UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 2013
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 0-13092
SPECTRASCIENCE, INC.
(Exact name of registrant as specified in its charter)
| MINNESOTA | 41-1448837 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
| 11568-11 Sorrento Valley Road, San Diego, CA | 92121 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number: (858) 847-0200
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 x
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 registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The aggregate market value of the voting Common Stock held by non-affiliates, computed by reference to the price at which the voting Common Stock was sold as of the last business day of the Company’s most recently completed second fiscal quarter is $8,151,000.
As of June 6, 2014 the number of outstanding shares of the registrant’s Common Stock, par value $0.01 per share, was 167,643,254.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SPECTRASCIENCE, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2013
TABLE OF CONTENTS
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| PART IV | |
| Item 15. Exhibits and Financial Statement Schedules | 67 |
| SIGNATURES | 68 |
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K constitute "forward-looking statements". These statements, identified by words such as “plan”, "anticipate", "believe", "estimate", "should," "expect" and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under the caption "Risk Factors" and elsewhere in this Form 10-K. We advise you to carefully review the reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our quarterly reports on Form 10-Q and our current reports on Form 8-K.
As used in this annual report, the terms "we", "us", "our", and “SpectraScience” mean SpectraScience, Inc., unless otherwise indicated.
Introduction
SpectraScience was incorporated in the State of Minnesota on May 4, 1983 as GV Medical, Inc. In October 1992, GV Medical changed its name to SpectraScience, Inc. The Company focuses on developing its WavSTAT ® Optical Biopsy System (“WavSTAT”). The WavSTAT employs a non-significant risk technology that optically illuminates tissue in real-time to distinguish between normal and pre-cancerous or cancerous tissue.
Our principal executive offices are located at 11568 Sorrento Valley Rd., Suite 11, San Diego, CA 92121. You can reach us by telephone at (858) 847-0200; by fax at (858) 847-0880; or by email at info@spectrascience.com. Our website address is www.spectrascience.com. The information contained on our web site is not deemed to be a part of this document.
Acquisition of Luma Imaging Corporation Assets
On November 6, 2007, the Company acquired 100% of the shares of LUMA Imaging Corporation (“LUMA”) from LUMA’s shareholders in consideration for 11.2 million restricted shares of SpectraScience common stock.
LUMA had developed and received approval from the U.S. Food and Drug Administration (the “FDA”) for an optical, non-invasive diagnostic imaging system that was proven to more effectively detect cervical cancer precursors than using conventional means alone (i.e. colposcopy). During the fiscal year ended December 31, 2010, the Company wrote off the remaining fair value of LUMA inventory in order to focus on the continued development and marketing of the WavSTAT. The Company retained the intellectual property of LUMA for use in the development of future generations of the WavSTAT System, in particular as it relates to the development of optical detection technology. The intellectual property consisted of a total of approximately 30 issued U.S. patents, certain foreign patents and 28 additional patent applications.
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Products and Markets
SpectraScience has developed a technology platform to instantly determine if tissue is normal, pre-cancerous or cancerous, without the need for a physical biopsy. The Company received FDA approval to market its proprietary and patented WavSTAT3 optical biopsy system capable of determining instantaneously whether colon tissue is normal, pre-cancerous or cancerous without physically removing tissue from the body and without waiting days for pathology results. The Company’s current improved colon diagnostic product, the WavSTAT4, will require future FDA approval in order to be sold in the United States. The WavSTAT4 has a CE mark, is approved for sale, and is in the process of being marketed, in the European Union. The Company plans to develop an esophageal diagnosis application and to explore additional applications for the detection of pre-cancerous and cancerous tissue in various tissues of the body.
The WavSTAT4 Optical Biopsy System operates by using cool, safe UV 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. The WavSTAT4 uses laser-induced auto-fluorescence to obtain spectral information from tissue at the suspected site. The system is classified as a non-significant risk device which transmits low-level UV laser light energy through an optical fiber to the tissue via the working channel of an endoscope. The tissue in contact with the optical fiber absorbs the light and the resulting tissue auto-fluorescence spectra is collected by the same optical fiber and returned to a detector within the WavSTAT4 console for processing. The system analyzes the spectral data and displays the results graphically for the user as normal tissue (green light), suspected pre-cancerous tissue, or cancerous tissue (red light). Data are recorded and saved redundantly in both flash memory and on a hard drive within the system. The WavSTAT4 has been tested at leading medical centers with results demonstrating statistically significant improvement in physician accuracy in the ability to detect pre-cancerous and cancerous tissue during endoscopy.
The WavSTAT Optical Biopsy System was specifically designed to serve as a technology platform to facilitate multiple medical applications for cancer diagnosis. We see additional opportunities for this core technology in esophageal cancer and in several other large as-yet-unexplored markets which include lung, skin, stomach, prostate and bladder cancer diagnosis. The Company is currently exploring these additional applications of its platform for these markets, and is analyzing feasibility of the use of its technology and the revenue opportunity for each market.
Colorectal Cancer
The American Cancer Society reports colorectal cancer as the third most common cancer diagnosed in the U.S. with approximately 140,000 new cases annually. With an estimated 50,000 deaths annually, colorectal cancer is second only to lung cancer as the leading cause of cancer death in the United States. Candidates for colorectal cancer screening include all persons, with or without symptoms, over the age of 50 (or an estimated 80-90 million people in the U.S.) with the screening market expected to increase 20% over the next ten years. Demographic trends in Europe are very similar.
Colorectal cancer is primarily diagnosed through the discovery and histo-pathologic analysis of polyps. Colon polyps are small masses of tissue found in the lining of the colon that may be either benign or malignant. The most commonly performed and generally accepted colorectal cancer screening procedure to detect polyps is an endoscopy of the colon, known as a colonoscopy. According to the American Society for Gastrointestinal Endoscopy guidelines for colorectal cancer screening, large polyps (greater than 1 centimeter) are generally removed as a matter of course and sent to pathology for evaluation. On the other hand, the guidelines further state that small polyps (less than 1 centimeter which account for approximately 85% of all polyps) require, “individualized treatment on a case by case basis”. The clinical utility of the WavSTAT4 occurs when the physician must decide the best course of treatment for small polyps. When small polyps are found, it is left to the physician's discretion based primarily on visual assessment, whether to remove the polyp, place the patient under surveillance, or to perform a physical biopsy. If a biopsy is performed and cancer or pre-cancer is documented by pathology, the polyp must then be removed. Historically in this context, approximately 70% of the physical biopsies taken are determined to be benign. The WavSTAT4 can significantly reduce the procedure cost and attendant complication rates by immediately classifying these polyps as benign without the need for removal and subsequent pathology. The WavSTAT4 was specifically designed to be used during colonoscopy to aid and improve the physician's ability to identify small polyps as normal, pre-cancerous or cancerous tissue in real time.
Relative to colorectal cancer, five-year survival rates as reported by the American Cancer Society are as follows:
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Approximately 90% of patients live five years or longer if the cancer is detected and treated at an early stage;
Only 70% of patients live five years or longer if the cancer spreads outside the polyp and colon to nearby organs or lymph nodes; and
The five-year survival rate for those patients in whom the cancer has spread further to the liver or other organs is only 12%.
Early detection of colorectal cancer is essential to long-term survival. Unfortunately, the American Cancer Society reports that only 39% of colorectal cancers are detected at an early stage. Clinical studies indicate that colorectal cancer screening procedures result in earlier detection and can prevent as many as 20 to 40% of potential colorectal cancers and subsequently reduce colorectal cancer deaths by 30 to 50%. Colorectal screening procedures not only save lives, they also save money. If a patient is not diagnosed until symptoms develop and the disease has spread, or if misdiagnosed at an early stage, the chance of patient survival plummets and more advanced treatment regimens such as surgery, chemotherapy and/or radiation become necessary.
Based on the results demonstrated by our own clinical studies, we believe that using the WavSTAT will:
Significantly improve the physician's diagnostic accuracy in determining whether small polyps in the colon are pre-cancerous or cancerous;
Improve patient survival rates by earlier detection and treatment of cancers, and more importantly pre-cancers, by more accurately identifying cancers or pre-cancers the physician may misdiagnose;
Improve the patient's quality of life by providing an immediate analysis of the tissue, thereby eliminating the anxiety of waiting several days to hear the pathology results;
Enable the physician to diagnose and treat the patient during the same endoscopy procedure with the same biopsy instrument, thereby potentially reducing the need for scheduling a second expensive endoscopy for treatment purposes;
Significantly reduce the number of physical biopsies performed and reduce the number of unnecessary follow-on endoscopies performed; and
Reduce the number of misdiagnosed patients, thereby eliminating the need for more costly advanced treatments such as surgery, chemotherapy and/or radiation.
Esophageal Cancer
Barrett’s esophagus is a condition of the lining of the lower esophagus thought to be caused primarily by Gastro Esophageal Reflux Disease (“GERD”), more commonly known as chronic heartburn. Barrett’s esophagus is considered to be a pre-malignant stage and a precursor to esophageal cancer. Physicians typically recommend that persons with chronic heartburn should have an endoscopy to look for Barrett’s esophagus. Some Barrett’s esophagus patients will advance further to a stage where additional abnormal tissue called dysplasia is present. Dysplasia is known to be the next progressive step toward esophageal cancer and is categorized as either low-grade or high-grade.
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Barrett’s esophagus, dysplasia and esophageal cancer patients are presently diagnosed via endoscopy of the esophagus with the physician taking multiple random physical biopsies of the esophageal lining; this is a significantly invasive procedure. It is critical that high-grade dysplasia is correctly diagnosed because physicians frequently recommend surgical resection, radio frequency ablation or removal of the esophagus in such an event. Unfortunately, dysplasia is difficult to find and/or diagnose because it is not reliably visible to the physician during standard endoscopy. The result is that physical biopsies (as many as 20 at once) are performed either randomly or in a geometric pattern in the esophagus in the hope of finding any diseased tissue. Current medical practice typically follows the guidelines described below:
Patients with chronic GERD (severe heartburn) receive a screening endoscopy of the esophagus with multiple biopsies to check for Barrett's esophagus;
Patients with Barrett's esophagus receive an endoscopy with multiple biopsies every year to check for dysplasia;
Patients with Barrett's esophagus that has progressed to include low-grade dysplasia receive an endoscopy with multiple biopsies every six months to check for high-grade dysplasia; and
Patients with Barrett's esophagus that has progressed to include high-grade dysplasia receive an endoscopy with multiple biopsies every three months to check for cancer and/or may be referred for esophageal surgical resection, photodynamic therapy or electrical (“RF”) ablation.
The relatively high death rate associated with esophageal cancer typically results from a lack of early diagnosis with the outcome being that the cancer has grown to an advanced stage. As described above, the frequency of endoscopic surveillance for these patients increases as the pre-cancerous stages advance in hopes of providing the earliest possible diagnosis.
Government Regulation
United States
Extensive government regulation, both in the United States and internationally, controls the design, manufacture, labeling, distribution and marketing of our products, particularly regarding product safety and effectiveness. In the United States, medical devices are subject to review and clearance or approval by the FDA. The FDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. If we fail to comply with applicable requirements prior to marketing the WavSTAT4 in the United States, we could face:
fines, injunctions or civil penalties;
recall or seizure of our products;
criminal prosecution;
a recommendation that we not be allowed to contract with the government;
total or partial suspension of production;
inability to obtain pre-market clearance/approval for our devices; and
withdrawal of marketing approvals.
The Food, Drug, and Cosmetic Act, the Public Health Service Act, and Safe Medical Devices Act of 1990 and other federal statutes and regulations also govern or influence the testing, manufacture, safety, labeling, storage, recordkeeping, clearance, advertising and promotion of such products.
In the United States, medical devices are assigned to one of three classes depending on the controls the FDA deems necessary to ensure the safety and effectiveness of the device. The WavSTAT4 is a Class III device; this is FDA’s most highly regulated category in the Center for Devices and Radiological Health (“CDRH”) guidelines. In addition to adhering to general controls to which all medical devices are subject, and special controls such as performance standards, post-market surveillance and patient registries, a Class III device must receive pre-marketing approval to ensure its safety and effectiveness prior to commercialization. The Company is in the process of obtaining this approval for the WavSTAT4 in the United States.
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FDA approval to distribute regulated devices can be obtained in one of two ways. If a new or significantly modified device is “substantially equivalent” to an existing legally marketed device, the new device can be commercially introduced after filing a 510(k) pre-market notification with the FDA and the subsequent issuance by the FDA of an order permitting commercial distribution. Changes to existing devices that do not significantly affect safety or effectiveness may be made without an additional 510(k) notification. We received 510(k) clearance from the FDA for our disposable and reusable Optical Biopsy Forceps in December 1996.
A second, more comprehensive approval process applies to a Class III device that is not substantially equivalent to an existing product. First, the applicant must conduct clinical trials in compliance with testing protocols and patient “informed consent” forms approved by an Institutional Review Board (“IRB” or the “Safety Committee”) at each participating research institution. These boards oversee and approve all clinical studies at their institutions (in some cases a central IRB may approve studies at multiple locations). Second, a Pre-Market Approval (“PMA”) application must be submitted to the FDA describing (i) the clinical trial results, (ii) the device and its components, (iii) the methods, facilities and controls used for manufacture of the device, (iv) proposed labeling and advertising literature, and (v) the demonstration that the product is safe and effective.
If the FDA determines, upon receipt of the PMA application, that the application is sufficiently complete to permit a substantive review, they will accept the application for filing. Review of a PMA typically takes from six months to two years from the date the application is accepted for filing, but can take longer. Often, during the review period, a panel primarily composed of clinicians and acting as an advisory committee will be convened to review, evaluate, and provide non-binding recommendations to the FDA as to whether the device should be approved. Toward the end of the application review process, the FDA generally will conduct an inspection of the manufacturer’s facilities to ensure that the facilities are compliant with the applicable Quality System Regulations requirements.
If FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will issue either an approval letter or a conditional approval letter that contains a number of conditions that must be satisfied in order to secure final approval of the PMA application. When and if those conditions are fulfilled to the satisfaction of the FDA, they will issue an approval letter, authorizing commercial marketing of the device for certain indications for use. If the FDA’s evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the application or issue a “not approvable letter.” The FDA may also determine that additional clinical trials are necessary, in which case pre-market approval could be delayed for several years while additional clinical trials are conducted and submitted in an amendment to the PMA application. The pre-market approval process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought have never been approved for marketing.
Any products manufactured or distributed pursuant to FDA clearances or approvals, are subject to pervasive and continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences when using the product.
Device manufacturers are required to register their establishments and list their devices with the FDA and certain state agencies, and are subject to periodic inspections. The Food, Drug, and Cosmetic Act requires devices to be manufactured in accordance with Quality System Requirements regulations, which impose procedural and documentation requirements upon a manufacturer and any of its contract manufacturers with respect to manufacturing and quality assurance activities. The frequency and depth of inspections of PMA products are generally more detailed and frequent than products cleared in the 510(k) process. The past two inspections by the FDA did not result in any adverse findings. Quality System Requirements regulations also require design controls and maintenance of service records. Changes in existing requirements or adoption or new requirements or policies could adversely affect our ability to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition or results of operations.
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The Company submitted a PMA for market clearance of the WavSTAT Optical Biopsy System for use during endoscopic screening of the colon in September 1998, and was approved by the FDA in November 2000. Based upon beta site outcome clinical studies, features were added to the WavSTAT, and submitted as a supplement to the original filing in September 2001. The supplement for the WavSTAT2 was approved by the FDA in November 2001. The Company submitted a supplement for approval of WavSTAT3 in February 2002 and approval was received in August 2002. We anticipate, but do not know for certain, that product improvements requiring approval, or any new applications, such as for the WavSTAT4 will be submitted as supplements to the original filing rather than as original PMA filings.
We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We are not aware of any manufacturing methods for the WavSTAT4 Systems that will require extensive or costly compliance with environmental regulations. However, since laws change over time there can be no assurance that (i) we will not be required to incur significant costs to comply with all applicable laws and regulations in the future, or (ii) the impact of changes in those laws or regulations or adoption of new laws and regulations will not have a material adverse effect upon our ability to do business.
European Union and Other Countries
The European Union encompasses most of the major countries in Europe. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trial, labeling, and adverse event reporting for medical devices. The principal directive prescribing the laws and regulations pertaining to medical devices in the European Union is the Medical Devices Directive, 93/42/EEC.
Devices that comply with the requirements of the Medical Devices Directive and applicable International Standards Organization (ISO) standards are entitled to bear the CE mark. SpectraScience compliance has been confirmed by our Notified Body to market and sell our medical device products in the European Union. Generally, companies must go through the ISO certification process in order to obtain the CE mark. SpectraScience has held the appropriate ISO certifications since July 2000, and the CE mark authorization followed in October 2000. In order to maintain this certification SpectraScience undergoes a yearly audit by our Notified Body. Our last audit was in 2014, when we confirmed both the certification for ISO 9001 and EN 13485:2003, which is the medical device adaptation of the ISO 9001 standard. There can be no assurance that we will be able to maintain international certification or CE mark authorization for our products or product components. Furthermore, even though a device bears the CE Mark, practical complications may arise with respect to market introduction because of differences among countries in areas such as labeling requirements and reimbursement practices. We may be required to spend significant amounts of capital in order to comply with the various regulatory requirements of foreign countries and achieve reasonable payment for our products.
Product Research and Development
The Company invested significant capital in research and development for the fiscal years ended December 31, 2013 and 2012 as continued improvements were made to the WavSTAT4 Optical Biopsy System. Research and development expenses were approximately $644,000 and $1,114,000 for the fiscal years ended December 31, 2013 and 2012, respectively.
Compliance with Environmental Laws
Management has reviewed the cost of compliance with environmental laws and deemed the cost of such compliance to be immaterial for the fiscal year ended December 31, 2013.
Distribution and Sales
Our objective is to become a leader in the development and commercialization of advanced minimally-invasive diagnostic products with the capability to differentiate in real-time between healthy, and pre-cancerous or cancerous tissue. During 2013, our sales and marketing efforts have been, and will continue to be focused on marketing the WavSTAT4 System in the colorectal diagnostic market. The WavSTAT4 represents a significant redesign and improvement over previous WavSTATs and the WavSTAT4 was completed and available to market in December 2011. We envision particular emphasis on selling the WavSTAT System in international markets and in June 2012 the Company entered into a distribution agreement with PENTAX Europe GmbH (“PENTAX”), for the sale of the WavSTAT in international markets.
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During the fiscal years ended December 2013 and 2012, the Company sold PENTAX $240,000 and $461,296 of mobile consoles and disposable forceps. We will continue to work with PENTAX throughout 2014 to develop marketing programs and sell the WavSTAT in the EU. A precondition to broad sales adoption in the major markets of Europe is the completion of a series of marketing evaluations in each of these major markets conducted by key opinion leaders. These evaluations are required to obtain widespread adoption of the WavSTAT System in each European country. We will be conducting these multi-national, multi-center studies in order to provide current clinical results and validate economic impact. These evaluations combine both the aspects of clinical efficacy as well as economic impact and are critical data points. During 2014 our focus will be on moving these evaluations forward.
