows:

 

		June 30,				December 31,
		2015				2014
Balance at beginning of period		$	4,496,602			$	2,951,629
Issuance of debentures for cash			820,750				2,506,376
Original issue discount			53,889				128,071
Debentures surrendered in exchange transactions			—				—
Debentures issued in exchange transactions			—				—
Debentures converted to common stock			(130,777	)			(1,089,474	)
Convertible debt			5,240,464				4,496,602
Less unamortized costs of financing			534,726				576,502
Convertible debt, net of unamortized costs		$	4,705,738			$	3,920,100
Convertible debt in default		$	3,282,497			$	1,862,160

 

Derivative Liability

 

Since the Company issued Convertible Debentures which included Holders Warrants, Agent Warrants and a conversion option that includes a possible exchange feature in the event of a future financing on terms more favorable than those of the existing warrants and debentures, this results in the warrants and conversion feature of the debentures being recorded as a liability and measured at fair value. In addition, Variable Debentures issued during the three months ended June 30, 2015, contained variable conversion rates based on unknown future prices of the Company’s common stock resulting in a conversion feature. The Company measures these warrants and conversion features using a combination of Black-Scholes option valuation models and Binomial Lattice option valuation models using similar assumptions to those described under “Stock-Based Compensation.” The time period over which the Company will be required to evaluate the fair value of the warrants is approximately five years and the time period over which the Company will be required to evaluate the fair value of the conversion features are six to twelve months or conversion.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, managements’ assessment of the probability of a more favorably priced future financing or significant fluctuations in the volatility of the trading market for the Company’s common stock, the Company’s fair value estimates could be materially different in the future.

 

The Company computes the fair value of the derivative liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the derivative liability is the Company’s stock price, which is subject to significant fluctuation and is not under its control. The resulting effect on net loss is therefore subject to significant fluctuation and will continue to be so until the Company’s Debentures, which the convertible feature is associated with, are converted into common stock or paid in full with cash. Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its stock price increases and non-cash income when its stock price decreases.

 

As of June 30, 2015 and December 31, 2014, the balances of the Derivative Liability are as follows:

 

						Conversion
		Warrants				Feature				Total
Balance at December 31, 2013		$	803,484			$	300,939			$	1,104,423
Elimination on extinguishment of debt			—				(197,482	)			(197,482	)
Change in fair value at year end			(38,526	)			193,424				154,898
Balance at December 31, 2014			764,958				296,881				1,061,839
Elimination on extinguishment of debt			—				(57,732	)			(57,732	)
Initial value on issuance of debt			—				381,824				381,824
Change in fair value at period end			(3,567	)			403,790				400,223
Balance at June 30, 2015		$	761,391			$	1,024,763			$	1,786,154

 

Debentures with warrants attached issued subsequent to March 31, 2013 did not contain an exchange provision and were accounted for using the equity method of valuing the note and warrant. For the six months ended June 30, 2015, $118,096 was recorded as additional paid-in capital.

 

4.      Shareholders’ Deficit

 

Common Stock

 

During the six months ended June 30, 2015, holders of Convertible Debentures with a face value of $130,777 converted their debentures into 2,705,306 shares of restricted common stock. In addition, associated with these debentures, the Company paid $27,062 in accrued interest by issuing 528,609 shares of restricted common stock and recorded a gain on extinguishment of debt of $119,369.

 

Warrants

 

During the six months ended June 30, 2015, in conjunction with the sale of Convertible Debentures, the Company issued five year common stock purchase warrants to acquire up to 5,725,312 shares to holders of the Debentures. These warrants have exercise prices ranging from $0.06 to $0.09 per share.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

In January 2015, the Company issued a warrant exercisable into up to 300,000 shares of common stock in exchange for services provided by a consultant. The value of these warrants, $2,848, was determined using the Black-Sholes Option pricing model and was included as non-cash expenses and additional paid-in capital during the six months ended June 30, 2015.

