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 month period ended
March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015.
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
Going Concern
Historically, the Company’s sources of cash have come
from the issuance and sale 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 2016, as it completes proof-of-concept
trials, conducts outcome-based clinical studies and increases sales and marketing efforts to commercialize the WavSTAT4 System
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 March 31, 2016, the Company had a working capital deficit
of $10,041,923 and cash of $1,785, compared to a working capital deficit of $8,324,600 and cash of $127,493 as of December 31,
2015. 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 three
months ended March 31, 2016, the Company raised $311,000, net of transaction costs of $24,000, 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 March 31, 2016, Convertible Debentures with a face value of
$4,750,976 held by 70 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.
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
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.
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)
Variable Conversion Rate Debentures
Starting in 2015, the Company entered into convertible debentures
with floating exercise prices discounted to market prices. As a result, a significant number of shares were either issued in 2015
or will be issued in subsequent periods at deeply discounted variable conversion prices. The downward pressure placed on the Company’s
stock as a result of these conversions can be classified as “death spirals” since the investors have no incentive to
maintain a stable stock price. The Company accounts for these debentures as derivative liabilities which means the debentures are
revalued at the end of each period and gains and losses are recognized at the issuance of the debentures and on the conversion
of the debentures.
Over Commitment of Shares
Since the number of shares issuable under convertible debentures
with floating exercise prices is undeterminable, the Company may be required to issue shares in excess of the number of shares
authorized by its shareholders. As a result, when the Company determines that is does not have sufficient shares to meet the obligations
of derivative unexercised debentures, warrants and options, the derivatives must be valued using the Black Scholes Option Pricing
method and a liability is recorded as though the obligations would be settled using some means other than stock.
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 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.
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
As of March 31, 2016, 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 March 31, 2016, the Company had options
outstanding exercisable into up to 34,168,800 shares of stock under the EIP and the Company’s prior Amended 2001 Stock
Plan of which up to 21,394,089 shares were exercisable. Awards under the Company’s EIP generally vest over four
years.
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 month periods ended March 31, 2016 and 2015:
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
3 to 5 years
|
|
|
5 years
|
|
|
Exercise price
|
|
$0.02 to $.04
|
|
|
$0.01
|
|
|
Expected volatility
|
|
243% to 266%
|
|
|
210%
|
|
|
Expected dividends
|
|
None
|
|
|
None
|
|
|
Risk-free interest rate
|
|
1.04% to 1.49%
|
|
|
1.48%
|
|
|
Forfeitures
|
|
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 three month periods ended March 31, 2016 and 2015, the
following common equivalent shares were excluded from the computation of loss per share since their effects are anti-dilutive.
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
3,085,000
|
|
|
|
3,085,000
|
|
|
Convertible debentures
|
|
|
378,651,041
|
|
|
|
101,060,673
|
|
|
Options
|
|
|
34,168,800
|
|
|
|
40,193,802
|
|
|
Warrants
|
|
|
132,875,170
|
|
|
|
109,205,387
|
|
|
Total
|
|
|
548,780,011
|
|
|
|
253,544,862
|
|
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 month periods ended March 31, 2016 and 2015:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss for basic earnings per share
|
|
$
|
(2,056,334
|
)
|
|
$
|
(1,709,690
|
)
|
|
Net loss for diluted earnings per share
|
|
$
|
(2,056,334
|
)
|
|
$
|
(1,709,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
609,825,530
|
|
|
|
194,355,277
|
|
|
Denominator for diluted earnings per share-
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares
|
|
|
609,825,530
|
|
|
|
194,355,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Inventory
Inventory consisted of the following at March 31, 2016 and December
31, 2015:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
257,114
|
|
|
$
|
216,704
|
|
|
Finished goods
|
|
|
36,411
|
|
|
|
45,183
|
|
|
|
|
|
293,525
|
|
|
|
261,887
|
|
|
Reserve for obsolescence
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
293,525
|
|
|
|
261,887
|
|
|
Less long-term portion
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
$
|
143,525
|
|
|
$
|
111,887
|
|
During the three months ended March 31, 2016, the Company purchased
the inventory of Oncoscope, Inc. from the Trustee of Oncoscope’s bankruptcy proceeding for a total of $40,000. This amount
has been reflected as raw materials.