Approximate sales by principal geographic area (as a percentage of sales) for fiscal years ended December 31, 2013 and 2012 were as follows:
| 2013 | 2012 | |||||||
| Domestic sales | - | % | - | % | ||||
| Foreign sales: | ||||||||
| Europe | 100.0 | 100.0 | ||||||
| Total foreign sales | 100.0 | 100.0 | ||||||
| Total sales | 100.0 | % | 100.0 | % | ||||
Major Customer
During the two years ended December 31, 2013 and 2012, we had sales to the following customer which represented greater than 10% of our annual revenue:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| PENTAX | $ | 240,000 | $ | 461,296 | ||||
The loss of this major customer, unless replaced by similar customers, could have a material adverse effect on our operations and our ability to generate income.
Third-Party Reimbursement
If and when the Company secures FDA approval, we expect to market and sell the WavSTAT4 System primarily through managed care hospitals and clinics. In the United States, the purchasers of medical devices generally rely on Medicare, Medicaid, private health insurance plans, health maintenance organizations and other sources of third party reimbursement for health care costs, to reimburse all or part of the cost of medical devices and/or the procedure in which the devices are used. Significant sales of our products will, in part, be dependent on the availability of adequate reimbursement from these third party payers for procedures carried out using our products. We believe that less invasive procedures generally provide less costly overall therapies compared to conventional drugs, surgery and other treatments. We anticipate hospital administrators and physicians will justify the use of our products by the cost and time saving recognized and clinical benefits that we believe will be derived from the use of our products.
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Third party payers determine whether to provide coverage for a particular procedure and reimburse health care providers for medical treatment at a fixed rate based on the diagnosis-related group established by the Center for Medicare and Medicaid Services. The fixed rate of reimbursement is based on the procedure performed and is unrelated to the specific type or number of devices used in a procedure. If a diagnosis-related group does not cover a procedure, payers may deny reimbursement. If reimbursement for a particular procedure is approved, third party payers will reimburse health care providers for medical treatment based on a variety of methods, including a lump sum prospective payment system based on a diagnosis-related group or per diem, a blend between the health care provider’s reported costs and a fee schedule, a payment for all or a portion of charges deemed reasonable and customary, or a negotiated per capita fixed payment.
Upon product introduction, currently existing available codes can be used to provide a level of reimbursement to users. Management believes however, that currently available reimbursement codes do not adequately reimburse for the anticipated value that optical biopsy technology brings to the medical care system. Optical biopsies in the lower gastrointestinal tract are not currently approved for reimbursement by third-party payers, and there can be no assurance that optical biopsy technology will be approved for any third party reimbursement for use in colorectal cancer screening, even if it proves to play a significant role in improving the endoscopist’s ability to accurately differentiate among polyps in the colon. Recently, a reimbursement code for optical biopsy in the upper gastrointestinal tract (esophagus) was approved, evidence that healthcare providers are accepting this minimally-invasive approach.
Demonstrating cost-effectiveness and improved patient outcomes is critical to increasing sales since payers evaluate these factors in determining whether to reimburse for new technologies. Payers may also delay reimbursement decisions for a year or more, even when provided with cost-effectiveness data, while they conduct their own technology assessments. The availability of peer-reviewed literature regarding the technology may help payers in reducing this technology assessment timeline. To promote the dissemination of literature regarding the WavSTAT4 optical biopsy technology, we are working to have published clinical utility and cost/benefit data in peer-reviewed journals.
We expect that there will be continued pressure on cost-containment throughout the United States health care system. Cost reduction, cost containment, managed care, and capitation pricing (putting a ceiling on price) are ever more familiar themes within health care. Limits on third-party reimbursements that lead to cuts in reimbursements for new or experimental procedures would affect the ability of smaller companies with new technologies to compete with larger established firms or with established technologies. Lobbying activities are often necessary to broadly introduce these new technologies, but lobbying requires extensive amounts of corporate resources that the Company may not be able to afford.
Reimbursement systems in international markets vary by country, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government managed health care systems that control reimbursement for new products and procedures. In most markets, there are private insurance systems as well as government-managed systems. Market acceptance of our products will depend on the availability and level of reimbursement in our targeted international markets. We may not be able to obtain reimbursement in any country within a particular time, for a particular time, for a particular amount, or at all.
We are unable to predict what additional legislation or regulation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, if any, or what effect it might have on us. In particular, we are unable to yet predict the impact that recently signed health care reform legislation will have on our business. Reforms may include (i) mandated basic health care benefits, (ii) controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, (iii) greater reliance on prospective payment systems, (iv) the creation of large insurance purchasing groups, and (v) fundamental changes to the health care delivery system. Management anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery systems and payment mechanisms. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, we cannot predict which reform proposals, if any, will be adopted, when they may be adopted or what impact they may have on us. Failure by hospitals and other users of our products to obtain reimbursement from third-party payers, or changes in government and private third-party payers’ policies toward reimbursement for procedures employing our products, could have a material adverse effect on our business, financial condition and results of operations.
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Manufacturing and Sources of Supply
SpectraScience manufactures the WavSTAT4 System at its facility in San Diego. The disposable WavSTAT optical biopsy forceps (one required for each patient) are outsourced to United States contract OEM manufacturers. The Company also performs certain final assembly processes of the WavSTAT forceps. All WavSTAT Systems previously used for pre-clinical testing, FDA compliant clinical trials, and cost effectiveness/outcome clinical studies were manufactured under a Quality System with Standard Operating Procedure controls. Management continues to utilize these quality control systems and adds to or modifies them as necessary.
The WavSTAT4 Systems are, and will be, manufactured in accordance with current FDA Quality System Regulations and ISO 9001 International Standards, both of which are necessary to sell products within the United States and the European Union. These requirements impose certain procedural and documentation requirements upon SpectraScience with respect to manufacturing and quality assurance activities, as well as upon those third parties with whom the Company contracts to perform certain manufacturing processes.
During 2007, SpectraScience was granted ISO 9001 and 13485:2003 certification for its manufacturing facility and Quality System. These international standards are the European equivalent to the FDA’s Quality System Regulations. Meeting these standards permits use of the CE mark to export the WavSTAT4 Optical Biopsy System to the European Union.
The FDA has reviewed the manufacturing processes and Standard Operating Procedures required to build a WavSTAT System and we are authorized to manufacture the product in our current facility. Both the FDA and the European Notified Body will continue to perform periodic audits as long as SpectraScience manufactures and commercializes medical products.
Competition
The medical device industry is highly competitive. Management believes the Company has few direct competitors in applying spectroscopy for the differentiation of normal, pre-cancerous or cancerous tissues in the gastrointestinal tract; however, the development of products using spectroscopic diagnostics for various medical specialties is expanding. To the best of our knowledge, no other competitors have completed FDA clinical studies or submitted a pre-market approval application to the FDA or received CE Mark authority to distribute a product for the detection of colorectal or esophageal cancer.
Many competitors have substantially greater resources than we do, either internally or in combination with strategic partners. These resources may allow them to develop, market and distribute technologies or products that could be more effective than those developed or marketed by us, or that would render our technologies and products obsolete. The resource advantages they may have are:
greater capital resources;
greater manufacturing resources;
greater resources and expertise in testing products in clinical trials;
greater resources and expertise in the areas of research and development;
greater expertise in obtaining regulatory approvals; and
greater resources for marketing and sales activities.
The companies listed below have developed or are in the process of developing products that use light-based spectroscopic technology or similar methods. These companies compete with and could potentially compete with SpectraScience products or technologies. However, none of these companies use a technology or method which is the same as that used by SpectraScience and only one has commercialized a diagnostic application (Mela Sciences, Inc. for skin cancer) that does not require image analysis and physician interpretation.
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Competitors
There are a number of companies with products or developing products that may directly or indirectly compete with our products. Among these companies are Olympus Corporation, Tokyo, Japan; PENTAX, a division of HOYA Corporation, Tokyo, Japan; Fujifilm Corporation, Tokyo, Japan; Mauna Kea Technologies, Paris France; MELA Sciences, Inc. Irvington, NY; Caliber ID, Rochester, NY; Verisante Technology, Inc., Vancouver, British Columbia; Guided Therapeutics, Inc., Norcross, Georgia; OncoScope, Inc., Durham, North Carolina; and NinePoint Medical, Inc., Cambridge, Massachusetts. Many of these companies have significantly greater resources than we do. In addition, there are other smaller potential competitors working on light-based technologies for detection and diagnosis and several academic centers conducting research.
Patents
SpectraScience currently owns exclusive rights to a total of 34 issued U.S. utility patents, seven U.S. design patents and approximately 25 foreign counterpart patents. Our most recent patent grant was in August 2012 and we continue to apply for patents to expand and strengthen our intellectual property portfolio. Our U.S. patents are listed below:
| Patent Name | U.S. Patent Number | |||
| Optical Biopsy Forceps | 5,762,613 | |||
| System for Diagnosing Tissue with Guidewire | 5,601,087 | |||
| Method of Diagnosing Tissue with Guidewire | 5,439,000 | |||
| Guidewire Catheter and Apparatus for Diagnostic Imaging | 5,383,467 | |||
| Optical Biopsy Forceps System and Method of Diagnosing Tissue | 6,066,102 | |||
| Optical Biopsy Forceps | 6,129,683 | |||
| Optical Biopsy System and Methods for tissue Diagnosis | 6,174,291 | |||
| Optical Forceps System and Method of Diagnosing and Treating Tissue | 6,394,964 | |||
| Spectral Volume Microprobe Analysis of Materials | 5,713,364 | |||
| Spectral Volume Microprobe Arrays | 6,104,945 | |||
| Spectroscopic System Employing a Plurality of Data Types | 6,385,484 | |||
| Spectral Volume Microprobe Arrays | 6,411,835 | |||
| Systems and Methods for Optical Examination of Samples | 6,411,838 | |||
| Spectral Data Classification of Samples | 6,421,553 | |||
| Optical Methods and Systems for Rapid Screening of the Cervix | 6,427,082 | |||
| Substantially Monostatic, Substantially Confocal Optical Systems for Examination of Samples | 6,760,613 | |||
| Fluorescent Fiberoptic Probe for Tissue Health Discrimination and Method of Use Thereof | 6,768,918 | |||
| Method and Apparatus for Identifying Spectral Artifacts | 6,818,903 | |||
| Spectral Volume for Microprobe Arrays | 6,826,422 | |||
| System for Normalizing Spectra | 6,839,661 | |||
| Optical Probe Accessory Device for Use In-Vivo Diagnostic Procedures | 6,847,490 | |||
| Methods of Monitoring Effects of Chemical Agents on a Sample | 6,902,935 | |||
| Optimal Windows for Obtaining Optical Data for Characterization of Tissue Samples | 6,933,154 | |||
| Methods and Apparatus for Displaying Diagnostic Data | 7,136,518 | |||
| Colonic Polyp Discrimination by Tissue Florescence and Fiberoptic Probe | 7,103,401 | |||
| Optical Methods and Systems for Rapid Screening of the Cervix | 7,127,282 | |||
| Methods and Systems for Correcting Image Misalignment | 7,187,810 | |||
| Image Processing using Measures of Similarity | 7,260,248 | |||
| Methods and Apparatus for Processing Spectral Data for use in Tissue Characterization | 7,282,723 | |||
| Methods and apparatus for characterization of tissue samples | 7,309,867 | |||
| Fluorescent fiberoptic probe for tissue health discrimination | 7,310,547 | |||
| Methods and Systems for Correcting Image Misalignment | 7,406,215 | |||
| Methods and Apparatus for Calibrating Spectral Data | 7,459,696 | |||
| Unique Methods and Apparatus for Evaluation of Image Focus | 7,469,160 | |||
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SpectraScience is also the exclusive licensee through the Massachusetts General Hospital of U.S. Patent 5,843,000 entitled, “Optical Biopsy Forceps and Method of Diagnosing Tissue”. We believe that this patent, in combination with our other optical forceps patents, provides the Company an advantage in marketing biopsy forceps that contain optical fiber. The above patents expire between 2015 and 2022. Each of the international patents designates several countries for patent protection.
The Company believes that it holds one of the strongest patent portfolios of its kind in the field of optical methods for the diagnosis and detection of tissue abnormalities, particularly for identifying cancer and its precursors. Management also believes that its intellectual property portfolio will protect the core technology and methods embodied in the WavSTAT4 Optical Biopsy System as well as for many of the Company’s future products and can create a substantial barrier to entry for others pursuing similar approaches.
Core Areas of Patent Protection
SpectraScience’s portfolio provides protection in the following key technology, design and methods areas:
Localized tissue characterization using optical methods;
Specific application and combinations of autofluorescence, broadband spectroscopy and video imaging;
Design and use of disposable components, in combination with systems and methods, including use of unique identifiers;
Algorithms specific to optical assessment of tissue characteristics, particularly involving identification, classification and calibration methods;
Clinical applications of these methods and systems for identifying tissue characteristics, including use of display methods, marking methods (including biomarkers) and in combination with treatment; and
Applications to further future system development, including applications for screening, treatment and other applications beyond colon and esophageal cancer.
SpectraScience holds registered trademarks for the WavSTAT System and SpectraScience trade names, and software and graphics are protected by appropriate copyrights.
Our ability to obtain and maintain patent protection for our products, preserve our trade secrets and operate without infringing on the proprietary rights of others will directly affect how successful our operations will be. Our strategy regarding the protection of our proprietary rights and innovations is to seek patents on those portions of our technology that we believe are patentable, and to protect as trade secrets other confidential information and proprietary know-how. SpectraScience is careful to protect its trade secrets and proprietary know-how by obtaining confidentiality and invention assignment agreements in connection with employment, consulting and advisory relationships. There are certain technological aspects of the WavSTAT Systems that are not covered by any patents or patent applications.
The patent and trade secret positions of medical device companies like SpectraScience are uncertain and involve complex and evolving legal and factual questions. To date, no claims have been brought against the Company alleging that our technology or products infringe intellectual property rights of others. Often, patent and intellectual property disputes in the medical device industry are settled through licensing or similar arrangements. However, necessary licenses from other parties may not be available to us on satisfactory terms, if at all, and the costs associated with such arrangements may be substantial and could include ongoing royalties.
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United States patent applications are not publicly disclosed until they are issued or corresponding foreign applications are published in other countries. Since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, management cannot be certain that SpectraScience was the first to invent the inventions covered by each of its pending patent applications, or that it was the first to file patent applications for such inventions. In addition, the laws of some foreign countries do not provide the same degree of intellectual property-rights protection as do the laws of the United States. Litigation associated with patent or intellectual property infringement or protection could be lengthy and prohibitively costly. SpectraScience may not have the financial resources to defend its patents from infringement or claims of invalidity, or to successfully defend itself against intellectual property infringement claims by third parties.
Product Liability
The risk of product liability claims, product recalls and associated adverse publicity is inherent in the manufacturing, marketing and sale of medical products. We have clinical trial liability insurance coverage for our clinical programs however, there can be no assurance that future insurance coverage will be adequate or available. We may not be able to secure product liability insurance coverage on acceptable terms or at reasonable costs when needed. Any liability damages could exceed the amount of our coverage. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future products.
Employees
As of June 6, 2014, SpectraScience has five full-time and three part-time employees and consultants, with three involved in manufacturing/engineering, one in sales and marketing, one in regulatory and three in finance and administration. The Company’s payroll is administered through an independent third party. SpectraScience is not subject to any collective bargaining agreement and management believes that employee relations are generally satisfactory.
SpectraScience also relies on external consultants in the financial, regulatory, software development and design engineering areas. In the future, if management decided to increase our workforce in response to improved economic, market, and/or business conditions, we might not be able to attract or retain employees with the skills we require.
We describe below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this annual report, may adversely affect our business, operating results and financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this annual report should be considered carefully in evaluating our company and our business and the value of our securities.
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RISKS RELATED TO OUR BUSINESS
We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.
We have yet to establish any history of profitable operations. We have incurred annual operating losses of approximately $2,732,000 and $4,321,000, respectively, during the past two years of operations. As a result, at December 31, 2013 we had an accumulated deficit of approximately $41,376,000. We have incurred net losses from continuing operations of approximately $2,750,000 and $9,093,000 for the years ending December 31, 2013 and 2012, respectively. Our revenues have not been sufficient to sustain our operations and we expect that they will be insufficient to sustain our operations for the foreseeable future. Our failure to generate meaningful revenues and ultimately profits from the WavSTAT System and applications of our technology could and will likely require that we raise additional capital which may not be available or available on acceptable terms. This could ultimately reduce or suspend our operations and ultimately cause us to go out of business. Our profitability will require the successful commercialization of our imaging systems and no assurances can be given when this will occur or if we will ever be profitable.
We will require additional financing to sustain our operations and without it, we may not be able to continue operations.
At December 31, 2013, we had a working capital deficit of approximately $4,080,000. We had an operating cash flow deficit of approximately $1,613,000 for the year ended December 31, 2013 and an operating cash flow deficit of approximately $2,887,000 in 2012. We may not have sufficient financial resources to fund our operations and will likely require additional funds to continue our operations.
We may face intense competition from companies that have greater financial, personnel and research and development resources.
Competitive forces may impact our projected growth and ability to generate revenues and profits, which would have a negative impact on our business and the price of our common stock. Our competitors may be developing products that compete with the WavSTAT Systems. Our commercial opportunities would then be reduced or eliminated should our competitors develop and market products for any of the diseases that we target that are more effective or are less expensive than the products or product candidates we are developing.
Even if we are successful in developing an effective WavSTAT System, and we obtain FDA and other regulatory approvals necessary for commercialization, our products may not compete effectively with other successful products. Researchers are continually learning more about diseases, which may lead to new technologies and tools for analysis.
Our competitors include fully integrated medical device companies, universities and public and private research institutions. Many of the organizations competing with us may have substantially greater capital resources, larger research and development staffs and facilities, greater experience in product development and in obtaining regulatory approvals, and greater marketing capabilities than we do.
The market for medical devices is intensely competitive. Many of our potential competitors have longer operating histories, greater name recognition, more employees, and significantly greater financial, technical, marketing, public relations, and distribution resources than we have. This intense competitive environment may require us to make changes in our products, pricing, licensing, services or marketing to develop, maintain and extend our current technology. Price concessions or the emergence of other pricing or distribution strategies of competitors may diminish our revenues, adversely impact our margins or lead to a reduction in our market share, any of which may harm our business.
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Our WavSTAT System technology may become obsolete.
Our WavSTAT System products may be made unmarketable by new scientific or technological developments where new treatment modalities are introduced that are more efficacious or more economical. Any one of our competitors could develop a more effective product which would render our technology obsolete.
Our inability to attract and retain qualified personnel could impede our ability to generate revenues and profits and to otherwise implement our business plan and growth strategies, which would have a negative impact on our business and could adversely affect the price of our common stock.
We currently have a staff of eight employees and consultants, consisting of, among others, our Chief Executive Officer, Chief Financial Officer, Director of Sales and Marketing and Chief Engineer Director, as well as administrative employees. We will be required over the longer-term to hire highly skilled managerial, scientific and administrative personnel to fully implement our business plan and growth strategies. We cannot assure you that we will be able to engage the services of such qualified personnel at competitive prices or at all, particularly given the risks of employment attributable to our limited financial resources and lack of an established track record.
Our planned growth will place strains on our management team and other company resources to both implement more sophisticated managerial, operational and financial systems, procedures and controls and to train and manage the personnel necessary to perform those functions. Our inability to manage our growth could impede our ability to generate revenues and profits and to otherwise implement our business plan and growth strategies, which would have a negative impact on our business and the market value of the Company.
We will need to significantly expand our operations to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships with various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties. This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational and financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage, train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and retain the anticipated increased number of employees.