 

The balance of all warrants outstanding as of June 30, 2015 is as follows:

 

						Weighted
						Average
						Exercise
		Warrants				Price
Outstanding at January 1, 2015			103,430,075			$	0.11
Granted			6,025,312			$	0.08
Exchanged cancelled			—			$	—
Exchanged issued			—			$	—
Cancelled			(9,459,694	)		$	0.31
Exercised			—			$	—
Outstanding at June 30, 2015			99,995,693			$	0.08
Exercisable at June 30, 2015			99,995,693			$	0.08

 

Stock Options

 

Options outstanding as of June 30, 2015 are as follows:

 

						Weighted Average				Weighted Average				Aggregate
						Exercise Price				Remaining Contractual				Intrinsic
		Options				Per Share				Term (years)				Value (1)
Outstanding at January 1, 2015			34,293,800			$	0.02				8.74
Granted			5,900,002			$	0.01				9.61
Cancelled			(25,000	)		$	0.90				—
Exercised			(450,000	)		$	0.01				—
Outstanding at June 30, 2015			39,718,802			$	0.02				8.66			$	54,500
Exercisable at June 30, 2015			18,454,489			$	0.02				8.56			$	12,000
Weighted average fair value of options granted during the period			5,900,002			$	0.01

 

(1)

These amounts represent the excess, if any, between the exercise price and $0.01, the closing market price of the Company’s common stock on June 30, 2015 as quoted on the Over-the-Counter Bulletin Board under the symbol “SCIE”.

 

In February 2015, the Company’s Board of Directors authorized the issuance of stock options exercisable into up to 5,900,002 shares of common stock at an exercise price of $0.01 per share to a group of employees, directors and consultants. A portion of the options contained vesting criteria conditioned on certain milestones being achieved by the Company. If the milestones are not achieved, the options are subject to being cancelled. During the three months ended June 30, 2015, two directors exercised stock options into 450,000 shares of common stock at an exercise price of $0.01 per share

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

At June 30, 2015, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is $458,722, which we expect to be recognized over the next four years.

 

5.      Fair Value Measurements

 

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

 

The Company’s balance sheet contains derivative and warrant liabilities that are recorded at fair value on a recurring basis. The three-level valuation hierarchy for disclosure of fair value is as follows:

 

Level 1: uses quoted market prices in active markets for identical assets or liabilities.

 

Level 2: uses observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: uses unobservable inputs that are not corroborated by market data.

 

The fair value of the Company’s recorded derivative and warrant liabilities is determined based on unobservable inputs that are not corroborated by market data, which require a Level 3 classification. A Binomial Lattice option valuation model was used to determine the fair value with similar assumptions to those described under “Stock-Based Compensation”. The Company records derivative and warrant liabilities on the condensed consolidated balance sheets at fair value with changes in fair value recorded in the condensed consolidated statements of operation.

 

The following table presents the balances of liabilities measured at fair value on a recurring basis by level as of June 30, 2015:

 

		Fair Value Measurements Using
		Quoted Prices in				Significant Other				Significant
		Active Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
As of June 30, 2015
Derivative liability		$	—			$	—			$	1,024,763			$	1,024,763
Warrant liability			—				—				761,391				761,391
Total		$	—			$	—			$	1,786,154			$	1,786,154

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the six months ended June 30, 2015:

 

		Warrant				Derivative				Total
		Liability				Liability				Liability
Balance December 31, 2014		$	764,958			$	296,881			$	1,061,839
Elimination on extinguishment of debt			—				(57,732	)			(57,732	)
Initial value on issuance of debt			—				381,824				381,824
Change in estimated fair value (1)			(3,567	)			403,790				400,223
Balance June 30, 2015		$	761,391			$	1,024,763			$	1,786,154

 

(1) Included in the Condensed Statements of Operation on the line “Change in fair value of derivative and warrant liabilities.”

 

Management used the following inputs to value the Derivative and Warrant Liabilities for the six months ended June 30, 2015:

 

		Derivative Liability		Warrant Liability
Expected term		1 year		5 years
Exercise price		$0.01 - $0.099		$0.075 - $0.1287
Expected volatility		286% to 294%		219% to 221%
Expected dividends		None		None
Risk-free interest rate		0.22% to 0.28%		1.32% to 1.63%
Forfeitures		None		None

  

In computing the fair value of the derivative and warrant liability at June 30, 2015 for instruments under the Binomial Lattice option-pricing model, management estimated a 40% probability of a down round financing event at a price of $0.025 and a 20% to 75% probability that existing note holders with exchange privileges would exchange their existing debentures and warrants for new debentures and warrants.

