0001615774-15-003309.txt : 20151116 0001615774-15-003309.hdr.sgml : 20151116 20151116151339 ACCESSION NUMBER: 0001615774-15-003309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20150930 FILED AS OF DATE: 20151116 DATE AS OF CHANGE: 20151116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRASCIENCE INC CENTRAL INDEX KEY: 0000727672 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411448837 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13092 FILM NUMBER: 151233789 BUSINESS ADDRESS: STREET 1: 11568 SORRENTO VALLEY ROAD STREET 2: SUITE 11 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: (858) 847-0200 MAIL ADDRESS: STREET 1: 11568 SORRENTO VALLEY ROAD STREET 2: SUITE 11 CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: GV MEDICAL INC /MN DATE OF NAME CHANGE: 19931119 FORMER COMPANY: FORMER CONFORMED NAME: GV MEDICAL INC DATE OF NAME CHANGE: 19920703 10-Q 1 s102109_10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

Commission file number 0-13092

 

SPECTRASCIENCE, INC.

 

(Exact name of registrant

as specified in its charter)

 

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

 

11568 Sorrento Valley Rd., Suite 11

San Diego, California 92121

(Address of principal executive offices, including zip code)

(858) 847-0200

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer       ¨ Accelerated filer                 ¨
   
Non-accelerated filer          ¨ Smaller reporting company       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 number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on November 16, 2015 was 210,615,011.  

 

 

 

 

SPECTRASCIENCE, INC.

 

FORM 10-Q

For the Nine months Ended September 30, 2015

 

TABLE OF CONTENTS

 

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

 

2

 

 

PART I     FINANCIAL INFORMATION:

 

Item 1. Financial Statements

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   September 30,   December 31, 
   2015   2014 
   (Unaudited)   (Audited) 
         
ASSETS          
Current assets:          
Cash  $55,061   $223,529 
Inventory, current portion   183,848    283,624 
Deferred debt issuance costs   98,456    107,636 
Prepaid expenses and other current assets   308,319    244,173 
Total current assets   645,684    858,962 
           
Fixed assets, net   1,153    3,665 
Long-term inventory   120,000    - 
Patents, net   1,226,077    1,347,894 
   $1,992,914   $2,210,521 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable  $792,891   $836,136 
Note payable   115,000    100,000 
Convertible debt, net of discounts of $554,173 as of September 30, 2015 and $576,502 as of December 31, 2014   5,441,346    3,920,100 
Derivative liability   1,107,116    1,061,839 
Accrued expenses   1,112,466    673,012 
Total current liabilities   8,568,819    6,591,087 
           
COMMITMENTS AND CONTINGENCIES          
           
Stockholders' deficit          
Series A Convertible Preferred Stock, $.01 par value; 0 shares authorized, issued and outstanding as of September 30, 2015 and December 31, 2014   -    - 
Series B Convertible Preferred Stock, $.01 par value; 2,585,000 shares authorized, issued and outstanding as of September 30, 2015 and December 31, 2014; liquidation value of $517,000 plus accumulated and unpaid dividends of $106,931 as of September 30, 2015 and December 31, 2014   25,850    25,850 
Series C Convertible Preferred Stock, $.01 par value; 1,000,000 shares authorized; 500,000 shares issued and outstanding as of September 30, 2015 and December 31, 2014; liquidation value of $100,000 as of September 30, 2015 and December 31, 2014   5,000    5,000 
Common stock, $.01 par value; 746,915,000 shares authorized; 198,039,192 and 194,355,277 shares issued and outstanding as of September 30, 2015 and December 31, 2014   1,980,392    1,943,553 
Additional paid in capital   39,939,048    39,509,115 
Accumulated deficit   (48,526,195)   (45,864,084)
Total stockholders' deficit   (6,575,905)   (4,380,566)
   $1,992,914   $2,210,521 

 

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

 

3

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Operation

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Revenue  $-   $-   $-   $- 
Cost of revenue   -    -    (12,000)   (6,000)
Gross profit   -    -    12,000    6,000 
                     