We may have difficulty in developing and retaining an effective sales force or in obtaining effective distribution partners and may not be able to achieve sufficient revenues to affect our business plan.
The market for skilled sales and marketing personnel is highly competitive and specialized. If we are unable to hire and retain skilled and knowledgeable sales people it may negatively impact our ability to introduce our products or generate revenue sufficient to affect our future business plans. In addition, our inability to develop business relationships with key technical distributors may also negatively impact our ability to successfully market our products.
We may have difficulty in attracting and retaining management and outside independent members to our Board of Directors as a result of their concerns relating to their increased personal exposure to lawsuits and shareholder claims by virtue of holding these positions in a publicly held company.
The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and shareholder claims, as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and management are also becoming increasingly concerned with the availability of directors and officers liability insurance to pay on a timely basis the costs incurred in defending such claims. We currently carry directors and officers’ liability insurance, but such insurance is expensive and can be difficult to obtain. If we are unable to obtain directors and officers liability insurance at affordable rates or at all in the future, it may become increasingly more difficult to attract and retain qualified outside directors to serve on our board of directors. The fees of directors are also rising in response to their increased duties, obligations and liabilities as well as increased exposure to such risks. As a company with a limited operating history and limited resources, we will have a more difficult time attracting and retaining management and outside independent directors than a more established company due to these enhanced duties, obligations and liabilities.
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If we fail to comply with extensive regulations enforced by domestic and foreign regulatory authorities, the commercialization of our products could be prevented or delayed.
Our WavSTAT Systems are subject to extensive government regulations related to development, testing, manufacturing and commercialization in the United States and other countries. The determination of when and whether a product is ready for large scale purchase and potential use will be made by the government through consultation with a number of governmental agencies, including the FDA, the National Institutes of Health, and the Centers for Disease Control and Prevention. Some of our product candidates are in the clinical stages of development and have not received required regulatory approval from the FDA for applications we hope to commercially market. The process of obtaining and complying with the FDA and other governmental regulatory approvals and regulations is costly, time consuming, uncertain and subject to unanticipated delays. Despite the time and expense incurred, regulatory approval is never guaranteed. We also are subject to the following risks and obligations, among others:
| • | The FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied; |
| • | The FDA may require additional testing for safety and effectiveness; |
| • | The FDA may interpret data from pre-clinical testing and clinical trials in different ways than us; |
| • | If regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and |
| • | The FDA may change their approval policies and/or adopt new regulations. |
Failure to comply with these or other regulatory requirements of the FDA may subject us to administrative or judicially imposed sanctions, including:
| • | Warning letters; |
| • | Civil penalties; |
| • | Criminal penalties; |
| • | Injunctions; |
| • | Product seizure or detention; |
| • | Product recalls; and |
| • | Total or partial suspension of production. |
Delays in successfully completing our clinical and European evalustion trials could jeopardize our ability to obtain regulatory approval or market our WavSTAT System candidates on a timely basis.
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Our business prospects will depend on our ability to complete clinical trials, obtain satisfactory results, obtain required regulatory approvals and successfully commercialize our WavSTAT System product candidates. Completion of our clinical trials, announcement of results of the trials and our ability to obtain regulatory approvals could be delayed for a variety of reasons, including:
| • | Unsatisfactory results of any clinical trial; |
| • | The failure of principal third-party investigators to perform clinical trials on our anticipated schedules; and |
| • | Different interpretations of pre-clinical and clinical data, which could initially lead to inconclusive results. |
Our development costs will increase if we have material delays in any clinical trial or if we need to perform more or larger clinical trials than planned.
If clinical or evaluation trial delays are significant, or if any of our WavSTAT System product candidates do not prove to be safe or effective or do not receive required regulatory approvals, our financial results and the commercial prospects for our product candidates will be harmed. Furthermore, our inability to complete our clinical trials in a timely manner could jeopardize our ability to obtain regulatory approval.
The independent clinical investigators that we rely upon to conduct our clinical trials may not be diligent, careful or timely, and may make mistakes, in the conduct of our clinical trials.
We depend on independent clinical investigators to conduct our clinical trials. The investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our product development programs. If independent investigators fail to devote sufficient time and resources to our product development programs, or if their performance is substandard, it may delay FDA approval of our products. These independent investigators may also have relationships with other commercial entities, some of which may compete with us. If these independent investigators assist our competitors at our expense, it could harm our competitive position.
Our product development efforts may not yield marketable products due to results of studies or trials, failure to achieve regulatory approvals or market acceptance, proprietary rights of others or manufacturing issues.
Our success depends on our ability to successfully develop and obtain regulatory approval to market new products. We expect that a significant portion of the research that we will conduct will involve new and unproven technologies. Development of a product requires substantial technical, financial and human resources even if the product is not successfully completed.
Potential products may appear to be promising at various stages of development yet fail to reach the market for a number of reasons, including the:
| • | Lack of adequate quality or sufficient prevention benefit, or unacceptable safety during pre-clinical studies or clinical trials; |
| • | Failure to receive necessary regulatory approvals; |
| • | Existence of proprietary rights of third parties; and/or |
| • | Inability to develop manufacturing methods that are efficient, cost-effective and capable of meeting stringent regulatory standards. |
Our inability to protect our intellectual property rights could negatively impact our projected growth and ability to generate revenues and profits, which would have a negative impact on our business and the value of your investment.
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We rely on a combination of patent, patent pending, copyright, trademark and trade secret laws, proprietary rights agreements and non-disclosure agreements to protect our intellectual properties. These measures may not prove to be effective in protecting our intellectual properties.
In the case of patents, our existing patents may be invalidated, any patents that we currently or prospectively apply may not be granted, or any of these patents may not ultimately provide significant commercial benefits. Further, competing companies may circumvent any patents that we may hold by developing products which closely emulate but do not infringe our patents. While we currently have and intend to seek patent protection for our products in selected foreign countries, those patents may not receive the same degree of protection as they would in the United States. We may not be able to successfully defend our patents and proprietary rights in any action we may file for patent infringement. Similarly, we may be required to defend litigation involving the patents or proprietary rights of others, or we may be able to obtain licenses for these rights. Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial.
The WavSTAT System is protected by 34 issued patents, in the United States and approximately 25 foreign patents, which we own, and one additional patent for which we own the exclusive license. We also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection. Our competitors may independently develop the same or superior designs, technologies, processes and know-how.
While we have and will continue to enter into proprietary rights agreements with our employees and third parties giving us proprietary rights to certain technology developed by those employees or parties while engaged by the Company, courts of competent jurisdiction may not enforce those agreements.
The patents we own comprise a large portion of our assets, which could limit our financial viability.
Our patents comprise approximately 65% of our assets at December 31, 2013. If our existing patents are invalidated or if they fail to provide significant commercial benefits, it will severely hurt our financial condition, as a significant percentage of our assets would lose their value. Further, since our patents are amortized over the course of their term until they expire, our assets comprised of patents will continually be written down to zero.
Legislative actions and potential new accounting pronouncements are likely to impact our future financial position and results of operations.
Compliance with publicly-traded company regulations adversely impacts our resources. As a publicly-traded company, we are subject to rules and regulations that increase our legal and financial compliance costs, make some activities more time-consuming and costly, and divert our management's attention away from the operation of our business. We are obligated to file with the U.S. Securities and Exchange Commission, or the SEC, annual and quarterly information and other reports that are specified in the Securities Exchange Act of 1934, or the Exchange Act, and are also subject to other reporting and corporate governance requirements, including requirements of the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated thereunder, which impose significant compliance and reporting obligations upon us. We may not be successful in complying with these obligations, and compliance with these obligations could be time consuming and expensive. Failure to comply with the additional reporting and corporate governance requirements could lead to fines imposed on us, deregistration under the Exchange Act and, in the most egregious cases, criminal sanctions could be imposed.
Our products may be subject to recall or product liability claims.
Our WavSTAT System products may be used in connection with medical procedures in which it is important that those products function with precision and accuracy. If our products do not function as designed, or are designed improperly, we may be forced by regulatory agencies to withdraw such products from the market. In addition, if medical personnel or their patients suffer injury as a result of any failure of our products to function as designed, or due to an inappropriate design, we may be subject to lawsuits seeking significant compensatory and punitive damages. Any product recall or lawsuit seeking significant monetary damages may have a material effect on our business and financial condition.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None
SpectraScience leases its principal facility from an unrelated third party. The facility is located at 11568-11 Sorrento Valley Road, San Diego, California 92121, and is well maintained and approved by the FDA for manufacturing. The facility consists of approximately 5,080 square feet of office, research and development, manufacturing, quality testing, and warehouse space. The lease provides for monthly rental payments ranging from $4,826 to $5,432 through April 2018, plus a pro rata share of operating expense and real estate taxes (approximately $1,500 per month). We believe that our present facility is adequate for our needs for the foreseeable future. In the event of the termination of this lease, we believe that we could lease other acceptable space on a comparable basis.
We are not currently a party to any legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock is quoted on the OTCQB under the symbol SCIE.QB. The last reported bid price of the Common Stock on June 6, 2014 was $0.05.
The following table sets forth for the calendar period indicated; the quarterly closing prices of our Common Stock as reported by the OTCBB and the OTCQB, the bulletin boards on which our common stock was traded during fiscal years 2013 and 2012.
| Closing Price | ||||||||
| High | Low | |||||||
| Year Ended December, 2012 | ||||||||
| First Quarter | $ | 0.12 | $ | 0.05 | ||||
| Second Quarter | $ | 0.15 | $ | 0.05 | ||||
| Third Quarter | $ | 0.24 | $ | 0.08 | ||||
| Fourth Quarter | $ | 0.15 | $ | 0.05 | ||||
| Year Ended December, 2013 | ||||||||
| First Quarter | $ | 0.08 | $ | 0.05 | ||||
| Second Quarter | $ | 0.08 | $ | 0.04 | ||||
| Third Quarter | $ | 0.05 | $ | 0.03 | ||||
| Fourth Quarter | $ | 0.04 | $ | 0.02 | ||||
On June 6, 2014 we had approximately 800 shareholders of record of our common stock.
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To date, we have not declared or paid cash dividends on our common stock. The current policy of the board of directors is to retain any earnings to fund the development and growth of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors our board may deem relevant at the time.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2013 we issued the following equity securities:
| Number of | ||||||||||||
| Date of | Common Shares | Source of | ||||||||||
| Common Stock | Issuance | Issued | Payment | Amount | ||||||||
| 11/22/2013 | 150,000 | Services | $ | 6,000 | ||||||||
| 11/22/2013 | 150,000 | Services | $ | 6,000 | ||||||||
| 11/30/2013 | 4,117,007 | Convertible Debt Conversion | $ | 235,904 | ||||||||
| Common Stock Purchase Warrants | Date of | |||||||||||
| Issued With Convertible Debentures | Issuance | Number of Shares | Exercise Price | Expiration Date | ||||||||
| 10/25/2013 | 2,923,977 | $ | 0.0900 | 10/25/2018 | ||||||||
| 11/4/2013 | 2,923,977 | $ | 0.0900 | 11/4/2018 | ||||||||
| 11/30/2013 | 348,611 | $ | 0.0900 | 11/30/2018 | ||||||||
| 11/30/2013 | 670,421 | $ | 0.0900 | 11/30/2018 | ||||||||
| 11/30/2013 | 689,135 | $ | 0.0900 | 11/30/2018 | ||||||||
| 11/30/2013 | 985,239 | $ | 0.0900 | 11/30/2018 | ||||||||
| 11/30/2013 | 652,220 | $ | 0.0900 | 11/30/2018 | ||||||||
| 12/20/2013 | 2,923,977 | $ | 0.0900 | 12/20/2018 | ||||||||
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 6. | SELECTED FINANCIAL DATA |
Not required.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis provides information that management believes is relevant to assess and understand our results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and footnotes that follow such consolidated financial statements.
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Certain statements contained in this Annual Report on Form 10-K, including in this Item 7, that are not related to historical results, including, without limitation, statements regarding our business strategy and objectives, near term operating goals, our expectations regarding the market for our products and beliefs with respect to opportunities, strategic partnerships and industry conditions in those markets, our beliefs about our products and expectations with respect to their performance and acceptance, regulatory practices and developments, our beliefs about our employees, our beliefs and intentions with respect to intellectual property, our beliefs with respect to reimbursement, our beliefs and expectations regarding competition, future operating losses and our future financial position, our expectations with respect to future cash needs and the sufficiency of our working capital, and estimated cost savings, are forward-looking statements and involve risks and uncertainties. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, such assumptions may not prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are 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 this Form 10-K. All forward-looking statements contained in this Form 10-K are qualified in their entirety by this statement.
Plan of Operation
During the year ended December 31, 2013, SpectraScience continued improvements made to the WavSTAT4 in 2012 under its distribution agreement with PENTAX Europe, GmbH (“PENTAX”), for distribution of its products in Europe the Middle East and Africa. All of the sales of approximately $240,000 and $461,000 for the years ended December 31, 2013 and 2012 were to PENTAX.
Over the next 12 months, SpectraScience intends to:
Market and sell the WavSTAT4 Optical Biopsy System colon cancer diagnostic application through PENTAX 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 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.
Cash Requirements
SpectraScience expects to incur significant additional operating losses through 2014, as we continue with outcome-based clinical studies, research and development activities and ramp up sales and marketing efforts to sell the WavSTAT4 Systems. We may incur unexpected expenses, or we may not be able to meet our revenue forecast, and such events will require us to seek additional capital.
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SpectraScience has financed its capital requirements principally through the private sale of equity securities. The Company had cash balances of approximately $237,000 at December 31, 2013 and $90,000 at December 31, 2012. The approximate $147,000 increase in cash for the year was a result of approximately $1,754,000 of cash used in operations and approximately $4,000 related to acquisitions of equipment offset by net proceeds from the sale of convertible debentures and debt of approximately $1,904,000. The Company will have to raise additional cash to provide working capital to execute its present business plans.
SpectraScience’s future liquidity and capital requirements will depend upon a number of factors, including but not limited to:
The timing and progress of market evaluation clinical trials;
The timing and extent to which SpectraScience’s products gain market acceptance;
The timing and expense of developing marketing and strategic distribution channels;
The progress and expense of developing next generation products and new applications for incorporation into the WavSTAT Optical Biopsy Systems;
The potential requirements and related costs for product modifications;
The timing and expense of various U.S. and foreign regulatory filings;
The maintenance of various U.S. and foreign government approvals, or the timing of receipt of additional
approvals;
The status, maintenance and enhancement of SpectraScience’s patent portfolio; and
The overall effect of the present global economic recession, in particular the uncertainty within the economies of the European Union, on the ability of the Company to generate sales revenue.
Results of Operations
The following discussion should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
| 24 |
Comparison of years ended December 31, 2013 and December 31, 2012
| Year Ended December 31, | Favorable | |||||||||||||||
| 2013 | 2012 | (Unfavorable) | % | |||||||||||||
| Revenue | $ | 240,000 | $ | 461,296 | $ | (221,296 | ) | -48.0 | % | |||||||
| Cost of revenue | 125,395 | 313,069 | 187,674 | 59.9 | % | |||||||||||
| Gross profit | 114,605 | 148,227 | (33,622 | ) | -22.7 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 644,076 | 1,114,011 | 469,935 | 42.2 | % | |||||||||||
| General and administrative | 1,934,482 | 2,923,719 | 989,237 | 33.8 | % | |||||||||||
| Sales and marketing | 267,757 | 431,269 | 163,512 | 37.9 | % | |||||||||||
| 2,846,315 | 4,468,999 | 1,622,684 | 36.3 | % | ||||||||||||
| Loss from operations | (2,731,710 | ) | (4,320,772 | ) | 1,589,062 | -36.8 | % | |||||||||
| Other income (expense) | (17,935 | ) | (4,771,826 | ) | 4,753,891 | NM | ||||||||||
| Net income (loss) | $ | (2,749,645 | ) | $ | (9,092,598 | ) | $ | 6,342,953 | 69.8 | % | ||||||
Revenues
Revenues for the year ended December 31, 2013 decreased $221,296, 48.0%, to $240,000 compared to $461,296 for the year ended December 31, 2012. The primary reason for the revenue decrease was a decrease in the number of WaveSTAT4 Systems shipped- 8 in 2013 vs. 9 in 2012 coupled with accessories shipped in 2012 of approximately $191,000 vs. no shipments of accessories in 2013. We anticipate that revenue will increase as a result of our distribution agreement with PENTAX.
Cost of Revenue
Cost of revenue for the year ended December 31, 2013 decreased $187,674, 59.9%, to $125,395 compared to $313,069 for the year ended December 31, 2012. The primary reason for the cost of revenue decrease was the reduction in revenue discussed above.
Research and Development Expenses
Research and development expenses decreased by $469,935, 42.2%, to $644,076 for the year ended December 31, 2013 from $1,114,011 for the year ended December 31, 2012. This decrease was primarily due to a reduction in payroll expense of approximately $169,000 and a reduction in clinical studies of approximately $290,000. We anticipate that development costs will remain low but 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 $989,237, 33.8%, to $1,934,482 for the year ended December 31, 2013 from $2,923,719 the year ended December 31, 2012. The primary reason for the decrease was a decrease in impairment costs related to intellectual property of $621,000 the previous year, a reduction in investor relations costs of approximately $184,000 and a decrease in depreciation and amortization expenses of approximately $142,000. We anticipate that general and administrative expenses will increase as we increase our activity in Europe.
| 25 |
Sales and Marketing Expenses
Sales and marketing expenses decreased by $163,512, 37.9%, to $267,757 for the year ended December 31, 2013 from $431,269 for the year ended December 31, 2012. The primary reason for the decrease was a decrease in payroll costs of approximately $106,000 and a decrease in other compensation of approximately $37,000 related to the valuation of stock options. We anticipate that sales and marketing expenses will increase as we increase our activity in Europe.
Other Expense
Other expense for the year ended December 31, 2013 was expense of $17,935 compared to expense of $4,771,826 for the year ended December 31, 2012. This change was due primarily to the change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other expense (income) as a result of quarterly re-evaluating these obligations.
| 26 |
Liquidity and Capital Resources
| As of | Increase | |||||||||||
| December 31, 2013 | December 31, 2012 | (Decrease) | ||||||||||
| Working Capital | ||||||||||||
| Current assets | $ | 801,109 | $ | 648,948 | $ | 152,161 | ||||||
| Current liabilities | 4,881,597 | 3,989,735 | 891,862 | |||||||||
| Working capital deficit | $ | (4,080,488 | ) | $ | (3,340,787 | ) | $ | 739,701 | ||||
| Long-term debt | $ | - | $ | - | $ | - | ||||||
| Stockholders' deficit | $ | (2,551,231 | ) | $ | (1,576,408 | ) | $ | 974,823 | ||||
| Year Ended December 31, | Increase | |||||||||||
| 2013 | 2012 | (Decrease) | ||||||||||
| Statements of Cash Flows Select Information | ||||||||||||
| Net cash provided (used) by: | ||||||||||||
| Operating activities | $ | (1,612,677 | ) | $ | (2,887,361 | ) | $ | (1,274,684 | ) | |||
| Investing activities | $ | (4,178 | ) | $ | (4,170 | ) | $ | 8 | ||||
| Financing activities | $ | 1,763,260 | $ | 2,731,000 | $ | (967,740 | ) | |||||
| As of December 31, | Increase | |||||||||||
| 2013 | 2012 | (Decrease) | ||||||||||
| Balance Sheet Select Information | ||||||||||||
| Cash | $ | 236,597 | $ | 90,192 | $ | 146,405 | ||||||
| Accounts receivable | $ | 60,000 | $ | - | $ | 60,000 | ||||||
| Inventory | $ | 247,433 | $ | 202,077 | $ | 45,356 | ||||||
| Accounts payable and accrued expenses | $ | 1,440,063 | $ | 1,045,553 | $ | 394,510 | ||||||
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 2014, 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.
| 27 |
As of December 31, 2013, the Company had a working capital deficit of $4,080,488 and cash of $236,597, compared to a working capital deficit of $3,340,787 and cash of $90,192 as of December 31, 2012. 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. During the six months ended June 30, 2013, the Company raised $692,560, net of transaction costs, under this agreement. Subsequent to June 30, 2013, the Company has engaged another agent to assist it with raising capital and has commenced raising capital on its own. During the six months ended December 31, 2013, the Company raised $1,156,576, net of transaction costs, under this agreement. 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 Agreement occur as expected, 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
The Company has no off balance sheet arrangements.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to intangibles, income taxes, financing operations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. Note that our preparation of this Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amount of revenue, if any, and expenses during the reporting period. Actual results may differ from those estimates.