  

6.      Contingencies

 

None

 

7.      Subsequent Events

 

Convertible Debentures and Warrants

 

During July and August 2015, the Company sold $277,778 of Unsecured Convertible Debentures (the “Debentures”) to an accredited investor for aggregate consideration of $250,000. The Debentures mature in twelve months, carry a fixed conversion price of $.045, an annual interest rate of 10% and are convertible into 6,172,840 shares of common stock at maturity. The Company received net cash proceeds of approximately $230,000 after payment of fees and expenses of $20,000. In addition, the Company issued the holder of the Debentures detachable five-year warrants to purchase 3,086,420 additional shares of common stock at an exercise price of $0.090 per share.

 

Variable Debentures

 

In July 2015, the Company entered into two notes accumulating $74,500 that can be repaid for $85,675 to $104,300 if paid within 90-180 days. If paid subsequent to 180 days, the notes are convertible into common stock at a discount to the market price. Management estimates that the notes will be paid within the 90-180 days.

 

Subsequent events have been evaluated through the date financial statements are filed with the Securities and Exchange Commission.

 

 

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q (the “Report”) contains forward-looking statements that are not related to historical results, including, without limitation, statements regarding our business strategy and objectives, our anticipated duration of periods of net loss, our near term operating goals, our expectations regarding the market for our products, the introduction of our products in new international markets and our beliefs with respect to opportunities and industry conditions in those markets, our beliefs about our products, product development, acquisition or licensing of complementary technologies and expectations with respect to our products’ performance and acceptance, the results of and our intentions with respect to our distribution agreement with PENTAX Europe GmbH, our beliefs about the strengths of our intellectual property portfolio, our regulatory goals and developments, anticipated clinical trials and research, our agreements with Laidlaw and other agents and their effect on our future capital resources and future financial position, our expectations with respect to stock option expense recognition, our future cash needs, the sufficiency of our working capital and our operating losses for the remainder of the current fiscal year. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause or contribute to such differences, including, but not limited to, changes in law or regulatory policies, unanticipated competition from other similar businesses, adverse outcomes from litigation, unexpected employee departures or disruptions, adverse market and general economic factors and other factors described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Such forward-looking statements are qualified in their entirety by the cautions and risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

Business

 

SpectraScience, Inc. (the “Company,” “SpectraScience,” “we,” “our,” or “us”) develops and manufactures innovative Laser Induced Fluorescence spectrophotometry systems capable of determining whether tissue is normal, pre-cancerous or cancerous without removing tissue from the body. The WavSTAT Optical Biopsy System (the “WavSTAT System”) is SpectraScience’s first product to incorporate its proprietary fluorescence technology for clinical use. The WavSTAT System carries the CE mark designation which allows for the sale and marketing in the European Union for the diagnosis of cancer. We are developing light-based diagnostics for additional indications including inflammatory bowel disease and esophageal cancer. Once these additional applications are developed we plan to self-certify for CE mark approval for sale in the European Union and then file an application with the FDA seeking permission to begin marketing for that indication for use in the United States. We believe we have a strong intellectual property portfolio that will allow us to continue to expand our WavSTAT cancer diagnosis platform to address the diagnosis of multiple cancers, utilize additional proprietary bio-photonic techniques to improve the WavSTAT’s overall diagnostic performance and ultimately allow for the detection of cancer and pre-cancer over a relatively large area of examined tissue.

 

Our principal executive offices are located at 11568 Sorrento Valley Rd., Suite 11, San Diego, CA 92121. We can be reached by telephone at (858) 847-0200; by fax at (858) 847-0880; or by email at info@spectrascience.com. We have a Web site at http://www.spectrascience.com. The information contained on our Web site shall not be deemed to be a part of this Report.

 

Plan of Operation

 

During the six month period ended June 30, 2015, SpectraScience carried forward on the improvements made to the WavSTAT4 in fiscal 2011 and continued working with PENTAX Europe, GmbH (“PENTAX”), for distribution of its products in Europe, the Middle East and Africa.