Recently Adopted
and Issued Accounting Pronouncements
In April 2015, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amended
Interest – Imputation of Interest of the Accounting Standards Codification. The amended guidance requires that debt issuance
costs related to a recognized debt liability, which were presented as deferred charges (assets), be presented in the balance sheet
as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance
costs are not affected by the amendments in this update. The amendments is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets
and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments.
The accounting guidance for lessors is largely unchanged. The ASU is effective for annual and interim periods beginning after December
15, 2018. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact that the
adoption of this guidance will have on the Company’s financial statements.
Reclassifications
Certain reclassifications have been made to the 2015
financial statements in order for them to conform to the 2016 presentation. Such reclassifications have no impact on the Company’s
financial position or results of operations.
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 $137,982 as of October 1, 2015 and interest will accrue at 20% from October 1, 2015
until paid. The note remained outstanding at March 31, 2016 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)
Notes Payable- Related Parties
During the three months ended March 31, 2016, two affiliates
of the Company advanced to the Company cash in an accumulated amount of $35,000 in exchange for one year 10% promissory notes.
The balance of the notes remains $35,000 at March 31, 2016.
Convertible Debentures
As of March 31, 2016, the Company has issued and
outstanding Convertible Debentures (“Debentures”) with original terms of three 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 initial conversion prices ranging from $0.01 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 $0.02 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 exercise prices 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 $6,232,345 as of March 31, 2016.
During the three months ended March 31, 2016, the Company has
issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year,
interest rates ranging from 0-10% per year and original issue discounts ranging from 0-10% which contain variable conversion rates
ranging from discounts of 40-50% of the Company’s common stock based on the Company’s common stock 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 $199,250 as of March 31, 2016 which includes $29,712 of principal either added to the original notes or issued as
new notes related to forbearance agreements as a result of the Company not having an adequate number of authorized shares to honor
the noteholders conversion requests.
As of March 31, 2016 and December 31, 2015, the balances of
the Debentures are as follows:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
6,174,760
|
|
|
$
|
4,496,602
|
|
|
Issuance of debentures for cash
|
|
|
300,000
|
|
|
|
1,970,250
|
|
|
Original issue discount
|
|
|
-
|
|
|
|
145,263
|
|
|
Issuance of debentures for forbearance
|
|
|
29,712
|
|
|
|
-
|
|
|
Debentures converted to common stock
|
|
|
(72,877
|
)
|
|
|
(437,355
|
)
|
|
Convertible debt
|
|
|
6,431,595
|
|
|
|
6,174,760
|
|
|
Less unamortized costs of financing
|
|
|
323,962
|
|
|
|
430,156
|
|
|
Convertible debt, net of unamortized costs
|
|
$
|
6,107,633
|
|
|
$
|
5,744,604
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt in default
|
|
$
|
4,750,976
|
|
|
$
|
4,313,199
|
|
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
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, outstanding Variable Debentures contain
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 Black-Scholes option valuation model 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.
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.