Revenue Recognition
We recognize 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 our 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. We use customer purchase orders to determine the existence of an arrangement. We use shipping documents and third-party proof of delivery to verify that title has transferred. We assess whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, we assess a number of factors, including past transaction history with the customer and the creditworthiness of the customer.
Stock Based Compensation
We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or 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. We adopted ASC 718 on January 1, 2006 using the modified prospective method. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton (Black-Scholes) option-pricing model. These standards require us to expense employee stock options and other share-based payments. The Company recognizes as expense the fair value of employee and non-employee stock option grants. These expenses amounted to approximately $376,000 and $454,000 for the years ended December 31, 2013 and 2012, respectively.
| 28 |
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.
Convertible Debentures and Warrants
For Convertible Debentures issued previous to March 31, 2013 containing exchange features, we account for the Convertible Debentures, associated warrants and conversion features under the provisions of FASB Topic 470, Debt, or ASC 470 which requires the measurement and recognition of the fair values for all components related to the Convertible Debentures at the end of each reporting period. We estimate the fair value of the resulting Beneficial Conversion Feature ("BCF"), holders warrants and agent warrants at each measurement date using a combination of the Black-Scholes-Merton and modified Binomial Lattice option-pricing models. These standards require us to record the fair value of the Convertible Debentures, BCF and warrants at the time of issuance and to remeasure these values and record associated income statement expense or benefit at each reporting period. A more detailed description can be found in Note 8 of the enclosed financial statements. For Convertible Debentures issued subsequent to March 31, 2013 which did not contain exchange features, we account for the Convertible Debentures, associated warrants and conversion features under the provisions of ASC 815 which requires the valuation of the debt discount to be recognized on the date of issuance and the amount of debt discount to be amortized over the life of the Convertible Debenture.
RECENT ACCOUNTING PRONOUNCEMENTS: None
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated audited financial statements for the years ended December 31, 2013 and 2012 are filed as part of this Form 10-K.
| 29 |
SpectraScience, Inc. and Subsidiary
Consolidated Financial Statements
Years Ended December 31, 2013 and 2012
| 30 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
SpectraScience, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of SpectraScience, Inc., and subsidiary as of December 31, 2013, and the related consolidated statements of operations, shareholders' deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SpectraScience, Inc. and subsidiary as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and its ability to continue as a going concern is dependent on the Company’s ability to attract investors and generate cash through issuance of equity instruments and convertible debt. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ HJ Associates & Consultants, LLP | ||
| HJ Associates & Consultants, LLP | ||
| Salt Lake City, Utah | ||
| June 27, 2014 |
| 31 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
SpectraScience, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of SpectraScience, Inc., and subsidiary as of December 31, 2012, and the related consolidated statements of operations, shareholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SpectraScience, Inc. and subsidiary as of December 31, 2012, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and its ability to continue as a going concern is dependent on the Company’s ability to attract investors and generate cash through issuance of equity instruments and convertible debt. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ McGladrey LLP | ||
| McGladrey LLP | ||
| Des Moines, Iowa | ||
| April 17, 2013 |
| 32 |
SpectraScience, Inc. and Subsidiary
Consolidated Balance Sheets
| December 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 236,597 | $ | 90,192 | ||||
| Accounts receivable, net | 60,000 | - | ||||||
| Inventory | 247,433 | 202,077 | ||||||
| Deferred debt issuance costs | 82,227 | 165,649 | ||||||
| Prepaid expenses and other current assets | 174,852 | 191,030 | ||||||
| Total current assets | 801,109 | 648,948 | ||||||
| Fixed assets, net | 15,917 | 85,592 | ||||||
| Patents, net | 1,513,340 | 1,678,787 | ||||||
| $ | 2,330,366 | $ | 2,413,327 | |||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,009,018 | $ | 861,698 | ||||
| Note payable to an affiliate | 30,000 | - | ||||||
| Convertible debt, net of discounts of $644,518 as of December 31, 2013 and $520,851 as of December 31, 2012 | 2,307,111 | 608,622 | ||||||
| Derivative liability | 1,104,423 | 2,335,560 | ||||||
| Accrued Expenses | 431,045 | 183,855 | ||||||
| Total current liabilities | 4,881,597 | 3,989,735 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Stockholders' deficit | ||||||||
| Series A Convertible Preferred Stock, $.01 par value; 0 shares authorized, issued and outstanding as of December 31, 2013 and December 31, 2012 | - | - | ||||||
| Series B Convertible Preferred Stock, $.01 par value; 2,585,000 shares authorized, issued and outstanding as of December 31, 2013 and December 31, 2012; liquidation value of $517,000 plus accumulated and and unpaid dividends of $106,931 as of December 31, 2013 and December 31, 2012 | 25,850 | 25,850 | ||||||
| Series C Convertible Preferred Stock, $.01 par value; 1,000,000 shares authorized; 500,000 and 1,000,000 shares issued and outstanding as of December 31, 2013 and December 31, 2012; liquidation value of $100,000 and $200,000 as of December 31, 2013 and December 31, 2012 | 5,000 | 10,000 | ||||||
| Common stock, $.01 par value; 321,415,000 shares authorized; 166,712,054 and 152,229,665 shares issued and outstanding as of December 31, 2013 and December 31, 2012 | 1,667,120 | 1,522,297 | ||||||
| Additional paid in capital | 37,126,602 | 35,491,603 | ||||||
| Accumulated deficit | (41,375,803 | ) | (38,626,158 | ) | ||||
| Total stockholders' deficit | (2,551,231 | ) | (1,576,408 | ) | ||||
| $ | 2,330,366 | $ | 2,413,327 | |||||
See accompanying reports of independent registered public accounting firms, summary of accounting polices and notes to consolidated financial statements.
| 33 |
SpectraScience, Inc. and Subsidiary
Consolidated Statements of Operations
| Year Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Revenue | $ | 240,000 | $ | 461,296 | ||||
| Cost of revenue | 125,395 | 313,069 | ||||||
| Gross profit | 114,605 | 148,227 | ||||||
| Operating expenses: | ||||||||
| Research and development | 644,076 | 1,114,011 | ||||||
| General and administrative | 1,934,482 | 2,923,719 | ||||||
| Sales and marketing | 267,757 | 431,269 | ||||||
| 2,846,315 | 4,468,999 | |||||||
| Loss from operations | (2,731,710 | ) | (4,320,772 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense | (295,111 | ) | (293,200 | ) | ||||
| Change in fair value of derivative and warrant liabilities | 2,060,749 | 1,267,750 | ||||||
| Amortization of derivative and warrant liabilities discount | (1,304,867 | ) | (2,555,199 | ) | ||||
| Amortization of deferred debt issuance costs and original issue discount | (694,939 | ) | (1,102,221 | ) | ||||
| Gain (loss) on extinguishment of debt | 225,830 | (2,088,074 | ) | |||||
| Other income (expense), net | (9,597 | ) | (882 | ) | ||||
| (17,935 | ) | (4,771,826 | ) | |||||
| Net loss | $ | (2,749,645 | ) | $ | (9,092,598 | ) | ||
| Basic loss per share | $ | (0.02 | ) | $ | (0.08 | ) | ||
| Diluted loss per share | $ | (0.02 | ) | $ | (0.09 | ) | ||
| Weighted average common shares outstanding | 160,015,532 | 118,764,366 | ||||||
See accompanying reports of independent registered public accounting firms, summary of accounting polices and notes to consolidated financial statements.
| 34 |
SpectraScience, Inc. and Subsidiary
Consolidated Statements of Shareholders' Deficit
For Years Ended December 31, 2013 and 2012
| 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 January 1, 2012 | 2,585,000 | $ | 25,850 | 1,000,000 | $ | 10,000 | 108,041,084 | $ | 1,080,411 | $ | 30,922,930 | $ | (29,533,560 | ) | $ | 2,505,631 | ||||||||||||||||||||
| Non cash issuance of stock options | - | - | - | - | - | - | 376,189 | - | 376,189 | |||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | 1,475,000 | 14,750 | 66,750 | - | 81,500 | |||||||||||||||||||||||||||
| Conversion of convertible debt | - | - | - | - | 42,698,711 | 426,987 | 2,036,619 | - | 2,463,606 | |||||||||||||||||||||||||||
| Cashless warrant exercise | - | - | - | - | 14,870 | 149 | 1,041 | - | 1,190 | |||||||||||||||||||||||||||
| Loss on debt extinguishment | - | - | - | - | - | - | 2,088,074 | - | 2,088,074 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (9,092,598 | ) | (9,092,598 | ) | |||||||||||||||||||||||||
| Balance December 31, 2012 | 2,585,000 | 25,850 | 1,000,000 | 10,000 | 152,229,665 | 1,522,297 | 35,491,603 | (38,626,158 | ) | (1,576,408 | ) | |||||||||||||||||||||||||
| Non cash issuance of stock options | - | - | - | - | - | - | 360,213 | - | 360,213 | |||||||||||||||||||||||||||
| Common stock issued for cash and prepaid expenses | - | - | - | - | 500,000 | 5,000 | 20,000 | - | 25,000 | |||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | 4,300,000 | 43,000 | 213,500 | - | 256,500 | |||||||||||||||||||||||||||
| Conversion of convertible debt | - | - | - | - | 9,182,389 | 91,823 | 323,035 | - | 414,858 | |||||||||||||||||||||||||||
| Conversion of Series C Convertible Preferred | - | - | (500,000 | ) | (5,000 | ) | 500,000 | 5,000 | - | - | - | |||||||||||||||||||||||||
| Warrant valuation on issuance of convertible debt | - | - | - | - | - | - | 718,251 | - | 718,251 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (2,749,645 | ) | (2,749,645 | ) | |||||||||||||||||||||||||
| Balance December 31, 2013 | 2,585,000 | $ | 25,850 | 500,000 | $ | 5,000 | 166,712,054 | $ | 1,667,120 | $ | 37,126,602 | $ | (41,375,803 | ) | $ | (2,551,231 | ) | |||||||||||||||||||
See accompanying reports of independent registered public accounting firms, summary of accountingpolicies and notes to consolidated financial statements.
| 35 |
SpectraScience, Inc. and Subsidiary
Consolidated Statements of Cash Flows
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (2,749,645 | ) | $ | (9,092,598 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Write off of uncollectable accounts receivable | (78,624 | ) | - | |||||
| Amortization and depreciation | 239,300 | 916,798 | ||||||
| Non-cash issuance of stock options | 360,213 | 376,189 | ||||||
| Amortization of derivative and warrant liabilities discount | 1,304,867 | 2,555,199 | ||||||
| Amortization of deferred debt issuance costs and original issue discount | 694,939 | 1,102,221 | ||||||
| Change in fair value of derivative and warrant liabilities | (2,060,749 | ) | (1,267,750 | ) | ||||
| (Gain) loss on extinguishment of debt | (225,830 | ) | 2,088,074 | |||||
| Fair market value of common stock issued for services | 256,500 | 82,690 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 18,624 | 26,733 | ||||||
| Inventories | (45,356 | ) | 165,761 | |||||
| Prepaid expense and other assets | 31,803 | (166,537 | ) | |||||
| Accounts payable | 138,705 | 165,889 | ||||||
| Accrued expenses | 502,576 | 159,970 | ||||||
| Net cash used in operating activities | (1,612,677 | ) | (2,887,361 | ) | ||||
| Investing activities: | ||||||||
| Purchases of fixed assets | (4,178 | ) | (4,170 | ) | ||||
| Net cash used in investing activities | (4,178 | ) | (4,170 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from issuance of convertible notes payable | 2,122,000 | 3,305,762 | ||||||
| Proceeds from issuance of note payable to affiliate | 45,000 | - | ||||||
| Payments against note payable to affiliate | (15,000 | ) | - | |||||
| Proceeds from issuance of common stock for cash | 9,375 | - | ||||||
| Debt issuance costs | (398,115 | ) | (574,762 | ) | ||||
| Net cash provided by financing activities | 1,763,260 | 2,731,000 | ||||||
| Net increase (decrease) in cash | 146,405 | (160,531 | ) | |||||
| Cash, beginning of year | 90,192 | 250,723 | ||||||
| Cash, end of period | $ | 236,597 | $ | 90,192 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 12,237 | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| Non Cash Investing and Financing Activities: | ||||||||
| Conversion of convertible notes to common stock | $ | 473,684 | $ | 2,224,212 | ||||
| Conversion of interest due on convertible notes to common stock | $ | 59,366 | $ | 222,420 | ||||
| Exchange of interest due on convertible notes to new notes | $ | 62,155 | $ | - | ||||
| Conversion of preferred stock to common stock | $ | 5,000 | $ | - | ||||
See accompanying reports of independent registered public accounting firms, summary of accounting polices and notes to consolidated financial statements.
| 36 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: Organization and 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 subsidiary Luma Imaging Corp. From 1996, the Company primarily focused 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 Imaging Corporation (“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 intellectual property consisted of a total of 34 issued U.S. Patents and 28 additional patent applications.
Note 2: 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 2014, 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.
| 37 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As of December 31, 2013, the Company had a working capital deficit of $4,080,488 and cash of $236,597, compared to a working capital deficit of $3,340,787 and cash of $90,192 as of December 31, 2012. 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. During the six months ended June 30, 2013, the Company raised $692,560, net of transaction costs of $169,440, under this agreement. Subsequent to June 30, 2013, the Company has engaged another agent to assist it with raising capital and has commenced raising capital on its own. During the six months ended December 31, 2013, the Company raised $1,156,576, net of transaction costs of $103,424, under this agreement. 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 Agreement occur as expected, 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 December 31, 2013, Convertible Debentures with a face value of $1,324,212 held by 32 individual investors are in default. None of these investors have served notice of default on the Convertible Debentures held by them.
The accompanying consolidated 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.
Note 3: Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of SpectraScience, Inc. and its wholly-owned subsidiary LUMA. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the 2012 financial statements in order for them to conform to the 2013 presentation. Such reclassifications have no impact on the Company’s financial position or results of operations.
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.
Accounts Receivable
Receivables are carried at original invoice amount less payment received and an estimate is made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Receivables are generally considered past due 30 days after payment date as specified on the invoice. We determine allowance for doubtful accounts by regularly evaluating individual receivables and considering a creditor’s financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of previously written off receivables previously written off are recorded when received.
| 38 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Inventory
We state our inventory at the lower of cost (using the first-in, first-out method) or market value, determined on an average cost basis. We provide inventory allowances when conditions indicate that the selling price could be less than cost due to obsolescence and reductions in estimated future demand. We balance 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 inventory reserves that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when we sell products.
Property and Equipment
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.
Patents
The Company accounts for acquired intangible assets under FASB ASC Topic 350 Goodwill and Other Intangibles –General Intangibles Other than Goodwill. All patents are amortized over the shorter of their remaining legal lives or estimated economic lives. When acquired, the WavSTAT System patents had an average remaining useful life of 14 years, while the LUMA patents had an average remaining life of approximately 16 years.
Convertible Debentures and Warrants
For Convertible Debentures issued previous to March 31, 2013 containing exchange features, we account for the Convertible Debentures, associated warrants and conversion features under the provisions of FASB Topic 470, Debt, or ASC 470 which requires the measurement and recognition of the fair values for all components related to the Convertible Debentures at the end of each reporting period. We estimate the fair value of the resulting Beneficial Conversion Feature ("BCF"), holders warrants and agent warrants at each measurement date using a combination of the Black-Scholes-Merton and modified Binomial Lattice option-pricing models. These standards require us to record the fair value of the Convertible Debentures, BCF and warrants at the time of issuance and to remeasure these values and record associated income statement expense or benefit at each reporting period. A more detailed description can be found in Note 8 of the enclosed financial statements. For Convertible Debentures issued subsequent to March 31, 2013 which did not contain exchange features, we account for the Convertible Debentures, associated warrants and conversion features under the provisions of ASC 815 which requires the valuation of the debt discount to be recognized on the date of issuance and the amount of debt discount to be amortized over the life of the Convertible Debenture.
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.
| 39 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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 fee 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.
Research and Development
Research and development costs are expensed as incurred. There may be cases in the future where certain research and development costs such as software development costs are capitalized. For the years ended December 31, 2013 and 2012, research and development costs were approximately $644,000 and $1,114,000, respectively.
Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their estimated fair values due to the short-term maturities of those financial instruments.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss carryforwards that are available to offset future taxable income and research and development credits. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
FASB Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have determined that the Company does not have uncertain tax positions on its tax returns for the years 2013 and prior. Based on evaluation of the 2013 transactions and events, the Company does not have any material uncertain tax positions that require measurement. Because the Company had a full valuation allowance on its deferred tax assets as of December 31, 2013 and 2012, the Company has not recognized any tax benefits since inception.
| 40 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our consolidated balance sheets at December 31, 2013 or 2012, and have not recognized interest and/or penalties in the consolidated statement of operations for the years ended December 31, 2013 or 2012.
We are subject to taxation in the U.S. and the state of California. All of our tax years are subject to examination by the U.S. and California tax authorities due to the carry-forward of unutilized net operating losses.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period of computation. Diluted earnings (loss) per share is computed similarly to basic earnings 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 only if the additional common shares would be dilutive. (See Note 13)
Note 4: Accounts Receivables
Accounts receivables are carried at the expected realizable value and consisted of the following at December 31, 2013 and 2012:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Accounts receivable - trade | $ | 60,000 | $ | - | ||||
| Allowance for doubtful accounts | - | - | ||||||
| Accounts receivable, net | $ | 60,000 | $ | - | ||||
During the years ended December 31, 2013 and 2012, we had one significant customer who accounted for 100% of sales during each year.
At December 31, 2013, we had one significant customer who accounted for 100% of our accounts receivable.