 

 

Over the next 12 months, SpectraScience intends to:

 

Market and sell the WavSTAT4 Optical Biopsy System colon cancer diagnostic application through PENTAX and other distribution channels in the European Union;   Conduct country-specific evaluation trials to demonstrate the effectiveness and cost benefit of the WavSTAT4 Optical Biopsy System in each relevant European jurisdiction;   Coordinate the creation and publication of scientific papers and presentations related to the country-specific evaluation trials to support widespread education and adoption of the WavSTAT4 ;   Pursue the introduction of the WavSTAT4 colon cancer application in other international markets, in particular China, Saudi Arabia and India;   Begin meeting with the FDA towards the preparation and submission of a Supplemental PMA filing with the FDA and plan for additional clinical trials to support eventual approval for sale in the United States;   Begin the design and planning for the next generation of multi-modal fluorescence and broadband spectroscopy systems at our facility in San Diego, California.   Continue to expand and refine our intellectual property portfolio.

 

Results of Operations

 

Comparison of the Three Months Ended June 30, 2015 and 2014

 

		Three Months Ended June 30,								Favorable
		2015				2014				(Unfavorable)				%
Revenue		$	—			$	—			$	—			NM
Cost of revenue			(6,000	)			—				6,000			NM
Gross profit			6,000				—				6,000			NM
Operating expenses:
Research and development			157,329				276,188				118,859				43.0	%
General and administrative			344,811				292,858				(51,953	)			17.7	%
Sales and marketing			94,098				140,791				46,693				33.2	%
			596,238				709,837				113,599				16.0	%
Loss from operations			(590,238	)			(709,837	)			119,599				16.8	%
Other income (expense)			(153,023	)			(460,506	)			307,483				66.8	%
Net loss		$	(743,261	)		$	(1,170,343	)		$	427,082				36.5	%

 

Revenues

 

There was no revenue during the three months ended June 30, 2015 or June 30, 2014. We anticipate that revenue will resume as a result of our distribution agreement with PENTAX and continuing direct sales efforts in certain locations once sufficient information has been accumulated from our MORDIS trials in Europe.

 

 

Cost of Revenue

 

Cost of revenue for the quarter ended June 30, 2015 was a negative $6,000 compared to no cost of revenue for the quarter ended June 30, 2014. The reason for the negative cost of revenue was the result of two systems installed in 2013 came off of warranty with no associated costs.

 

Research and Development Expenses

 

Research and development expenses decreased by $118,859, 43.0%, to $157,329 for the quarter ended June 30, 2015 from $276,188 for the quarter ended June 30, 2014. This decrease was due to a decrease in consulting costs over the previous year’s quarter of approximately $10,000, a decrease of clinical trial costs of approximately $82,000 coupled with a decrease in non-cash stock option expense of approximately $24,000. We anticipate that clinical costs will increase as we proceed with our introduction of the WaveSTAT4 in Europe.

 

General and Administrative Expenses

 

General and administrative expenses increased by $51,953, 17.7%, to $344,811 for the quarter ended June 30, 2015 from $292,858 for the quarter ended June 30, 2014. The primary reason for the increase was an increase during the current quarter compared to the same quarter of the previous year in payroll of approximately $51,000. We anticipate that general and administrative expenses will increase as we increase our activity in Europe.

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by $46,693, 33.2%, to $94,098 for the quarter ended June 30, 2015 from $140,791 for the quarter ended June 30, 2014. The primary reason for the decrease was a decrease in travel costs of approximately $21,000, a decrease in payroll costs of approximately $7,000 and a decrease in advertising expense of approximately $17,000. We anticipate that sales and marketing expenses will increase as we increase our activity in Europe.

 

Other Income (Expense)

 

Other income (expense) for the quarter ended June 30, 2015 was expense of $153,023 compared to expense of $460,506 for the quarter ended June 30, 2014. This change was due primarily to a gain on the extinguishment of convertible debentures for approximately $37,000 offset by a change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluating these obligations.