Operating expenses:                    
Research and development   172,405    138,806    504,415    673,173 
General and administrative   284,724    280,000    1,010,989    1,092,689 
Sales and marketing   50,700    114,178    184,660    344,529 
    507,829    532,984    1,700,064    2,110,391 
                     
Loss from operations   (507,829)   (532,984)   (1,688,064)   (2,104,391)
                     
Other income (expense)                    
Interest expense   (183,184)   (131,846)   (474,727)   (347,587)
Change in fair value of derivative and warrant liabilities   753,538    1,883,289    353,315    (168,471)
Amortization of derivative and warrant liabilities discount   (176,661)   (396,853)   (699,957)   (850,691)
Amortization of deferred debt issuance costs and original issue discount   (90,130)   (85,034)   (262,520)   (197,608)
Gain on extinguishment of debt   -    227,259    119,369    227,259 
Other income (expense), net   (4,893)   (5,343)   (9,527)   (20,523)
    298,670    1,491,472    (974,047)   (1,357,621)
                     
Net income (loss)  $(209,159)  $958,488   $(2,662,111)  $(3,462,012)
                     
Income (loss) per share:                    
Basic  $(0.00)  $0.01   $(0.01)  $(0.02)
Fully diluted  $(0.00)  $0.01   $(0.01)  $(0.02)
                     
Weighted average common shares outstanding:                    
Basic   198,039,192    171,996,818    196,519,704    169,070,461 
Fully diluted   198,039,192    186,965,778    196,519,704    169,070,461 

 

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

 

4

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Deficit

For the nne months ended September 30, 2015

(unaudited)

 

                           Additional       Total 
   Series B Preferred Stock   Series C Preferred Stock   Common Stock   Paid-In   Accumulated   Shareholders' 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                     
Balance December 31, 2014   2,585,000   $25,850    500,000   $5,000    194,355,277   $1,943,553   $39,509,115   $(45,864,084)  $(4,380,566)
                                              
Conversion of convertible debt   -    -    -    -    3,233,915    32,339    63,863    -    96,202 
Exercise of stock options   -    -    -    -    450,000    4,500    -         4,500 
Non cash issuance of stock options   -    -    -    -    -    -    137,522    -    137,522 
Non cash issuance of warrant for consulting services   -    -    -    -    -    -    2,848    -    2,848 
Warrant valuation on issuance of convertible debt   -    -    -    -    -    -    225,700    -    225,700 
Net loss   -    -    -    -    -    -    -    (2,662,111)   (2,662,111)
                                              
Balance September 30, 2015   2,585,000   $25,850    500,000   $5,000    198,039,192   $1,980,392   $39,939,048   $(48,526,195)  $(6,575,905)

 

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

 

5

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended September 30, 
   2015   2014 
Operating activities:          
Net loss  $(2,662,111)  $(3,462,012)
Adjustments to reconcile net loss to cash used in operating activities:          
Amortization and depreciation   124,329    140,836 
Non-cash issuance of stock options and warrants   140,370    349,853 
Amortization of derivative and warrant liabilities discount   699,957    850,691 
Amortization of deferred debt issuance costs and original issue discount   262,520    197,608 
Change in fair value of derivative and warrant liabilities   (353,315)   168,471 
Gain on extinguishment of debt   (119,369)   (227,259)
Fair market value of common stock issued for services   -    50,000 
Changes in assets and liabilities:          
Accounts receivable   -    60,000 
Inventory   (20,224)   (69,247)
Prepaid expense and other assets   (64,146)   (26,966)
Accounts payable   (43,245)   (222,927)
Accrued expenses   481,516    317,271 
Net cash used in operating activities   (1,553,718)   (1,873,681)
           
Investing activities:          
Purchases of fixed assets   -    (6,275)
Net cash used in investing activities   -    (6,275)
           
Financing activities:          
Proceeds from issuance of convertible notes payable   1,520,250    1,856,376 
Payments against note payable to affiliate   -    (30,000)
Proceeds from exercise of stock options   4,500    18,624 
Debt issuance costs   (139,500)   (158,000)
Net cash provided by financing activities   1,385,250    1,687,000 
           
Net decrease in cash   (168,468)   (192,956)
           