Note 5: Inventory
Inventory is carried at the lower of average cost or market and consisted of the following at December 31, 2013 and 2012:
| 41 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Raw materials | $ | 201,098 | $ | 155,022 | ||||
| Finished goods | 46,335 | 47,055 | ||||||
| 247,433 | 202,077 | |||||||
| Reserve for obsolescence | - | - | ||||||
| $ | 247,433 | $ | 202,077 | |||||
Note 6: Property and Equipment
The following is a summary of equipment, at cost, less accumulated depreciation at December 31, 2013 and 2012:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Computers and office fixtures | $ | 47,817 | $ | 43,639 | ||||
| Machinery and equipment | 424,900 | 424,900 | ||||||
| Leasehold improvements | - | 11,000 | ||||||
| 472,717 | 479,539 | |||||||
| Less accumulated depreciation | 456,800 | 393,947 | ||||||
| $ | 15,917 | $ | 85,592 | |||||
Depreciation expense for the years ended December 31, 2013 and 2012 was $73,853 and $162,853, respectively. Repairs and maintenance are charged to expense as incurred while improvements are capitalized. Upon the sale, retirement or disposal of fixed assets, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss recorded to the consolidated statements of operations.
Note 7: Patents
The following is a summary of patents less accumulated amortization at December 31, 2013 and 2012:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Patents | $ | 2,980,033 | $ | 2,980,033 | ||||
| Less accumulated amortization | 1,466,693 | 1,301,246 | ||||||
| $ | 1,513,340 | $ | 1,678,787 | |||||
| 42 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Amortization expense associated with patents for the years ended December 31, 2013 and 2012 was $165,447 and $753,945 respectively. The estimated future amortization expense related to patents as of December 31, 2013 is as follows:
| Year Ended December 31. | Amount | |||
| 2014 | $ | 165,445 | ||
| 2015 | 162,422 | |||
| 2016 | 160,948 | |||
| 2017 | 159,347 | |||
| 2018 | 148,649 | |||
| Thereafter | 716,529 | |||
| Total | $ | 1,513,340 | ||
Note 8: Liabilities
Note Payable to an Affiliate
In September 2013, the Company issued a nine month unsecured note with a face value of $45,000 and 500,000 restricted shares of common stock to an affiliate of the Company in exchange for $54,325 in cash. The imputed annual rate of interest was calculated to be 18.4% and is to be repaid in nine equal monthly installments of $5,000. At December 31, 2013, the balance of the note payable was $30,000. Of the 500,000 shares issued, 312,500 shares were issued for prepaid expenses in an amount of $15,625 which is being amortized as interest expense over the life of the note and 187,500 shares were issued for cash in an amount of $9,375.
Convertible Debt
As of December 31, 2013, 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 of 5% which, at the option of the holder, may convert into common stock at an initial conversion price ranging from $0.045 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 $0.0745 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. During the year ended December 31, 2013, Debentures with accumulated principal of $564,213 and accrued interest of $62,155 were exchanged for Debentures with accumulated principal of $626,368. Debentures issued subsequent to March 31, 2013 do not contain such an exchange clause.
| 43 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As of December 31, 2013 and 2012, the balances of the Debentures are as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Balance at beginning of period | $ | 1,129,473 | $ | - | ||||
| Issuance of debentures for cash | 2,122,000 | 3,186,000 | ||||||
| Original issue discount | 111,685 | 167,685 | ||||||
| Debentures surrendered in exchange transactions | (564,213 | ) | - | |||||
| Debentures issued in exchange transactions | 626,368 | - | ||||||
| Debentures converted to common stock | (473,684 | ) | (2,224,212 | ) | ||||
| Convertible debt | 2,951,629 | 1,129,473 | ||||||
| Less unamortized costs of financing | 644,518 | 520,851 | ||||||
| Convertible debt, net of unamortized costs | $ | 2,307,111 | $ | 608,622 | ||||
| Convertible debt in default | $ | 1,324,212 | $ | - | ||||
Derivative Liability
Since the Company issued Convertible Debentures which included Holders 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. The Company measures these warrants and conversion feature 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 feature is the lesser of 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, to which the convertible feature is associated, are converted into common stock or paid in full. 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.
| 44 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As of December 31, 2013 and 2012, the balances of the Derivative Liability are as follows:
| Conversion | ||||||||||||
| Warrants | Feature | Total | ||||||||||
| Balance at January 1, 2012 | $ | - | $ | - | $ | - | ||||||
| Liability on issuance of debt and warrants | 2,510,919 | 2,167,341 | 4,678,260 | |||||||||
| Change in fair value at year end | (780,875 | ) | 991,912 | 211,037 | ||||||||
| Elimination of liability on conversion | - | (2,553,737 | ) | (2,553,737 | ) | |||||||
| Balance at December 31, 2012 | 1,730,044 | 605,516 | 2,335,560 | |||||||||
| Liability on issuance of debt and warrants | 762,111 | 929,156 | 1,691,267 | |||||||||
| Elimination of liability on conversion | - | (107,639 | ) | (107,639 | ) | |||||||
| Change in fair value at period end | (1,688,671 | ) | (1,126,094 | ) | (2,814,765 | ) | ||||||
| Balance at December 31, 2013 | $ | 803,484 | $ | 300,939 | $ | 1,104,423 | ||||||
Debentures 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 year ended December 31, 2013, $508,961 was recorded as additional paid-in capital related to the initial valuation of debt discounts associated with new debentures entered into subsequent to March 3l, 2013.
Note 9: Income Taxes
The significant components of deferred tax assets as of December 31, 2013 and 2012 are shown below. A valuation allowance has been established to offset the deferred tax assets, as realization of such assets is uncertain.
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Excess of financial accounting over tax depreciation | $ | 54,000 | $ | 51,954 | ||||
| State income tax benefits | 2,166,000 | 1,985,066 | ||||||
| Net operating loss carryforward | 12,181,000 | 11,488,759 | ||||||
| Allowance for obsolete inventory | - | 12,469 | ||||||
| Allowance for bad debts, returns and discounts | - | 31,316 | ||||||
| Warranty expense | 12,000 | 11,949 | ||||||
| Derivative liability expense | 878,000 | 1,068,323 | ||||||
| Research and development credit carryforwards | 538,000 | 591,601 | ||||||
| Patent amortization | (603,000 | ) | (668,661 | ) | ||||
| Vacation accrual | 3,000 | 19,976 | ||||||
| Other | (356,200 | ) | (28,060 | ) | ||||
| Valuation reserve | (14,872,800 | ) | (14,564,692 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
| 45 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following reconciles the tax provision with the expected provision obtained by applying statutory rates to pretax income:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Federal income tax benefit computed at the Federal statutory rate | $ | (1,055,900 | ) | $ | (3,091,483 | ) | ||
| State income tax expense benefit net of Federal benefit | (273,700 | ) | (530,499 | ) | ||||
| Federal net operating loss carry-forward | 564,000 | 1,031,555 | ||||||
| Tax valuation allowance | 308,100 | 1,779,872 | ||||||
| Permanent differences | 56,000 | 715,563 | ||||||
| Other | 401,500 | 94,992 | ||||||
| Income tax benefit | $ | - | $ | - | ||||
The components of federal income tax benefit from continuing operations consisted of the following for the year ended:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Current income tax expense (benefit): | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Net current tax expense (benefit) | $ | - | $ | - | ||||
| Deferred tax expense (benefit) resulted from: | ||||||||
| Difference between financial and tax depreciation | $ | 6,000 | $ | (26,612 | ) | |||
| State income tax benefits | (21,100 | ) | (72,227 | ) | ||||
| Net operating (loss) income | (564,000 | ) | (492,547 | ) | ||||
| Research and development credits | (21,000 | ) | 24,328 | |||||
| Allowance for obsolete inventory | (13,000 | ) | - | |||||
| Amortization of patents | 66,000 | (300,296 | ) | |||||
| Derivative liability recognition | 191,000 | (783,315 | ) | |||||
| Vacation accrual | 17,000 | (2,911 | ) | |||||
| Warranty expense | - | (11,949 | ) | |||||
| Allowance for bad debts, returns and discounts | 31,000 | (8,943 | ) | |||||
| Other | - | (105,400 | ) | |||||
| Valuation reserve | 308,100 | 1,779,872 | ||||||
| Net deferred tax benefit | $ | - | $ | - | ||||
| $ | - | $ | - | |||||
| 46 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
At December 31, 2013, the Company had federal net operating loss carry-forwards of approximately $35,827,000 that expire from 2013 through 2033. During 2013, the Company had federal net operating losses of approximately $1,624,000 expire. In addition, the Company had research and development tax credits of approximately $475,000 that expire from 2017 through 2033. As a result of previous stock transactions, the Company's ability to utilize its net operating loss carry-forwards to offset future taxable income and utilize future research and development tax credits is subject to certain limitations under Section 382 and Section 383 of the Internal Revenue Code due to changes in equity ownership of the Company.
The Company has a history of operating losses and, as of yet, has not had any taxable income. The Company has calculated a deferred tax asset for its tax credits but offsets the tax asset with a valuation allowance. As a result, the Company has not realized or recorded any tax benefit related to its tax credits.
Note 10: Lease Obligations
The Company leases its principal facility from an unrelated third party. The facility consists of approximately 5,080 square feet of office, research and development, manufacturing, quality testing, and warehouse space. The lease provides for monthly rental payments ranging from $4,826 in 2014 to $5,432 in 2018 plus an additional shared estimated facility cost of approximately $1,500 per month. Lease expense for the years ended December 31, 2013 and 2012 amounted to $73,843 and $65,509, respectively. The following is a schedule of minimum annual rental payments for the next five years.
| Years ending December 31, | ||||
| 2014 | $ | 38,608 | ||
| 2015 | 59,649 | |||
| 2016 | 61,439 | |||
| 2017 | 63,282 | |||
| 2018 | 21,727 | |||
| Thereafter | - | |||
| Total minimum lease payments | $ | 244,705 | ||
Note 11: Equity Transactions
Series B Convertible Preferred Stock
There are authorized and outstanding 2,585,000 shares of Series B Convertible Preferred Stock (“Series B”). The Series B is convertible at $0.20 per common share and carries a liquidation preference of a like amount. At December 31, 2013 and 2012, the Series B had accumulated and unpaid dividends of $106,931.
Series C Convertible Preferred Stock
There were authorized and outstanding at December 31, 2012, 1,000,000 shares of Series C Convertible Preferred Stock (“Series C”). In April 2013, 500,000 shares of the Series C was converted into 500,000 shares of common stock. The remaining 500,000 shares of Series C outstanding at December 31, 2013 carries a liquidation preference of a like amount.
| 47 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Common Stock
In January 2013, the Company issued 3,000,000 shares of restricted common stock to two vendors for services. The fair value of the vested portion of these shares was determined to be $192,000. In June 2013, the Company issued 1,000,000 shares of restricted common stock to one vendor for services. The fair value of the vested portion of these shares was determined to be $52,500. In November 2013, the Company issued 300,000 shares of restricted common stock to two vendors for services. The fair value of the vested portion of these shares was determined to be $12,000
During the year ended December 31, 2013, holders of Convertible Debentures with a face value of $473,684 converted their debentures into 8,266,737 shares of restricted common stock. In addition, associated with these debentures, the Company paid $59,365 in accrued interest by issuing 915,652 shares of restricted common stock.
In April 2013, a shareholder converted 500,000 shares of Series C Convertible Preferred stock into 500,000 shares of restricted common stock.
In September 2013, the Company issued a nine month unsecured note with a face value of $45,000 and 500,000 restricted shares of common stock to an affiliate of the Company in exchange for $54,325 in cash. The imputed annual rate of interest was calculated to be 18.4% and is to be repaid in nine equal monthly installments. Of the 500,000 shares issued, 312,500 shares were issued for prepaid expenses in an amount of $15,625 which is being amortized as interest expense over the life of the note and 187,500 shares were issued for cash in an amount of $9,375.
During the year ended December 31, 2012, the holders of Convertible Debentures with a face value of $2,224,212 converted their debentures into 38,816,934 shares of common stock. In addition, associated with these debentures, the Company paid $222,420 in accrued interest by issuing 3,881,777 shares of common stock.
In December 2012, the Company issued 1,400,000 shares of restricted common stock to a vendor for services. The fair value of the shares was determined to be $70,000 based upon the market value of the stock on the date of issuance. The vendor services are expected to be performed over a twelve-month period over which the fair value of these shares will be amortized.
In October 2012, the Company issued 25,000 shares of restricted common stock to a vendor for services. The fair value of the shares was determined to be $3,000 based upon the market value of the stock on the date of issuance.
In July 2012, the Company issued 50,000 shares of restricted common stock to a vendor for services. The fair value of the shares was determined to be $8,500, based upon the market value of the stock on the date of issuance.
Convertible Debentures
From February through July 2013, the Company entered into subscription agreements with accredited investors to purchase an aggregate principal amount of $917,895 of Convertible Debentures initially convertible into shares of common stock at a conversion price of $0.0573, together with five-year warrants to purchase approximately 8,010,000 common shares at an exercise price equal to $0.0745 per share.
From September through December 2013, the Company entered into subscription agreements with accredited investors to purchase an aggregate principal amount of $1,315,790 of Convertible Debentures initially convertible into shares of common stock at a conversion price of $0.045, together with five-year warrants to purchase approximately 14,620,000 common shares at an exercise price equal to $0.09 per share.
| 48 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
From January through March 2012, the Company entered into subscription agreements with accredited investors to purchase an aggregate principal amount of $2,350,527 of Convertible Debentures initially convertible into shares of common stock at a conversion price of $0.0573, together with five-year warrants to purchase approximately 20,511,000 common shares at an exercise price equal to $0.0745 per share.
From August through December 2012, the Company entered into subscription agreements with accredited investors to purchase an aggregate principal amount of $1,003,158 of Convertible Debentures initially convertible into shares of common stock at a conversion price of $0.099, together with five-year warrants to purchase approximately 5,066,000 common shares at an exercise price equal to $0.1287 per share.
Stock Options
As of December 31, 2013, the Company had one stock-based employee compensation plan under which it makes grants, the 2011 Equity Incentive Plan (the “EIP”) which has been approved by our Board of Directors and is subject to shareholder approval. After approval by the shareholders, 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. At December 31, 2013, the Company had outstanding 15,075,000 options under the EIP and the Company’s prior Amended 2001 Stock Plan representing approximately 9% of the Company’s outstanding shares (10,510,313 of which were exercisable). Awards under the Company’s EIP generally vest over four years. Previous to shareholder approval, any grants under the EIP shall be accounted for as NQSOs.
The fair value of options granted were 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. These models and assumptions are complex and may change future expenses by increasing or decreasing stock-based compensation expense. Management used the following weighted average assumptions to value stock options granted during the years ended December 31, 2013 and 2012:
| Year Ended December 31, | ||||
| 2013 | 2012 | |||
| Expected term of options | None | 5 years | ||
| Exercise price | None | $0.09-$0.12 | ||
| Expected volatility | None | 102% | ||
| Expected dividends | None | None | ||
| Risk-free interest rate | None | 0.71% | ||
| Forfeitures | None | None | ||
In addition to the above, management estimated the forfeitures on employee options under the Option Plan would have negligible effects because such forfeitures would be a very small percentage. Management believes that options granted have been to a group of individuals that have a high desire to see the Company succeed and have aligned themselves to that end.
The expected lives used in the calculations were selected by management based on past experience, forward looking profit forecasts and estimates of what the trading price of the Company’s stock might be at different future dates. Risk-free interest rates used are the five-year U.S. Treasury rate as published for the applicable measurement dates.
| 49 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Volatility is a calculation based on fluctuations in the Company’s stock price over a historical time period consistent with the estimated life of the option.
A summary of the status of the options granted under the Company’s 2011 EIP at December 31, 2013 and 2012, and changes during the years then ended is presented below:
| Outstanding Options | ||||||||||||||
| Options | ||||||||||||||
| Weighted | Weighted | Weighted Average | ||||||||||||
| Average | Average | Remaining | ||||||||||||
| Exercise | Fair | Contractual Term | ||||||||||||
| Shares | Price | Value | in years | |||||||||||
| Outstanding, December 31, 2011 | 15,795,000 | $ | 0.20 | 8.20 | ||||||||||
| Granted | 5,246,667 | $ | 0.12 | $ | 0.08 | |||||||||
| Cancelled | (1,550,000 | ) | $ | 0.18 | ||||||||||
| Exercised | - | - | ||||||||||||
| Outstanding, December 31, 2012 | 19,491,667 | $ | 0.18 | 8.20 | ||||||||||
| Granted | - | - | ||||||||||||
| Cancelled | (4,416,667 | ) | $ | 0.33 | ||||||||||
| Exercised | - | - | ||||||||||||
| Outstanding, December 31, 2013 | 15,075,000 | $ | 0.14 | 6.94 | ||||||||||
| Exercisable, December 31, 2012 | 9,470,417 | $ | 0.24 | 6.71 | ||||||||||
| Exercisable, December 31, 2013 | 10,510,313 | $ | 0.15 | 6.45 | ||||||||||
The intrinsic value of the options outstanding under the EIP at December 31, 2013 and 2012 was 0 and 0.
A summary of the status of the options outstanding under the EIP at December 31, 2013 are presented in the table below:
| Outstanding | Exercisable | |||||||||||||||||||||
| Weighted | ||||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||||
| Range of | Remaining | Average | Average | |||||||||||||||||||
| Exercise | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||||
| Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||||
| Options | ||||||||||||||||||||||
| $ | 0.06-0.11 | 3,800,000 | 7.42 | $ | 0.10 | 3,214,583 | $ | 0.10 | ||||||||||||||
| $ | 0.12 | 3,805,000 | 8.72 | $ | 0.12 | 1,189,063 | $ | 0.12 | ||||||||||||||
| $ | 0.15 | 6,320,000 | 5.95 | $ | 0.15 | 4,990,000 | $ | 0.15 | ||||||||||||||
| $ | 0.24-0.90 | 1,150,000 | 4.91 | $ | 0.28 | 1,116,667 | $ | 0.28 | ||||||||||||||
| 15,075,000 | 6.94 | $ | 0.14 | 10,510,313 | $ | 0.15 | ||||||||||||||||
| 50 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
There were no stock options exercised during the years ended December 31, 2013 and 2012. At December 31, 2013, total unrecognized estimated employee and director compensation cost related to stock options granted is $376,982, which is expected to be recognized over the next three to four years.
Warrants
During the year ended December 31, 2013, in conjunction with the sale of Convertible Debentures, the Company issued five-year common stock purchase warrants to acquire approximately 22,629,000 shares to holders of the Debentures and 2,880,000 similar warrants as compensation to Agents. Of these warrants, approximately 10,385,000 have an exercise price of $0.0745 per share and approximately 15,124,000 have an exercise price of $0.09 per share.
During the year ended December 31, 2012, in conjunction with the sale of Convertible Debentures, the Company issued five-year common stock purchase warrants to acquire approximately 25,577,000 shares to holders of the Debentures and 7,673,000 similar warrants as compensation to Agents. Of these warrants, approximately 26,664,000 have an exercise price of $0.0745 per share and approximately 6,586,000 have an exercise price of $0.1287 per share.