 

 

Comparison of the Six Months Ended June 30, 2015 and 2014

 

		Six Months Ended June 30,								Favorable
		2015				2014				(Unfavorable)				%
Revenue		$	—			$	—			$	—			NM
Cost of revenue			(12,000	)			(6,000	)			6,000				100.0	%
Gross profit			12,000				6,000				6,000				100.0	%
Operating expenses:
Research and development			332,009				534,368				202,359				37.9	%
General and administrative			726,265				812,689				86,424				10.6	%
Sales and marketing			133,960				230,351				96,391				41.8	%
			1,192,234				1,577,408				385,174				24.4	%
Loss from operations			(1,180,234	)			(1,571,408	)			391,174				24.9	%
Other income (expense)			(1,272,717	)			(2,849,092	)			1,576,375				55.3	%
Net loss		$	(2,452,951	)		$	(4,420,500	)		$	1,967,549				44.5	%

 

Revenues

 

There was no revenue during the three months ended June 30, 2015 or June 30, 2014. We anticipate that revenue will resume as a result of our distribution agreement with PENTAX and continuing direct sales efforts in certain locations once sufficient information has been accumulated from our MORDIS trials in Europe.

 

Cost of Revenue

 

Cost of revenue for the six months ended June 30, 2015 was a negative $12,000 compared to a negative $6,000 for the six months ended June 30, 2014. The reason for the negative cost of revenue in each of the two periods was a result of four systems installed in 2013 and two systems installed in 2012 came off of warranty with no associated costs.

 

Research and Development Expenses

 

Research and development expenses decreased by $202,359, 37.9%, to $332,009 for the six months ended June 30, 2015 from $534,368 for the six months ended June 30, 2014. This decrease was due to a decrease in clinical trial costs over the previous year’s period of approximately $88,000, a decrease in payroll over the previous year’s period of approximately $53,000 coupled with a decrease in non-cash stock option expense of approximately $51,000. We anticipate that clinical costs will increase as we proceed with our introduction of the WaveSTAT4 in Europe.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $86,424, 10.6%, to $726,265 for the six months ended June 30, 2015 from $812,689 for the six months ended June 30, 2014. The primary reasons for the decrease was a decrease during the current period compared to the same period of the previous year in non-cash stock option expense of $154,000 offset in part by an increase in payroll costs of approximately $79,000. We anticipate that general and administrative expenses will increase as we increase our activity in Europe.

 

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by $96,391, 41.8%, to $133,960 for the six months ended June 30, 2015 from $230,351 for the six months ended June 30, 2014. The primary reason for the decrease was a decrease in travel costs of approximately $21,000, a decrease in payroll costs of approximately $49,000 and a decrease in advertising expense of approximately $19,000. We anticipate that sales and marketing expenses will increase as we increase our activity in Europe.

 

Other Income (Expense)

 

Other income (expense) for the six months ended June 30, 2015 was expense of $1,272,717 compared to expense of $2,849,092 for the six months ended June 30, 2014. This change was due primarily to a gain on the extinguishment of convertible debentures for approximately $119,000 coupled with the change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluating these obligations.

 

 

Liquidity and Capital Resources

 

		As of								Increase
		June 30, 2015				December 31, 2014				(Decrease)
Working Capital
Current assets		$	619,370			$	858,962			$	(239,592	)
Current liabilities			8,402,392				6,591,087				1,811,305
Working capital deficit		$	(7,783,022	)		$	(5,732,125	)		$	2,050,897
Long-term debt		$	—			$	—			$	—
Stockholders’ deficit		$	(6,514,350	)		$	(4,380,566	)		$	2,133,784

 

		Six Months Ended June 30,								Increase
		2015				2014				(Decrease)
Statements of Cash Flows Select Information
Net cash provided (used) by:
Operating activities		$	(929,764	)		$	(1,151,534	)		$	(221,770	)
Investing activities		$	—			$	(6,275	)		$	(6,275	)
Financing activities		$	748,470			$	1,365,000			$	(616,530	)

 

		As of								Increase
		June 30, 2015				December 31, 2014				(Decrease)
Balance Sheet Select Information
Cash		$	42,235			$	223,529			$	(181,294	)
Inventory		$	289,223			$	283,624			$	5,599
Accounts payable and accrued expenses		$	1,795,500			$	1,509,148			$	286,352

  