Cash, beginning of year   223,529    236,597 
           
Cash, end of period  $55,061   $43,641 
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid during the period for:          
Interest  $8,000   $- 
Income taxes  $-   $- 
Non Cash Investing and Financing Activities:          
Conversion of convertible notes to common stock  $130,777   $236,842 
Conversion of interest due on convertible notes to common stock  $27,062   $52,972 
Warrant valuation on issuance of convertible debentures  $225,700   $897,712 
Conversion of accrued interest to note payable  $15,000   $- 
Elimination of derivative liabilities on conversion  $-   $190,337 

 

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

 

6

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements

 

1.Nature of Business and Basis of Presentation

 

Description of Business

 

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

 

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

 

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

 

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

 

Basis of Presentation

 

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

 

7

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

Going Concern

 

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

 

As of September 30, 2015, the Company had a working capital deficit of $7,923,135 and cash of $55,061, compared to a working capital deficit of $5,732,125 and cash of $223,529 as of December 31, 2014. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two year period from the date of the Engagement Agreement. Subsequent to March 31, 2013, the Company has engaged other agents to assist the Company with raising capital and has commenced raising capital on its own. During the nine months ended September 30, 2015, the Company raised $1,380,750, net of transaction costs of $139,500, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

 

The holders of Convertible Debentures control the conversion of the Convertible Debentures and certain of the Convertible Debentures were not converted at their maturity constituting a potential default on the matured, but unconverted, Convertible Debentures. In the event of such default, principal, accrued interest and other related costs are immediately due and payable in cash. As of September 30, 2015, Convertible Debentures with a face value of $3,660,275 held by 58 individual investors are in default. None of these investors have served notice of default on the Convertible Debentures held by them.

 

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

 

8

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

2.Summary of Significant Accounting Policies

 

Revenue recognition

 

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

 

Consolidation

 

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

 

Risks and Uncertainties

 

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

 

Use of Estimates

 

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

 

Inventory Valuation

 

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

 

Valuation of Long-lived Assets

 

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

 

9

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

Stock-Based Compensation

 

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

 

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

 

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

 

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

 

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

 

10

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

   Three months ended September 30,  Nine months ended September 30,
   2015  2014  2015  2014
             
Expected term  1 year  None  1-5 years  5 years
Exercise price  $0.01  None  $0.01  $0.02
Expected volatility  285% to 322%  None  210% to 322%  187%
Expected dividends  None  None  None  None
Risk-free interest rate  0.26% to 0.33%  None  0.26% to 1.48%  1.64%
Forfeitures  None  None  None  None

 

Earnings (Loss) Per Share

 

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

 

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

 

   September 30,   September 30, 
   2015   2014 
         
Preferred Stock   3,085,000    3,085,000 
Convertible debentures   117,229,747    94,767,062 
Options   38,064,635    35,168,800 
Warrants   108,251,866    109,942,469 
Total   266,631,248    242,963,331 

 

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

 

11

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Numerator:                    
Net income (loss) for basic earnings per share  $(209,159)  $958,488   $(2,662,111)  $(3,462,012)
Net income (loss) for diluted earnings per share  $(209,159)  $958,488   $(2,662,111)  $(3,462,012)
                     
Denominator:                    
Weighted average basic shares outstanding   198,039,192    171,996,818    196,519,704    169,070,461 
Denominator for diluted earnings per share-                    
Adjusted weighted average shares   198,039,192    186,965,778    196,519,704    169,070,461 
                     
Income (loss) per share                    
Basic  $(0.00)  $0.01   $(0.01)  $(0.02)
Diluted  $(0.00)  $0.01   $(0.01)  $(0.02)

 

Inventory

 

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

 

   September 30,   December 31, 
   2015   2014 
           
Raw materials  $239,884   $238,441 
Finished goods   63,964    45,183 
    303,848    283,624 
Reserve for obsolescence   -    - 
    303,848    283,624 
Less long-term portion   120,000    - 
   $183,848   $283,624 

 

3. Liabilities

 

Note Payable

 

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

 

12

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

Convertible Debentures

 