In October 2012, a holder of a cashless warrant to purchase 86,340 shares of restricted common stock exercised the warrant in a cashless transaction and was issued 14,870 shares of restricted common stock. A summary of the status of the warrants granted under various agreements at December 31, 2013 and 2012, and changes during the years then ended is presented below:
| Warrants | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Exercise | Fair | |||||||||||
| Shares | Price | Value | ||||||||||
| Outstanding, December 31, 2011 | 25,903,032 | $ | 0.30 | |||||||||
| Granted | 33,178,830 | $ | 0.09 | $ | 0.08 | |||||||
| Expired | - | $ | - | |||||||||
| Exercised | (14,870 | ) | $ | 0.08 | ||||||||
| Outstanding, December 31, 2012 | 59,066,992 | $ | 0.18 | |||||||||
| Granted | 25,509,506 | $ | 0.08 | $ | 0.05 | |||||||
| Expired on exchange to new warrant | (4,024,286 | ) | $ | 0.11 | ||||||||
| Issued on exchange to new warrant | 7,377,582 | $ | 0.09 | |||||||||
| Exercised | - | $ | - | |||||||||
| Outstanding, December 31, 2013 | 87,929,794 | $ | 0.15 | |||||||||
| Exercisable, December 31, 2012 | 59,066,992 | $ | 0.18 | |||||||||
| Exercisable, December 31, 2013 | 87,929,794 | $ | 0.15 | |||||||||
| 51 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A summary of the status of the warrants outstanding at December 31, 2013 are presented in the table below:
| Outstanding | Exercisable | |||||||||||||||||||||
| Weighted | ||||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||||
| Range of | Remaining | Average | Average | |||||||||||||||||||
| Exercise | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||||
| Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||||
| Warrants | ||||||||||||||||||||||
| $ | 0.0745 | 39,333,936 | 3.52 | $ | 0.07 | 39,333,936 | $ | 0.07 | ||||||||||||||
| $ | 0.08-0.09 | 19,956,065 | 4.65 | $ | 0.09 | 19,956,065 | $ | 0.09 | ||||||||||||||
| $ | 0.1287 | 4,222,599 | 3.95 | $ | 0.13 | 4,222,599 | $ | 0.13 | ||||||||||||||
| $ | 0.30-0.35 | 24,417,194 | 1.14 | $ | 0.31 | 24,417,194 | $ | 0.31 | ||||||||||||||
| 87,929,794 | 3.14 | $ | 0.15 | 87,929,794 | $ | 0.15 | ||||||||||||||||
Note 12: 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 modified Black Scholes 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 consolidated balance sheets at fair value with changes in fair value recorded in the consolidated statements of operations.
The following table presents the balances of liabilities measured at fair value on a recurring basis by level as of December 31, 2013:
| Fair Value Measurements at December 31, 2013 Using | ||||||||||||||||
| Quoted Prices in | Significant Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| Derivative liability | $ | - | $ | - | $ | 300,939 | $ | 300,939 | ||||||||
| Warrant liability | - | - | 803,484 | 803,484 | ||||||||||||
| Total | $ | - | $ | - | $ | 1,104,423 | $ | 1,104,423 | ||||||||
| 52 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
| Fair Value Measurements at December 31, 2012 Using | ||||||||||||||||
| Quoted Prices in | Significant Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| Derivative liability | $ | - | $ | - | $ | 605,516 | $ | 605,516 | ||||||||
| Warrant liability | - | - | 1,730,044 | 1,730,044 | ||||||||||||
| Total | $ | - | $ | - | $ | 2,335,560 | $ | 2,335,560 | ||||||||
The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2012:
| Warrant | Derivative | Total | ||||||||||
| Liability | Liability | Liability | ||||||||||
| Balance December 31, 2011 | $ | - | $ | - | $ | - | ||||||
| Liability on issuance of debt and warrants | 2,507,868 | 2,167,341 | 4,675,209 | |||||||||
| Elimination of liability on conversion | (490,204 | ) | (581,696 | ) | (1,071,900 | ) | ||||||
| Change in estimated fair value (1) | (287,620 | ) | (980,129 | ) | (1,267,749 | ) | ||||||
| Balance December 31, 2012 | 1,730,044 | 605,516 | 2,335,560 | |||||||||
| Liability on issuance of debt and warrants | 762,111 | 929,156 | 1,691,267 | |||||||||
| Elimination of liability on conversion | - | (107,639 | ) | (107,639 | ) | |||||||
| Change in estimated fair value (1) | (1,688,671 | ) | (1,126,094 | ) | (2,814,765 | ) | ||||||
| Balance December 31, 2013 | $ | 803,484 | $ | 300,939 | $ | 1,104,423 | ||||||
(1) Included in the Statement of Operations on the line “Change in fair value of derivative liabilities.”
Management used the following inputs to value the Derivative and Warrant Liabilities for the year ended December 31, 2013:
| 12/31/2013 | 12/31/2012 | |||||||
| Derivative Liability | Warrant Liability | Derivative Liability | Warrant Liability | |||||
| Expected term | 6 months - 1 year | 5 years | 6 months | 5 years | ||||
| Exercise price | $0.045 - $0.099 | $0.075 - $0.1287 | $0.0573- $0.099 | $0.0745 - $0.1287 | ||||
| Expected volatility | 70% - 244% | 175% - 186% | 98% -193% | 95% - 170% | ||||
| Expected dividends | None | None | None | None | ||||
| Risk-free interest rate | .04% - .14% | .77% - 1.75% | .11% - .15% | .62% - 1.11% | ||||
| Forfeitures | None | None | None | None | ||||
In computing the fair value of the derivative and warrant liability at December 31, 2013 for instruments under the Binomial Lattice option-pricing model, management estimated a 40% probability of a down round financing event at a price of $0.036 and a 14% to 75% probability that existing note holders with exchange privileges would exchange their existing debentures and warrants for new debentures and warrants. At December 31, 2012, in computing the fair value of the derivative and warrant liability for instruments under the Binomial Lattice option-pricing model, management assumed a 75% probability of a down round financing event at various assumed stock prices.
| 53 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 13: Loss Per Share
Basic and diluted loss per share are the same for the fiscal years ended December 31, 2013 and 2012, since any additional common stock equivalents would be antidilutive. Potentially dilutive shares of common stock that have been excluded from the calculation of the weighted average number of dilutive common shares for the years ended December 31, 2013 and 2012 are as follows:
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Preferred Stock | 3,085,000 | 3,585,000 | ||||||
| Convertible debentures | 56,036,190 | 12,337,378 | ||||||
| Options | 15,075,000 | 19,491,667 | ||||||
| Warrants | 87,929,794 | 59,066,992 | ||||||
| Total | 162,125,984 | 94,481,037 | ||||||
The following table sets forth the computation of basic and diluted earnings per share and the additional income related to the change in fair value of derivative securities for the years ended December 31, 2013 and 2012:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Numerator: | ||||||||
| Net loss for basic earnings per share | $ | (2,749,645 | ) | $ | (9,092,598 | ) | ||
| Subtractions: | ||||||||
| Change in fair value of derivative securities | - | (2,230,476 | ) | |||||
| Net loss for diluted earnings per share | $ | (2,749,645 | ) | $ | (11,323,074 | ) | ||
| Denominator: | ||||||||
| Weighted average shares outstanding | 160,015,532 | 118,764,366 | ||||||
| Assumed conversion of dilutive securities Conversion feature- debentures | - | 13,515,850 | ||||||
| Denominator for diluted earnings per share- adjusted weighted average shares | 160,015,532 | 132,280,216 | ||||||
| Loss per share | ||||||||
| Basic | $ | (0.02 | ) | $ | (0.08 | ) | ||
| Diluted | $ | (0.02 | ) | $ | (0.09 | ) | ||
Note 14: Subsequent Events
Convertible Debentures and Warrants
From January 2014 through June 2014, the Company sold $1,551,113 of Unsecured Convertible Debentures (the “Debentures”) to accredited investors for aggregate consideration of $1,506,375. The Debentures mature in twelve months, carry a fixed conversion price of $.045, an annual interest rate of 10% and are convertible into 33,884,379 shares of common stock at maturity. The Company received net cash proceeds of approximately $1,426,376 after payment of fees and expenses of $80,000. In addition, the Company issued the holders of the Debentures detachable five-year warrants to purchase 16,942,189 additional shares of common stock and issued to a placement agent of a portion of the offering warrants to purchase 555,556 shares of common stock all at an exercise price of $0.090 per share and will issue to the same agent 1,111,111 shares of common stock in lieu of a cash payment.
| 54 |
SpectraScience, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Common Stock
In February 2014, an affiliate of the Company exercised a portion of his stock options into 931,200 shares of restricted common stock at an exercise price of $0.02 for proceeds to the Company of $18,624.
Subsequent events have been evaluated through the date financial statements are filed with the Securities and Exchange Commission.
| 55 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On February 7, 2014, the Company filed a Form 8-K indicating that McGladrey LLP ("MG"), was dismissed as the Company's independent registered accounting firm effective February 3, 2014. The Board of Directors of the Company, upon the recommendation of its Audit Committee, approved the dismissal of MG and elected to engage HJ Associates & Consultants, LLP (“HJ Associates”) to serve as the Company's independent registered accounting firm as of February 6, 2014.
MG's audit reports on the consolidated financial statements of the Company and its subsidiaries for the fiscal years ended December 31, 2011 and 2012 did not contain any adverse opinion or disclaimer of opinion, nor were either qualified or modified as to uncertainty, audit scope, or accounting principles, except that MG’s audit reports for the fiscal years ended December 31, 2011 and 2012 were modified for substantial doubt as to the Company’s ability to continue as a going concern.
During the fiscal years ended December 31, 2011 and 2012 and the subsequent interim periods through February 3, 2014, there were no disagreements with MG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of MG, would have caused MG to make reference to the subject matter of the disagreement(s) in connection with its reports.
During the fiscal years ended December 31, 2011 and December 31, 2012 and the subsequent interim periods through February 3, 2014, there were no “reportable events” as defined in Regulation S-K, Item 304(a)(1)(v), except that: (a) in connection with the audit of the Company’s financial statements for the fiscal year ended December 31, 2012, MG issued a material weakness letter relating to the Company’s internal controls over financial reporting; and (b) during MG’s review of the Company’s financial statements for the quarter ended March 31, 2013, MG informed the Company that the material weakness in the Company’s internal controls over financial reporting continued. MG had not completed a review of the Company’s financial statements for any period subsequent to the quarter ended March 31, 2013.
The Company authorized MG to respond fully to the inquiries of HJ Associates with respect to their role as predecessor auditor and provided MG with a copy of the foregoing disclosures. Attached as an exhibit to the Form 8-K was a copy of MG’s letter, dated February 7, 2014, stating its agreement with the statements in the Form 8-K.
During the Company's two most recent fiscal years ended December 31, 2012 and the subsequent interim periods through February 3, 2014, the Company did not consult HJ Associates with respect to the application of accounting principles to a specific transaction, either completed or contemplated, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other reportable matters set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 9A. 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 the 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 effective as of the Evaluation Date.
Evaluation of Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
| 56 |
Under supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework within the Internal Control-Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2013.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013 has not been attested to by HJ Associates & Consultants LLP, the Company’s independent registered public accounting firm, as stated in their report which is included herein pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report within this annual report.
Changes in Internal Financial Controls
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
| 57 |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The following information is provided with respect to the directors and officers of the Company:
| Name | Age | Director/Officer Since | ||
| Michael P. Oliver, President and Chief Executive Officer, Director | 65 | 2012/2010 | ||
| Lowell W. Giffhorn, Chief Financial Officer and Secretary | 67 | 2013 | ||
| Mark McWilliams, Chairman of the Board | 57 | 2004 | ||
| Sheldon L. Miller, Director | 77 | 2010 | ||
| Stanley Pappelbaum, M.D., Director | 76 | 2006 | ||
| Chester E. Sievert, Director | 62 | 2004 | ||
| F. Duwaine Townsen, Director | 80 | 2009 |
Michael P. Oliver, President and Chief Executive Officer, Director, joined SpectraScience as President and Chief Executive Officer in November 2010, and was elected a director in February 2012. Prior to joining the Company and since 2007, Mr. Oliver was Executive Vice President for Worldwide Marketing and Business Development for Silicon Border Development, a privately-owned developer of industrial properties for high technology companies. From 2004 to 2007, Mr. Oliver was a Senior Vice President at Thomas Group, a consultancy that specialized in operational improvement. From 1998 to 2003, Mr. Oliver was engaged as in a business development role with PricewaterhouseCoopers working with medical device and technology companies. From 1990 to 1998 Mr. Oliver was a member of four separate management teams that took struggling medical device companies, increased their revenues and profitability and sold them to strategic buyers. In those companies he served in the capacity of head of sales and marketing and, in two cases, had major operational responsibilities as well. He began his career with American Hospital Supply Corporation serving in a variety of sales, marketing and general management positions. Mr. Oliver received his MSA from George Washington University and his BS from the United States Naval Academy. The Board believes that Mr. Oliver’s experience in the medical device and technology industries, as well as his success in increasing revenues for medical device companies, make Mr. Oliver a valuable resource for the Board.
Lowell W. Giffhorn, Chief Financial Officer and Secretary, joined the Company as Chief Financial Officer and Secretary in September 2013.Since 2005, Mr. Giffhorn has served as the Chief Financial Officer and Director of Brendan Technologies, Inc., a developer and marketer of computational analytical software products for the biopharmaceutical industry. Also since 2005, he serves as the Chief Financial Officer of Imagenetix, Inc., a publicly held nutritional supplement company. He was the Chief Financial Officer from 1997 to 2005 and a member of the Board of Directors from 1999 to 2006 of Patriot Scientific Corporation, a publicly held microprocessor and intellectual property firm. From 1992 to 1996 and from 1987 to 1990 he was the CFO of Sym-Tek Systems, Inc. and Vice President of Finance for its successor, Sym-Tek Inc., a supplier of capital equipment to the semiconductor industry. Previous to 1987, he held various financial management positions in industries including defense contracting, hospitality, and public accounting. He obtained a M.B.A. degree from National University in 1975 and a B.S. in Accountancy from the University of Illinois in 1969. He was also a director and chairman of the audit committee of DND Technologies, Inc., a publicly held company, until it was acquired in 2009. Mr. Giffhorn devotes approximately 50% of his time to our affairs.
Mark McWilliams, Director. Since June 2007, Mr. McWilliams has served as the CEO of Medipacs, Inc., a development stage infusion pump company. From December 2003 to November 2005, Mr. McWilliams was Director of Cell Imaging and Analysis at Beckman Coulter after the sale of Q3DM to Beckman in December 2003. He was President and Chief Executive Officer and Director of Q3DM, from October 2001 to December 2003, a life-sciences startup that raised several angel and venture capital funding rounds that was acquired by Beckman Coulter. Previously, he was founder and COO of Medication Delivery Devices (“MDD”), an alternate care infusion systems company that was acquired by Baxter Healthcare in 1996. Mr. McWilliams served as a VP of Research and Development at Baxter Healthcare for three years following the sale of MDD. Prior to MDD, he served as Product Development Manager at the founding of Block Medical where he was responsible for bringing the company’s first two FDA approved products rapidly to market. Block was sold to Hillenbrand Industries in 1991. He previously worked for Hughes Aircraft, Vacuum General and Martin Marietta. Mr. McWilliams brings his expertise in managing and growing small technology companies and his strong network of contacts within the medical devices industry, to the Board of Directors. He earned his MSME from the Massachusetts Institute of Technology, his BSME from Northeastern University and holds eight utility patents.
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Sheldon L. Miller, Director . Sheldon L. Miller has been a litigator and expert counsel for more than forty years and in private practice for more than 30 years. Mr. Miller has operated the Law Office of Sheldon Miller, PC for the past 30 years. Mr. Miller was a member of the Board of Governors of the American Trial Lawyers Association from 1977 through 2009 (longest tenure in history). From 1979 through 1992, he was the President of the Mediation Tribunal Association in Wayne County (Detroit), Michigan. In 1971, he pioneered the concept of mediation and was the first mediator on behalf of the Plaintiff’s Bar in the State of Michigan. Mr. Miller was also the first to prosecute and articulate the concept of “comparative negligence” in the State of Michigan. Mr. Miller graduated from Wayne State University Law School in Detroit in 1961. Mr. Miller brings his considerable experience in legal risk analysis and responsibility to the Board of Directors.
Stanley J. Pappelbaum M.D., Director. Dr. Pappelbaum has been Managing Partner of Pappelbaum, Turner & Associates, a national healthcare consultancy company that advises hospital, medical group, health insurance, and governmental healthcare clients, since 2000. Dr. Pappelbaum joined Scripps hospital in 1996 as Chief Transformational Officer in charge of creating and implementing Scripps’ strategic vision of the future. In 1997, he was promoted to Executive Vice President and Chief Operating Officer and, in 1999, he was promoted to President and Chief Executive Officer when the hospital reached annual revenues of over $1 billion. From 1985 to 1995, he was the managing partner of Professional Health Consulting Group, a national company of physician executives that analyzed and managed change for complex not-for-profit healthcare systems clients throughout the United States. From 1969 to 1984, Dr. Pappelbaum taught and practiced Pediatric Cardiology at the University of California, San Diego and at San Diego Children’s Hospital, where he was Chief of Pediatric Cardiology from 1972 to 1978. Dr. Pappelbaum completed his undergraduate work at McGill University in Montreal and received his medical degree from the University of British Columbia Faculty of Medicine in Vancouver. He completed his residency in pediatric medicine at Montreal Children’s Hospital of McGill University and did graduate studies in cardiovascular physiology and a fellowship in pediatric cardiology at the University of California, Los Angeles. He also was awarded an Alfred P. Sloan Fellowship at the Massachusetts Institute of Technology, where he earned a Master's degree in management (health option). Dr. Pappelbaum brings his intimate knowledge of the healthcare industry and familiarity with recent changes in the healthcare environment to the Board of Directors.
Chester E. Sievert, Jr., Director. Mr. Sievert has been President of Advanced Photodynamic Technologies since January 2003. He previously worked at SpectraScience as a consultant in June 1996, and subsequently held various executive positions. Mr. Sievert served as Chairman of the Board of SpectraScience beginning in June 1999. He served as President from March 1998, and Chief Executive Officer from January 1999 until December 2001. He then became Executive Vice President of Technology and Chairman of the Board until September 2002. Prior to joining SpectraScience, Mr. Sievert was a founder and President of two medical product companies: ReTech, Inc., from 1980 to 1986, and FlexMedics Corporation, from 1986 to 1995. Both companies were sold to American Endoscopy, Inc. and Phillips Plastics Corporation, respectively. As a former Senior Research Health Scientist on staff at the University of Minnesota Medical School and the Veterans Administration Medical Center, Mr. Sievert has published more than 50 medical journal articles in the fields of gastroenterology, endoscopy and fiber optics. He has also been awarded eight United States and international patents. Mr. Sievert has a Bachelor of Science Degree in Comparative Physiology from the University of Minnesota. Mr. Sievert brings his significant experience in the application of light based and fluorescence technologies in the medical field to the Board of Directors, as well as his significant management experience and legacy understanding of the Company.
F. Duwaine Townsen, Director. Mr. Townsen co-founded and has been the Managing Partner of EndPoint Late-Stage Fund of San Diego since 1999. This fund invests exclusively in late-stage life science companies. Mr. Townsen co-founded the Ventana Growth Funds in 1982 and served as the group’s Managing Partner directing investments in early and middle stage life-science, high-technology and telecommunications companies. Prior to this, Mr. Townsen was the CEO and Chairman of Kay Laboratories, Inc., a medical device company, where he led the company through a successful IPO in 1978 and subsequent sale to American Hospital Supply Corporation in 1981. Following his public accounting experience, Mr. Townsen became a founder and Chief Financial Officer of Oceanographic Engineering Corporation and guided the company to profitability and its sale to Dillingham Corporation in 1967. Mr. Townsen serves as a director on the board of Sequal Technologies, a privately held high-technology company and has held numerous directorships at private and public companies, some of which included Agouron Pharmaceuticals, Inc., Brooktree Corporation, Cymer, Inc. and Maxim Pharmaceuticals, Inc. Mr. Townsen began his career with Arthur Young & Co. after graduating from San Diego State University. Mr. Townsen brings his specific public accounting environment and public markets experience to the Board of Directors, as well as his deep expertise related to corporate governance and fiduciary responsibility issues.