Historically, the Company’s sources of cash have come from the issuance and sales of equity securities and convertible debentures. The Company’s historical cash outflows have been primarily used for operating activities including research, development, administrative and sales activities. Fluctuations in the Company’s working capital due to timing differences of its cash receipts and cash disbursements also impact its cash flow. The Company expects to incur significant additional operating losses through at least the end of 2015, as it completes proof-of-concept trials, conducts outcome-based clinical studies and increases sales and marketing efforts to commercialize the WavSTAT4 Systems in Europe. If the Company does not receive sufficient funding, there is substantial doubt that the Company will be able to continue as a going concern. The Company may incur unknown expenses or may not be able to meet its revenue forecast, and one or more of these circumstances would require the Company to seek additional capital. The Company may not be able to obtain equity capital or debt funding on terms that are acceptable. Even if the Company receives additional funding, such proceeds may not be sufficient to allow the Company to sustain operations until it becomes profitable and begins to generate positive cash flows from operations.

 

 

As of June 30, 2015, the Company had a working capital deficit of $7,783,022 and cash of $42,235, compared to a working capital deficit of $5,732,125 and cash of $223,529 as of December 31, 2014. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two year period from the date of the Engagement Agreement. Subsequent to March 31, 2013, the Company has engaged other agents to assist the Company with raising capital and has commenced raising capital on its own. During the six months ended June 30, 2015, The Company raised $743,970, net of transaction costs of $76,780, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

 

Not required

 

Item 4.     Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Report (the “Evaluation Date”).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the Evaluation Date.

 

Changes in Internal Financial Controls

 

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

None

 

Item 1A.

Risk Factors

 

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended June 30, 2015 we issued the following equity securities: 

Number of

Date of

Common Shares

Source of

Common Stock

Issuance

Issued

Payment

Amount

5/29/2015

754,538

Conversion of debt

$

15,091

6/19/2015

200,000

Exercise of stock options

$

2,000

6/30/2015

250,000

Exercise of stock options

$

2,500

 

With respect to the above equity securities issuances, the Company relied on exemptions provided by Sections 4(a)(2) and 3(a)9 of the Securities Act of 1933, as amended (the “Securities Act”). No advertising or general solicitation was employed in offering the securities. The securities were issued to a limited number of persons all of whom were accredited investors as that term is defined in Rule 501 of Regulation D under the Securities Act. All were capable of analyzing the merits and risks of their investment, acknowledged in writing that they were acquiring the securities for investment and not with a view toward distribution or resale, and understood the speculative nature of their investment. All securities issued contained a restrictive legend prohibiting transfer of the shares except in accordance with federal securities laws.

 

Item 3.

Defaults Upon Senior Securities

 

As of August 14, 2015 there are Unsecured Convertible Debentures with a face value of $3,282,497 held by 55 individual Holders in default. As a result, the outstanding principal amount of these Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing shall become immediately due and payable in cash at the election of the Holders. As of August 14, 2015, none of the Holders of these Debentures have elected to provide notice of default. 

 

Item 4.

Mine Safety Disclosures

 

None 

Item 5.	Other Information

 

None

 

 

Item 6.	Exhibits
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended June 30, 2015, formatted in XBRL; (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.

 

* Furnished herewith

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	SpectraScience, Inc. (Registrant)
Date: August 14, 2015		/s/ Michael P. Oliver
		Michael P. Oliver
		President and Chief Executive Officer
		(Principal executive officer)
Date: August 14, 2015		/s/ Lowell W. Giffhorn
		Lowell W. Giffhorn
		Chief Financial Officer
		(Principal financial officer and principal accounting officer)

 

 

 Exhibit 31.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. §1350, AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Michael P. Oliver, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SpectraScience, Inc.

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

	/s/ Michael P. Oliver
	Name:  Michael P. Oliver
	Title:   Chief Executive Officer
	Date:   August 14, 2015

 

 

  Exhibit 31.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. §1350, AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Lowell W. Giffhorn, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SpectraScience, Inc.

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

	/s/ Lowell W. Giffhorn
	Name:  Lowell W. Giffhorn
	Title:   Chief Financial Officer
	Date:    August 14, 2015

 

 

 Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of SpectraScience, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael P. Oliver, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

	/s/ Michael P. Oliver
	Michael P. Oliver Chief Executive Officer Date: August 14, 2015

   

  

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of SpectraScience, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lowell W. Giffhorn, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

	/s/ Lowell W. Giffhorn
	Lowell W. Giffhorn Chief Financial Officer Date: August 14, 2015