In addition, since the number of shares issuable under the Variable
Debentures are undeterminable, the Company may be required to issue shares in excess of the number of shares authorized by its
shareholders. As a result, when the Company determines that is does not have sufficient shares to meet the obligations of derivative
unexercised debentures, warrants and options, the derivatives must be valued using the Black Sholes Option Pricing method and a
liability is recorded as though the obligations would be settled using some means other than stock. For the three months ended
March 31, 2016, the Company determined that it was over committed to the number of shares issuable on the exercise of outstanding
debentures, stock options and warrants for approximately 466,000,000 shares
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
As of March 31, 2016 and December 31, 2015, the balances of
the Derivative Liability are as follows:
|
|
|
|
|
|
|
|
|
Commitment
|
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
|
In Excess of
|
|
|
|
|
|
|
|
Warrants
|
|
|
Feature
|
|
|
Authorized Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
764,958
|
|
|
$
|
296,881
|
|
|
$
|
-
|
|
|
$
|
1,061,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability on issuance of debt and warrants
|
|
|
-
|
|
|
|
1,306,372
|
|
|
|
-
|
|
|
|
1,306,372
|
|
|
Change in fair value at year end
|
|
|
(726,216
|
)
|
|
|
(448,228
|
)
|
|
|
-
|
|
|
|
(1,174,444
|
)
|
|
Elimination of liability on conversion
|
|
|
-
|
|
|
|
(637,874
|
)
|
|
|
-
|
|
|
|
(637,874
|
)
|
|
Over commitment of stock
|
|
|
-
|
|
|
|
-
|
|
|
|
64,428
|
|
|
|
64,428
|
|
|
Balance at December 31, 2015
|
|
|
38,742
|
|
|
|
517,151
|
|
|
|
64,428
|
|
|
|
620,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability on issuance of debt and warrants
|
|
|
-
|
|
|
|
137,071
|
|
|
|
-
|
|
|
|
137,071
|
|
|
Change in fair value at year end
|
|
|
222,069
|
|
|
|
665,425
|
|
|
|
-
|
|
|
|
887,494
|
|
|
Elimination of liability on conversion
|
|
|
-
|
|
|
|
(211,729
|
)
|
|
|
-
|
|
|
|
(211,729
|
)
|
|
Over commitment of stock
|
|
|
-
|
|
|
|
-
|
|
|
|
131,504
|
|
|
|
131,504
|
|
|
Balance at March 31, 2016
|
|
$
|
260,811
|
|
|
$
|
1,107,918
|
|
|
$
|
195,932
|
|
|
$
|
1,564,661
|
|
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.
4. Shareholders’ Deficit
Common Stock
During the three months ended March 31, 2016, holders of Convertible
Debentures with a face value of $72,877 and accrued interest of $2,935 converted their debentures into 236,266,584 shares of common
stock. In addition, associated with these debentures, the Company recorded a gain on extinguishment of debt of $1,166.
Warrants
During the three months ended March 31, 2016, in conjunction
with the sale of Convertible Debentures, the Company issued five year common stock purchase warrants to acquire up to 15,000,000
shares to holders of the Debentures. These warrants have an exercise price of $0.02 per share.
In March 2016, the Company issued a
warrant exercisable into up to 1,000,000 shares of common stock in exchange for services provided by a consultant. The value of
these warrants, $1,652, was determined using the Black-Sholes Option pricing model and was included as non-cash expenses and additional
paid-in capital during the three months ended March 31, 2016.
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
The balance of all warrants outstanding
as of March 31, 2016 is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Outstanding at January 1, 2016
|
|
|
116,875,170
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
16,000,000
|
|
|
$
|
0.02
|
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
Outstanding at March 31, 2016
|
|
|
132,875,170
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
132,875,170
|
|
|
$
|
0.08
|
|
Stock Options
Options outstanding as of March 31, 2016 are as follows:
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Remaining Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Term (years)
|
|
|
Value (1)
|
|
|
Outstanding at January 1, 2016
|
|
|
34,168,800
|
|
|
$
|
0.02
|
|
|
|
8.03
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
34,168,800
|
|
|
$
|
0.02
|
|
|
|
7.79
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
21,394,089
|
|
|
$
|
0.02
|
|
|
|
7.79
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These amounts represent the excess, if any, between the exercise price and $0.0042, the closing market price of the Company’s
common stock on March 31, 2016 as quoted on the Over-the-Counter Bulletin Board under the symbol “SCIE”.