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Our Board of Directors has the responsibility for establishing broad corporate policies and for overseeing our overall performance. Members of the Board are kept informed of our business activities through discussions with the CEO and other officers, by reviewing analyses and reports sent to them, and by participating in Board and committee meetings. Our bylaws provide that each of the directors serves for a term that extends until resignation or replacement.
Code of Ethics. The Company has adopted a code of ethics applicable to its chief executive officer, senior financial officer and other employees. The code is available at no charge by request to the Company in writing, to the attention of the CFO. The Code is also available on the Corporate Governance section of the Company’s website at www.spectrascience.com . The Company intends to satisfy Form 8-K disclosure requirements by including on its website any amendment to, or waiver from, a provision of its Ethics or Code of Conduct policy that applies to the principal executive officer, principal financial officer, principal accounting officer and controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K under the Securities Act of 1933.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who own more than ten percent of the Company’s Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders (“Insiders”) are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based on a review of the copies of such reports furnished to the Company during the fiscal year ended December 31, 2013, all Section 16(a) filing requirements applicable to Insiders were complied with.
Audit Committee Financial Expert. The Audit Committee of the Board of Directors is comprised of three non-employee directors; F. Duwaine Townsen (Chairman), Mark McWilliams and Dr. Stanley Pappelbaum. The Board of Directors has determined that Mr. Townsen is an audit committee financial expert and is independent as defined under NASDAQ Rule 5605(a)(2).
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table for 2013
The following table summarizes compensation awarded to, earned by or paid to the Company’s Chief Executive Officer and other executive officers who were “Named Executive Officers” during the years ended December 31, 2013 and 2012.
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| Name and | Fiscal | Option | All Other | |||||||||||||||||||
| Principal Position | Year | Salary ($) | Bonus ($) | Awards ($) | Compensation ($) | Total ($) | ||||||||||||||||
| Michael P. Oliver (1) | 2013 | $ | 197,000 | $ | - | $ | - | $ | - | $ | 197,000 | |||||||||||
| President, CEO and Director | 2012 | $ | 225,000 | $ | - | $ | 211,779 | $ | - | $ | 436,779 | |||||||||||
| 2011 | $ | 225,000 | $ | 25,000 | $ | - | $ | - | $ | 250,000 | ||||||||||||
| Jim Dorst (2) | 2012 | $ | 175,000 | $ | - | $ | 82,027 | $ | - | $ | 257,027 | |||||||||||
| Chief Financial and Chief | 2011 | $ | 175,000 | $ | - | $ | - | $ | - | $ | 175,000 | |||||||||||
| Operating Officer | ||||||||||||||||||||||
| (1) | Mr. Oliver was appointed President and CEO on November 29, 2010. In January 2014, we entered into an employment agreement with Mr. Oliver. Per the terms of the agreement, Mr. Oliver’s base salary is $225,000 per year until the company accumulates at least $2,000,000 of equity financing in one transaction or $3,000,000 in the aggregate at which time his base salary will be increased to $325,000 per year. He will be entitled to an annual bonus of up to 50% of his base salary based on performance criteria to be determined by the Board of Directors. He shall be entitled to 12 month’s severance pay if terminated for reasons other than cause, as defined in the agreement, and an additional 12 month’s severance if a change in control action, as defined in the agreement, takes place. |
| (2) | Mr. Dorst’s employment with the Company ended on June 30,2013. |
| (3) | The value of each option award is the grant date fair value as determined under FASB ASC Topic 718, Compensation – Stock Compensation, or ASC 718. |
Pension Benefits. The Company does not have a pension benefit plan.
Nonqualified Deferred Compensation. There was no nonqualified deferred compensation in fiscal year 2012 to officers of the Company.
Outstanding Equity Awards at Fiscal Year End. The following table describes the outstanding stock option grants to named executive officers at year end. There are no Stock Awards issued or outstanding.
| Number | Number | |||||||||||||||
| of | of | |||||||||||||||
| Securities | Securities | |||||||||||||||
| Underlying | Underlying | |||||||||||||||
| Unexercised | Unexercised | Option | ||||||||||||||
| Options | Options | Exercise | Option | |||||||||||||
| (#) | (#) | Price | Expiration | |||||||||||||
| Name | Exercisable | Unexercisable | ($) | Date | ||||||||||||
| Michael P. Oliver (1) | 2,475,000 | 825,000 | $ | 0.15 | 12/16/2020 | |||||||||||
| President, CEO and Director | 739,583 | 1,627,084 | $ | 0.12 | 9/18/2022 | |||||||||||
| (1) | Option vests over four years, with 25% vesting 12 months after the grant date and 1/36 of the remaining grant amount vesting each month thereafter for three years. |
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Compensation of Directors.
The Company does not pay directors for Board of Directors’ meetings or committee meetings attended, but reimburses each such director for reasonable travel and out-of-pocket expenses for attendance at these meetings. Beginning in 2011, each sitting director annually in December is to be awarded a stock option to purchase 100,000 shares of common stock at an exercise price equal to market price on the date of grant. The stock option grant for 2013 was deferred to January 2014.
The options granted to employee and non-employee directors under the EIP expire ten years from the date of grant (subject to earlier termination in the event of death or termination), are not transferable (except by will or the laws of descent and distribution).
The following table shows the fair value of the compensation earned by each of our non-employee directors who received stock option grants during the year ended December 31, 2013:
DIRECTOR COMPENSATION FOR 2013
| Fees | ||||||||||||
| Earned | ||||||||||||
| or | ||||||||||||
| Paid In | Option | |||||||||||
| Cash | Awards | Total | ||||||||||
| Name | ($) | ($) | ($) | |||||||||
| Mark McWilliams | $ | - | $ | 12,229 | $ | 12,229 | ||||||
| Sheldon L. Miller | $ | - | $ | 14,173 | $ | 14,173 | ||||||
| Stanley Pappelbaum, M.D. | $ | - | $ | 20,584 | $ | 20,584 | ||||||
| Chester E. Sievert | $ | - | $ | 14,307 | $ | 14,307 | ||||||
| F. Duwaine Townsen | $ | - | $ | - | $ | - | ||||||
The option awards amount represent the value of the current year amortization of stock options issued in prior years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.
Summary of Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth December 31, 2013 information on our equity compensation plans in effect as of that date:
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| Number of securities | ||||||||||
| remaining available | ||||||||||
| Number of securities | for issuance under | |||||||||
| to be issued upon | Weighted average | equity compensaton | ||||||||
| exercise of | exercise price of | plans (excluding | ||||||||
| outstanding options, | outstanding options, | securities reflected in | ||||||||
| warrants and rights | warrants and rights | column (a)) | ||||||||
| Plan Category | (a) | (b) | (c) | |||||||
| Equity compensation plans approved by security holders | - | $ | - | - | ||||||
| Equity compensation plans not approved by security holders | 15,075,000 | $ | 0.14 | - | ||||||
| Total | 15,075,000 | $ | 0.14 | - | ||||||
EQUITY COMPENSATION PLAN INFORMATION
2011 Equity Incentive Plan
The Board adopted the 2011 SpectraScience, Inc. Equity Incentive Plan in February 2011 (the “EIP”). The EIP is subject to shareholder approval. On shareholder approval the EIP will provide for the grant of ISOs, NSOs, restricted stock awards, restricted unit awards, stock appreciation rights and performance awards to full-time employees (who may also be directors), non-employee directors, consultants, advisors 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 EIP is 15,000,000 shares of common stock with stock option grants for 8,546,667 common shares outstanding at December 31, 2013 and 6,453,333 shares of common stock available for future stock option grants.
OWNERSHIP OF COMMON STOCK
The following table shows as of June 6, 2014, the stock ownership of (i) all persons known by us to be beneficial owners of more than five percent of our outstanding shares of Common Stock, (ii) each director and each nominee for election as a director, (iii) the Named Executive Officers (as defined above in the section titled “Executive Compensation”), and (iv) all current directors and executive officers as a group.
Beneficial ownership of the Common Stock is determined in accordance with the rules of the SEC and includes any shares of Common Stock over which a person exercises shared or sole voting or investment powers, or of which a person has a right to acquire ownership at any time within 60 days of June 6, 2014. Except as otherwise indicated, and subject to applicable community property laws, the persons named in this table have sole voting and investment power with respect to all shares of Common Stock held by them. Applicable percentage ownership in the following table is based on 168,043,254 shares of Common Stock outstanding as of June 6, 2014, plus for each individual, any securities that individual has the right to acquire within 60 days of June 6, 2014.
Unless otherwise indicated below, the address of each principal shareholder is c/o SpectraScience, Inc., 11568-11 Sorrento Valley Road, San Diego, California 92121.
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| Amount of Benefical | Percent of | |||||||
| Name of Beneficial Owner | Ownership (1) | Ownership | ||||||
| Sheldon L. Miller (2)(10) | 5,863,176 | 3.4 | % | |||||
| Michael P. Oliver (3)(11)(10) | 4,019,831 | 2.3 | % | |||||
| Stanley Pappelbaum M.D. (4)(10) | 1,020,793 | * | ||||||
| Mark McWilliams (5)(10) | 1,309,943 | * | ||||||
| Chester E. Sievert (6)(10) | 1,086,466 | * | ||||||
| F. Duwaine Townsen (7)(10) | 585,024 | * | ||||||
| Lowell W. Giffhorn (8) (11) | 1,500,000 | * | ||||||
| All officers and directors as a group (9) (7 persons) | 15,385,233 | 8.6 | % | |||||
| * | Less than 1% |
| (1) | Beneficial ownership is determined in accordance with Rule 13d-3(a) of the Securities Exchange Act of 1934 and generally includes voting or investment power with respect to securities. Except as indicated by footnotes and subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of the Common Stock shown as beneficially owned by him or her. |
| (2) | Includes 570,793 shares which may be acquired upon exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. Also includes warrants to purchase 1,558,078 shares of Common Stock. |
| (3) | Includes 3,970,831 shares which may be acquired upon the exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. |
| (4) | Includes 970,793 shares which may be acquired upon the exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. |
| (5) | Includes 53,824 shares which may be acquired upon the exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. Also includes warrants to purchase 162,697 shares of Common Stock. |
| (6) | Includes 981,466 shares which may be acquired upon the exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. |
| (7) | Includes 585,024 shares which may be acquired upon the exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. |
| (8) | Includes 1,500,000 shares which may be acquired upon the exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. |
| (9) | Includes 8,632,731 shares which may be acquired upon the exercise of options which are currently exercisable or which become exercisable within 60 days of June 6, 2014. Also includes warrants to purchase 1,720,775 shares of Common Stock. |
| (10) | Director |
| (11) | Executive Officer |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
There have been no transactions during the last two fiscal years to which we have been a party in which the amount involved exceeded 1% of the Company’s average total assets for the last two fiscal years and in which any of our executive officers, directors or beneficial holders of more than 5% of our capital stock had or will have a direct or indirect material interest.
Director Independence
Although the Company is not listed on a national securities exchange, the Company has chosen to evaluate independence based upon the NASDAQ listed company rules. The Company has determined that Messrs. McWilliams, Miller, Pappelbaum, Sievert, and Townsen are independent under NASDAQ Rule 5605(a)(2). Mr. Oliver is not independent under NASDAQ Rule 5605(a)(2) because he has an employment relationship with the Company. Other than Mr. Oliver, the remaining directors of the Company are independent in that they have no relationship to the corporation that may interfere with the exercise of their independence from management and the Company. No independent director has a business or family relationship with another director to the best of management’s knowledge.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
Our audit committee of the Board of Directors is responsible for pre-approving all audits and permitted non-audit services to be performed for us by our independent auditor.
Our Audit Committee must pre-approve all audit services, engagement fees and terms, and all permitted non-audit engagements, subject to the de minimus exceptions permitted pursuant to the Securities Exchange Act of 1934. All audit-related fees were approved by our Audit Committee in fiscal 2013.
Independent Public Accountants’ Fees. During the current year, we changed our independent public accounting firm to HJ Associates & Consultants, LLP who audited our consolidated financial statements for the year ended December 31, 2013. The firm of McGladrey LLP, independent public accountants, audited our consolidated financial statements for the year ended December 31, 2012.
The following table presents fees for professional services rendered for the two most recent fiscal years.
| HJ Associates & | ||||||||||||
| Consultants LLP | McGladrey, LLP | |||||||||||
| Fee category | 2013 | 2013 | 2012 | |||||||||
| Audit fees | $ | 54,000 | $ | 39,000 | $ | 78,200 | ||||||
| Audit-related fees | $ | - | $ | - | $ | - | ||||||
| Tax fees | $ | - | $ | - | $ | - | ||||||
| All other fees | $ | - | $ | - | $ | - | ||||||
| Total fees | $ | 54,000 | $ | 39,000 | $ | 78,200 | ||||||
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| (1) | Audit fees include fees billed and expected to be billed for professional services rendered for the audit of our annual consolidated financial statements for the fiscal years ended December 31, 2013 and 2012, the review of our financial statements included in our reports on Form 10-Q, and accounting consultations necessary for the rendering of an opinion on our consolidated financial statements. |
| (2) | Audit-related fees include fees billed and expected to be billed for professional services rendered primarily for consultation and review of securities registration filings and related consents for the fiscal years ended December 31, 2013 and 2012. |
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | Documents filed as part of this report. |
| (1) | Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K: |
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
Consolidated Statements of Shareholders’ Equity from December 31, 2011 to December 31, 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
| (2) | Financial Statement Schedules. Not applicable. |
| (3) | Exhibits. See “Exhibit Index to Form 10-K” immediately following the signature page of this Form 10-K for a description of the documents that are filed as Exhibits to this report or incorporated by reference herein. |
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Pursuant to the requirements of Sections 13 and 15(d) 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: June 27, 2014 | By: | /s/ Michael P. Oliver |
|
Michael P. Oliver - President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/ Michael P. Oliver | ||
| Michael P. Oliver | Date: June 27, 2014 | |
|
President and Chief Executive Officer, Director (Principal Executive Officer) |
||
| /s/ Lowell W. Giffhorn | ||
| Lowell W. Giffhorn | Date: June 27, 2014 | |
|
Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |
||
| /s/ Mark D. McWilliams | ||
| Mark D. McWilliams | Date: June 27, 2014 | |
| Director | ||
| /s/ Stanley J. Pappelbaum | ||
| Stanley J. Pappelbaum | Date: June 27, 2014 | |
| Director | ||
| /s/ Chester E. Sievert | ||
| Chester E. Sievert | Date: June 27, 2014 | |
| Director | ||
| /s/ Duwaine Townsen | ||
| Duwaine Townsen | Date: June 27, 2014 | |
| Director | ||
| /s/ Sheldon L. Miller | ||
| Sheldon L. Miller | Date: June 27, 2014 | |
| Director |
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SPECTRASCIENCE, INC.
EXHIBIT INDEX
FORM 10-K FOR FISCAL YEAR 2013
|
Exhibit No. |
Description | |
| 2.1 | Stock Purchase Agreement by and among the Company, Euclid Partners IV, L.P., EuclidSR Partners, L.P., EuclidSR Biotechnology Partners IV, L.P., Stephen L. Watson and Ross Flewelling (Incorporated by reference to exhibit 2.1 to the Company’s Report on Form 8-K filed on November 13, 2007) | |
| 3.1 | Certificate of Amendment to Articles of Incorporation (Incorporated by reference to exhibit 3.3 to the Company’s Report on Form 10-Q for the quarter ended December 31, 2009, filed on November 16, 2009) | |
| 3.2 | Amended and Restated Articles of Incorporation(Incorporated by reference to exhibit 3.1 to the Company Report on Form 8-K filed August 6, 2004) | |
| 3.3 | Amended Bylaws (Incorporated by reference to exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed on April 30, 2009) | |
| 3.4 | Certificate of Redesignation of Series C Preferred Stock (Incorporated by reference to exhibit 3.4 to the Company Report on Form 10-K filed April 18, 2013) | |
| 4.1 | Certificate of Designation of the Relative Rights and Preferences of the Series A Preferred Stock (Incorporated by reference to exhibit 4.1 to the Company’s Report on Form 10-QSB for the quarter ended June 30, 2007, filed on August 14, 2007) | |
| 4.2 | Warrant to Purchase Series A Preferred Stock of SpectraScience, Inc. (Incorporated by reference to exhibit 4.2 to the Company’s Report on Form 10-QSB for the quarter ended June 30, 2007, filed on August 14, 2007) | |
| 4.3 | Common Stock Purchase Warrant issued to Placement Agent (Incorporated by reference to exhibit 4.3 to the Company’s Report on Form 10-KSB for the fiscal year ended December 31, 2005, filed on March 31, 2008) | |
| 4.4 | Certificate of Designation of Rights and Preferences of Series B Preferred stock of SpectraScience, Inc. (Incorporated by reference to exhibit 4.6 to the Company’s Report on Form 8-K filed on November 6, 2009) | |
| 4.5 | Form of Warrant to Purchase Common Stock of SpectraScience, Inc. issued to Holders of Series B Preferred Stock (Incorporated by reference to exhibit 4.5 to the Company’s Report on Form 8-K filed on November 6, 2009) | |
| 4.6 | Form of Warrant to Purchase Common Stock of SpectraScience, Inc. issued to Holders of Series C Preferred Stock(Incorporated by reference to exhibit 4.5 to the Company Report on Form 8-K filed June 24, 2010) | |
| 4.7 | Certificate of Designation of Rights and Preferences of Series C Preferred Stock of SpectraScience, Inc. (Incorporated by reference to exhibit 4.6 to the Company Report on Form 8-K filed June 24, 2010) | |
| 4.8 | Form of Agent Warrant for Series C Preferred Stock offering (Incorporated by reference to exhibit 4.6 to the Company’s Registration Statement on Form S-1/A filed on August 26, 2010) | |
| 4.9 | Form of Debenture issued by the Company to each subscriber in the Company’s Convertible Debenture Offering (Incorporated by reference to exhibit 4.1 to the Company’s Report on Form 8-K filed on January 30, 2013) | |
|
4.10 |
Form of Warrant issued by the Company to each subscriber in the Company’s Convertible Debenture Offering (Incorporated by reference to exhibit 4.2 to the Company’s Report on Form 8-K filed on January 30, 2013) | |
| 10.1 | Common Stock Purchase Agreement dated as of January 30, 2009, by and between SpectraScience, Inc. and Fusion Capital Fund II, LLC (Incorporated by reference to exhibit 10.1 to the Company’s Report on Form 8-K filed on February 4, 2009) | |
| 10.2 | Registration Rights Agreement dated as of January 30, 2009, by and between SpectraScience, Inc. and Fusion Capital Fund II, LLC. (Incorporated by reference to exhibit 10.2 to the Company’s Report on Form 8-K filed on February 4, 2009) | |
| 10.3* | Amended 2001 Stock Plan (Incorporated by reference to exhibit 10.27 to the Company’s Report on Form 8-K filed on August 6, 2004) |
| 69 |
| 10.4* | Form of Directors’ Option Agreement (Incorporated by reference to exhibit 10.1 to the Company’s Report on Form S-1 filed April 30, 2009) | |
| 10.5* | 2011 Equity Incentive Plan (Incorporated by reference to exhibit 10.1 to the Company’s Report on Form 8-K filed on March 1, 2012) | |
| 10.6* | Form of Nonqualified Stock Option Award Agreement (Incorporated by reference to exhibit 10.2 to the Company’s Report on Form 8-K filed on March 1, 2012) | |
| 10.7* | Offer Letter to Michael P. Oliver (Incorporated by reference to Exhibit 10.7 to the Company’s Report on Form 10-K for the fiscal year ended December 31, 2010, filed on March 31, 2012) | |
| 10.8 | Dealer Agreement dated April 6, 2010 by and between the Company and Felix Investments, LLC (Incorporated by reference to exhibit 10.6 to the Company’s Registration Statement on Form S-1/A filed on August 26, 2010) | |
| 10.9 | Dealer Agreement dated July 2, 2009 by and between the Company and Felix Investments, LLC (Incorporated by reference to exhibit 10.5 to the Company’s Registration Statement on Form S-1/A filed on August 26, 2010) | |
| 10.10 | Form of Subscription Agreement by and between the Company and each Subscriber for the Company’s Convertible Debenture Offering (Incorporated by reference to exhibit 10.1 to the Company’s Report on Form 10-K filed on April 18, 2012) | |
| 10.11 | Form of Subscription Agreement by and between the Company and each Subscriber for the Company’s Convertible Debenture Offering (Incorporated by reference to exhibit 10.1 to the Company’s Report on Form 10-Q filed on March 28, 2014) | |
| 10.12 | Form of Convertible Debenture by and between the Company and each Subscriber for the Company’s Convertible Debenture Offering (Incorporated by reference to exhibit 10.2 to the Company’s Report on Form 10-Q filed on March 28, 2014) | |
| 10.13 | Form of Warrant for each Subscriber for the Company’s Convertible Debenture Offering (Incorporated by reference to exhibit 10.3 to the Company’s Report on Form 10-Q filed on March 28, 2014) | |
| 10.14* + | Employment Agreement of Michael P. Oliver dated January 1, 2013 | |
| 21+ | Subsidiaries of the registrant – Luma Imaging Corporation, a Delaware corporation, and SpectraScience International, Inc., a Minnesota corporation | |
| 23.1+ | Consent of Independent Registered Public Accounting Firm – McGladrey LLP | |
| 23.2+ | Consent of Independent Registered Public Accounting Firm- HJ Associates & Consultants LLP | |
| 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 annual report on Form 10-K of the Company for the year ended December 31, 2013, formatted in XBRL; (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements tagged as blocks of text. | |
| + Filed herewith. | ||
| ++ Furnished herewith. | ||
| * Denotes management compensatory plan or contract. |
| 70 |
Exhibit 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into by and between SpectraScience, Inc., a Minnesota corporation (the “Company”), and Michael Oliver (“Executive”), effective January 1, 2013 (the “Effective Date”).
RECITALS
WHEREAS, Executive currently is employed by SpectraScience as its President and Chief Executive Officer.
WHEREAS, the Company wishes to provide Executive with certain severance payments and benefits, as described below, to which Executive is not otherwise entitled, in exchange for the promises and restrictions described in this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Position. The Company will employ Executive as its President & Chief Executive Officer. In this position, Executive will serve the Company faithfully and to the best of Executive’s ability. Executive will devote his full business and professional time, attention and energies to the performance of Executive’s duties with the Company, and Executive agrees to comply with the Company’s policies, procedures, rules, regulations and programs. Executive may devote time to outside board or advisory positions as pre-approved by the Company’s Board of Directors (the “Board”). Executive will render such business and professional services in the performance of such duties, consistent with Executive’s position within the Company, as will be reasonably assigned to Executive by the Board of Directors. Executive will be based in San Diego, California and will travel as needed, including to collaborator and partner locations, academic medical centers, banking and other conferences, and other locations as necessary or advisable in performance of Executive’s duties.
2. Term of Employment. Executive and the Company agree that Executive will be employed at-will and that Executive’s employment with the Company will continue until terminated pursuant to Section 5 of this Agreement.
3. Compensation. During Executive’s employment with the Company, the Company will provide Executive with the following compensation:
a. Base Salary. The Company will pay Executive a base salary of $325,000 per year, to be reviewed approximately annually by the Board and adjusted from time to time as determined by the Board in its discretion, and payable in accordance with the Company’s standard payroll policies, but no less frequently than monthly. Notwithstanding the foregoing, from the Effective Date of this Agreement until the closing of a round (or multiple rounds) of equity (or debt convertible into equity) financing resulting in gross proceeds to the Company in excess of $2,000,000 in any one transaction or $3,000,000 in the aggregate (a “Qualified Financing”), Executive will be paid a base salary of $225,000 per year, payable in accordance with the Company’s standard payroll policies, but no less frequently than monthly. Upon closing of the Qualified Financing, Executive’s rate of compensation will be increased to the $325,000 annualized rate described above and Executive will be paid a bonus equal to the difference between the base salary actually paid to Executive from the Effective Date of this Agreement until the closing of the Qualified Financing and the amount Executive would otherwise have been paid during such period at the $325,000 annualized rate, such bonus to be paid within 30 days of the closing of the Qualified Financing.
b. Annual Bonus. During Executive’s employment with the Company, Executive will be eligible to earn an annual bonus of up to fifty percent (50%) of Executive’s then-current base salary (prorated for partial years) for achievement of reasonable Company and individual performance-related goals to be defined by the Board. The exact payment terms of a bonus, if any, are to be set by the Compensation Committee of the Board of Directors (the “Compensation Committee”), as authorized by the Company’s Board of Directors in its sole discretion. To earn a bonus under this Section 3.b., Executive must be employed by the Company on the last day of the Company’s fiscal year. The bonus, if earned, will be paid within thirty (30) days after receipt by the Compensation Committee of the Company’s final year-end financial statements.
c. Taxes. All compensation and benefits provided by the Company to Executive (including but not limited to Executive’s base salary and annual bonus), will be subject to required and authorized deductions and withholdings.
4. Employee Benefits. During Executive’s employment with the Company, Executive will be entitled to participate in any employee benefit plans, health insurance plans, life insurance plans, disability income plans, retirement plans, expense reimbursement plans and other benefit plans that the Company may from time to time have in effect for its executive-level employees. Executive’s participation will be subject to the terms of the applicable plan documents and applicable policies of the Company. Nothing in this Agreement will require the Company to adopt group insurance, employee benefit, and/or retirement plans or restrict the Company’s right to amend, modify, or terminate such plans at any time, including during Executive’s employment. Executive will be eligible for twenty (20) days of paid time off per full calendar year (prorated for partial years), in addition to standard holidays, in accordance with the Company’s policies in effect from time to time.
5. Termination. Executive’s employment by the Company will terminate as follows:
a. By mutual written agreement of the parties.
b. Automatically upon the death of Executive or the insolvency or bankruptcy of the Company.
c. By Executive without Good Reason or by the Company without Cause upon ninety (90) days’ written notice of termination.
d. By the Company with Cause immediately upon written notice of termination. For purposes of this Agreement, “Cause” will mean:
| i. | Executive’s material breach of any material term of this Agreement or any other Agreement between the parties, failure to carry out his duties or good faith directives from the Company, or violation of the Company’s policies or procedures; |
| ii. | Any willful or deliberate misconduct; |
| iii. | Any act of fraud, embezzlement, dishonesty, misappropriation or breach of fiduciary duty by Executive relating to the Company or its agents, business partners, or stockholders; and |
| iv. | Executive’s commission of (A) a felony, or (B) a misdemeanor involving moral turpitude, whether or not against the Company and whether or not committed in the scope of Executive’s employment. |
e. By Executive for Good Reason upon written notice to the Company, with a copy to the Board, within thirty (30) calendar days of the event constituting Good Reason. Upon receipt of such notice, the Company will have thirty (30) calendar days to cure such event. If the Company does not cure such event to the reasonable satisfaction of Executive within such thirty-day period, Executive must terminate within thirty (30) calendar days thereafter in order for Executive’s termination to be for Good Reason. For purposes of this Agreement, “Good Reason” will mean:
| i. | The assignment of Executive to a position other than President & CEO without Executive’s consent and which results in a material diminution of Executive’s authority, duties, or responsibilities; |
| ii. | A material reduction by the Company of Executive’s Salary at any time without Executive’s consent; |
| iii. | Executive being required to relocate to an office location more than fifty (50) miles from Executive’s current office in San Diego, California. Should Executive be required and agree to relocate to an office location more than 50 miles from Executive’s current office in San Diego, California, all reasonable moving expenses to relocate Executive’s office and private residence will be paid for and billed directly to Company, with all reimbursements being requested and made within one (1) year after being incurred; or |
| iv. | Any other material breach by the Company of any material provision of this Agreement. |
f. Except as provided in Section 7, after the effective date of termination, Executive will not be entitled to any compensation, bonuses, benefits, or payments whatsoever except for base salary earned through his last day of employment and any accrued benefits.
6. Pay in Lieu of Notice. If either the Company or Executive terminates Executive’s employment, the Company, in its discretion, may treat Executive’s termination as effective at any earlier date during any required notice period if Company continues to pay Executive’s then-current base salary for the unexpired portion of the applicable notice period.
7. Severance Pay and Benefits. If (1) Executive is involuntarily terminated by the Company without Cause or Executive terminates his employment for Good Reason, and (2) Executive executes (and does not rescind) a release of claims in a form supplied by the Company (the “Release”), then the Company will provide Executive the following severance pay and benefits:
a. Severance pay in an amount equal to twelve (12) months’ of Executive’s then current base salary, subject to required and authorized deductions and withholdings, which will be paid at regular payroll intervals over the course of the 12-month period immediately following the effective date of Executive’s termination and commencing upon the first scheduled payroll cycle immediately following the date the Release is executed and no longer subject to revocation (the “Separation Effective Date”). The first such cash payment will include payment of all amounts that otherwise would have been due prior to the Separation Effective Date had such payments commenced immediately upon the termination of Executive’s employment.
b. Provided Executive elects pursuant to COBRA to continue to participate in the Company’s group health and dental insurance plans, to pay COBRA premiums for health and dental insurance coverage under the plans for the 12-month period immediately following the effective date of the termination .. The Company will discontinue payments under this Section 7.b if and at such time as Executive is eligible to enroll in a new employer’s group health and/or dental programs, as applicable, and Executive agrees to promptly provide the Company notice if he becomes eligible to enroll in the group health and/or dental programs of a new employer. If the Company determines, in its sole discretion, that payment of the COBRA premiums under this Section 7.b would result in a violation of the nondiscrimination rules of Section 105(h)(2) of the Internal Revenue Code or any statute or regulation of similar effect (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of paying the COBRA premiums, the Company may instead elect to pay Executive on the first day of each month, a fully taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings (the “Special Severance Payment”), for each remaining month during which Executive is entitled to receive payment of the COBRA premiums under this Section 7.b. Executive may, but is not obligated to, use the Special Severance Payment toward the cost of COBRA premiums. The Company has the right to modify or terminate its group insurance plans at any time and Executive will have the same right to participate in the Company’s group insurance plans only as is provided on an equivalent basis to the Company’s employees.
8. Change of Control.
a. If, within the 12-month period following a Change of Control, Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason, then, in addition to the severance obligations due to Executive under Section 7 above, an additional one hundred percent (100%) of the Executive’s then current salary less withholding taxes shall be paid on the date of termination and one hundred percent (100%) of any then-unvested shares under Company stock options then held by Executive will vest upon the date of such termination and the period of time for their exercise will be at the discretion of the Company, provided that no option will be exercisable after expiration of its original term. It may be necessary for Executive to exercise such shares on the day of Change in Control, and the Company will use its best efforts to provide Executive with a reasonable period of advance written notice in such event.
b. For purposes of this Agreement, “Change of Control” means:
| i. | after the date hereof, any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or |
| ii. | the date of the consummation of a merger or consolidation of the Company with any other corporation or entity that has been approved by the stockholders of the Company, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or |
| iii. | the date of the consummation of the sale or disposition of all or substantially all of the Company’s assets. |
9. Confidentiality and Assignment of Inventions Agreement. In further consideration of the severance payments and benefits described in this Agreement, and as term and condition of Executive’s continued employment with the Company, Executive agrees to execute and abide by the terms of the Confidentiality and Assignment of Inventions Agreement attached hereto as Exhibit A.
10. Code Section 409A. Notwithstanding any other provision of this Agreement to the contrary, the parties to this Agreement intend that this Agreement will satisfy the applicable requirements, if any, of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (collectively hereinafter referred to as “409A”) in a manner that will preclude the imposition of additional taxes and interest imposed under 409A. The parties agree that the Agreement will be amended (as determined by the Company in consultation with Executive) to the extent necessary to comply with 409A, as amended from time to time, and the notices and other guidance of general applicability issued thereunder. Notwithstanding anything in this Agreement to the contrary, if any amounts that become due under this Agreement on account of Executive’s termination of employment constitute “nonqualified deferred compensation” within the meaning of 409A, payment of such amounts will not commence until Executive incurs a Separation from Service, as defined under 409A). If, at the time of Executive’s termination of employment under this Agreement, Executive is a “specified employee” (within the meaning of 409A), any amounts that constitute “nonqualified deferred compensation” within the meaning of 409A that become payable to Executive on account of Executive’s Separation from Service (including any amounts payable pursuant to the preceding sentence) will not be paid or commence earlier than the first day of the seventh month following the date of Executive’s termination of employment (the “409A Suspension Period”). Within fourteen (14) calendar days after the end of the 409A Suspension Period, Executive will be paid a lump sum equal to any payments delayed because of the preceding sentence. Thereafter, Executive will receive any remaining benefits as if there had not been an earlier delay. Each payment due under this Agreement is treated as a separate payment for purposes of Treasury Regulations Sections 1.409A-1(b)(4)(F) and 1.409A-2(b)(2).
11. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of Minnesota.
12. Assignment. This Agreement will be assignable by the Company and the terms of this Agreement automatically will inure to the benefit of the Company and its successors and assigns.
13. Captions. The captions set forth in this Agreement are for convenience only and will not be considered as part of this Agreement or as in any way limiting or amplifying the terms and conditions hereof.
14. Entire Agreement. This Agreement incorporates the entire understanding between the parties as to its subject matter and supersedes all prior agreements and understandings relating to such subject matter. This Agreement may not be canceled, modified, or otherwise changed except by another written agreement signed by Executive and the Chairman of the Board.
15. Waivers. The Company’s action in not enforcing a breach of any part of this Agreement will not prevent the Company from enforcing it as to the breach or any other breach of this Agreement. No waiver of this Agreement will be binding upon the Company unless agreed to in writing signed by the Chairman of the Board.
16. Severability. If any provision of this Agreement is held invalid or unenforceable by a court, the Company and Executive agree that that part should be modified by the court to make it enforceable to the maximum extent possible. If the part cannot be modified, then that part should be severed and the other parts of this Agreement will remain enforceable.
17. Notices. Any and all notices referred to herein will be deemed properly given only if in writing and delivered personally to the intended recipient, or the recipient’s home address in the case of Executive, or sent postage prepaid, by certified mail, to the party to whom notice is being given, as follows:
| a. | To the Company, to the attention of the Board of Directors of the Company, at the Company’s administrative office or at such other address as the Company will specify in writing to Executive; or |
| b. | To Executive at his home address as it then appears on the records of the Company, it being the duty of Executive to keep the Company informed of a current home address at all times. |
18. Counterparts. More than one counterpart of this Agreement may be executed by the parties hereto, and each fully executed counterpart will be deemed an original.
With the intention of being bound hereby, the parties have executed this Agreement as of the date set forth above.
| EXECUTIVE | |||
| Dated: 10 Jan 2014 | By: | /s/ Michael Oliver | |
| SPECTRASCIENCE, INC. | |||
| Dated: 10 Jan 2014 | By: | /s/ M McWilliams | |
| Its: Chairman of the Board | |||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement (No.333-128227) on Form S-8 of SpectraScience, Inc. of our report dated April 17, 2013, relating to our audit of the consolidated financial statements which appears in this Annual Report on Form 10-K of SpectraScience, Inc. for the year ended December 31, 2013.
/s/ McGladrey LLP
Des Moines, IA
June 27, 2014
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement No.333-128227 on Form S-8 of SpectraScience, Inc. of our report dated June 27, 2014, relating to our audit of the consolidated financial statements as of and for the year ended December 31, 2013, which appears in this Annual Report on Form 10-K of SpectraScience, Inc. for the year ended December 31, 2013.
/s/ HJ Associates & Consultants, LLP
HJ Associates & Consultants, LLP
Salt Lake City, UT
June 27, 2014
Exhibit 31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael P. Oliver, certify that:
1. I have reviewed this annual report on Form 10-K 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 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.
| Dated: June 27, 2014 | ||
| Signature: | /s/ Michael P. Oliver | |
| Name: Michael P. Oliver | ||
| Title: President and Chief Executive Officer | ||
Exhibit 31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lowell W. Giffhorn, certify that:
1. I have reviewed this annual report on Form 10-K 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 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.
| Dated: June 27, 2014 | ||
| Signature: | /s/ Lowell W. Giffhorn | |
| Name: Lowell W. Giffhorn | ||
| Title: Chief Financial Officer | ||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SpectraScience, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on his knowledge:
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 as of and for the periods covered in the Report.
| /s/ Michael P. Oliver | |
|
Michael P. Oliver President and Chief Executive Officer |
Dated: June 27, 2014
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SpectraScience, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on his knowledge:
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 as of and for the periods covered in the Report.
| /s/ Lowell W. Giffhorn | |
|
Lowell W. Giffhorn Chief Financial Officer |
|
| Dated: June 27, 2014 |
|
Patents - Additional Information (Detail) (Patents, USD $)
|
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2013
|
Dec. 31, 2012
|
|
|
Patents
|
||
| Finite-Lived Intangible Assets [Line Items] | ||
| Amortization of Intangible Assets | $ 165,447 | $ 753,945 |
|
Components of Federal Income Tax Benefit from Continuing Operations (Detail) (USD $)
|
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2013
|
Dec. 31, 2012
|
|
| Current income tax expense (benefit): | ||
| Federal | $ 0 | $ 0 |
| State | 0 | 0 |
| Net current tax expense (benefit) | 0 | 0 |
| Deferred tax expense (benefit) resulted from: | ||
| Difference between financial and tax depreciation | 6,000 | (26,612) |
| State income tax benefits | (21,100) | (72,227) |
| Net operating (loss) income | (564,000) | (492,547) |
| Research and development credits | (21,000) | 24,328 |
| Allowance for obsolete inventory | (13,000) | 0 |
| Amortization of patents | 66,000 | (300,296) |
| Derivative liability recognition | 191,000 | (783,315) |
| Vacation accrual | 17,000 | (2,911) |
| Warranty expense | 0 | (11,949) |
| Allowance for bad debts, returns and discounts | 31,000 | (8,943) |
| Other | 0 | (105,400) |
| Valuation reserve | 308,100 | 1,779,872 |
| Net deferred tax benefit | 0 | 0 |
| Income Tax Expense (Benefit) | $ 0 | $ 0 |
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