|
At March 31, 2016, total unrecognized estimated employee compensation
cost related to non-vested stock options granted prior to that date is $293,327, 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:
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
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 derivative
liabilities which are measured at fair value on a recurring basis by level as of March 31, 2016:
|
|
|
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 March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,107,918
|
|
|
$
|
1,107,918
|
|
|
Warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
260,811
|
|
|
|
260,811
|
|
|
Commitment in excess of authorized stock
|
|
|
-
|
|
|
|
-
|
|
|
|
195,932
|
|
|
|
195,932
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,564,661
|
|
|
$
|
1,564,661
|
|
The following table presents changes in the derivative
liabilities with significant unobservable inputs (Level 3) for the three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
Commitment
|
|
|
|
|
|
|
|
Warrant
|
|
|
Derivative
|
|
|
In Excess of
|
|
|
Total
|
|
|
|
|
Liability
|
|
|
Liability
|
|
|
Authorized Stock
|
|
|
Liability
|
|
|
Balance December 31, 2015
|
|
$
|
38,742
|
|
|
$
|
517,151
|
|
|
$
|
64,428
|
|
|
$
|
620,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability on issuance of debt and warrants
|
|
|
-
|
|
|
|
137,071
|
|
|
|
-
|
|
|
|
137,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of liability on conversion
|
|
|
-
|
|
|
|
(211,729
|
)
|
|
|
-
|
|
|
|
(211,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimated fair value (1)
|
|
|
222,069
|
|
|
|
665,425
|
|
|
|
-
|
|
|
|
887,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment in excess of authorized stock
|
|
|
-
|
|
|
|
-
|
|
|
|
131,504
|
|
|
|
131,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2016
|
|
$
|
260,811
|
|
|
$
|
1,107,918
|
|
|
$
|
195,932
|
|
|
$
|
1,564,661
|
|
|
(1)
|
Included in the Condensed Statements of Operation on the line “Change in fair value of derivative and warrant liabilities.”
|
SpectraScience, Inc.
Notes to Unaudited Condensed Financial Statements (continued)
Management used the following inputs to value the Derivative
and Warrant Liabilities for the three months ended March 31, 2016:
|
|
|
Derivative Liability
|
|
Warrant Liability
|
|
Expected term
|
|
6 months to 2 years
|
|
5 years
|
|
Exercise price
|
|
$0.00025 - $0.099
|
|
$0.075 - $0.1287
|
|
Expected volatility
|
|
280% to 334%
|
|
279% to 283%
|
|
Expected dividends
|
|
None
|
|
None
|
|
Risk-free interest rate
|
|
0.37% to 0.75%
|
|
1.21% to 1.49%
|
|
Forfeitures
|
|
None
|
|
None
|
In computing the fair value of the derivative and warrant liability
at March 31, 2016 for instruments under the Binomial Lattice option-pricing model, management estimated a 60% probability of a
down round financing event at a price of $0.025 and a 9% to 34% 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
Series AA Preferred Shares
On April 15, 2016, the Board of Directors of the Company authorized
an amendment to the Company’s Articles of Incorporation, as amended (the “Articles of Incorporation”), in the
form of a Certificate of Designation that authorized the issuance of up to three thousand (3,000) shares of a new series of preferred
stock, par value $0.0001 per share, designated “Series AA Super Voting Preferred Stock,” for which the board of directors
established the rights, preferences and limitations thereof.
Each holder of outstanding shares of Series AA Super Voting
Preferred Stock shall be entitled to one million (1,000,000) votes for each share of Series AA Super Voting Preferred Stock held
on the record date for the determination of stockholders entitled to vote at each meeting of stockholders of the Company. The holders
are restricted from voting the preferred shares for any proposal on the election of directors.
Convertible Debentures and Warrants
During April 2016, the Company received an advance of $150,000
against a yet to be finalized Secured Convertible Debenture (the “Debenture”) to an accredited investor. The terms
of the Debenture are anticipated to include a two to three year maturity, a conversion price that will vary based on the price
of the Company’s stock and an annual interest rate of 8%. The Company received net cash proceeds of approximately $138,000
after payment of fees and expenses of $12,000. The secured interest is on all of the assets of the Company.
In May 2016 a holder of Variable Rate Convertible Debentures
with a face value of $1,138 converted their debenture and accrued interest into 1,138,090 shares of common stock.
Subsequent events have been evaluated through the date financial
statements are filed with the Securities and Exchange Commission.