As of September 30, 2015, the Company has issued and outstanding Convertible Debentures (“Debentures”) with original terms of nine months to one year, an interest rate ranging from 10-20% per year and an original issue discount ranging from 5% to 10% which, at the option of the holder, may convert into common stock at an initial conversion price ranging from $0.03 to $0.099 per share. The Debentures were issued with detachable five year cashless Holders Warrants that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.06 to $0.1287 per share. In addition, the Company issued five year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price ranging from $0.0745 to $0.1287 per share. For debentures issued through March 31, 2013, at the option of the Debenture holder, the terms of the Debentures and Holders Warrants are subject to an exchange feature in the event that the Company issues securities with terms more favorable than those of the then outstanding Debentures and Holders Warrants. Debentures issued subsequent to March 31, 2013 do not contain such an exchange clause. The gross amount of Debentures outstanding is $5,499,159 as of September 30, 2015.

 

During the nine months ended September 30, 2015, the Company has issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year, an interest rate ranging from 0-10% per year and original issue discount rate ranging from 0-10% which contain variable conversion rates ranging from discounts of 40-50% of the Company’s common stock based on the lowest trading prices ranging from 10-25 days previous to conversion. The Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods of 0-180 days subsequent to issuance at premiums ranging from 0-50%. The gross amount of Variable Debentures outstanding is $496,361 as of September 30, 2015.

 

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

 

   September 30,   December 31, 
   2015   2014 
         
Balance at beginning of period  $4,496,602   $2,951,629 
Issuance of debentures for cash   1,520,250    2,506,376 
Original issue discount   109,444    128,071 
Debentures converted to common stock   (130,777)   (1,089,474)
Convertible debt   5,995,519    4,496,602 
Less unamortized costs of financing   554,173    576,502 
Convertible debt, net of unamortized costs  $5,441,346   $3,920,100 
           
Convertible debt in default  $3,660,275   $1,862,160 

 

Derivative Liability

 

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

 

13

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

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

 

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

 

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

 

       Conversion     
   Warrants   Feature   Total 
             
Balance at December 31, 2013  $803,484   $300,939   $1,104,423 
Elimination on extinguishment of debt   -    (197,482)   (197,482)
Change in fair value at year end   (38,526)   193,424    154,898 
Balance at December 31, 2014   764,958    296,881    1,061,839 
                
Elimination on extinguishment of debt   -    (57,732)   (57,732)
Initial value on issuance of debt   -    456,324    456,324 
Change in fair value at period end   (402,484)   49,169    (353,315)
Balance at September 30, 2015  $362,474   $744,642   $1,107,116 

 

Debentures with warrants attached issued subsequent to March 31, 2013 did not contain an exchange provision and were accounted for using the equity method of valuing the note and warrant. For the nine months ended September 30, 2015, $225,700 was recorded as additional paid-in capital.

 

4. Shareholders’ Deficit

 

Common Stock

 

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

 

Warrants

 

During the nine months ended September 30, 2015, in conjunction with the sale of Convertible Debentures, the Company issued five year common stock purchase warrants to acquire up to 13,981,485 shares to holders of the Debentures. These warrants have exercise prices ranging from $0.06 to $0.09 per share.

 

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

 

14

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

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

 

       Weighted 
       Average 
       Exercise 
   Warrants   Price 
Outstanding at January 1, 2015   103,430,075   $0.11 
Granted   14,281,485   $0.08 
Exchanged cancelled   -   $- 
Exchanged issued   -   $- 
Cancelled   (9,459,694)  $0.31 
Exercised   -   $- 
Outstanding at September 30, 2015   108,251,866   $0.08 
           
Exercisable at September 30, 2015   108,251,866   $0.08 

 

Stock Options

 

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

 

       Weighted Average   Weighted Average   Aggregate 
       Exercise Price   Remaining Contractual   Intrinsic 
   Options   Per Share   Term (years)   Value (1) 
Outstanding at January 1, 2015   34,293,800   $0.02    8.49      
Granted   5,900,002   $0.01    9.36      
Cancelled   (1,679,167)  $0.03    -      
Exercised   (450,000)  $0.01    -      
Outstanding at September 30, 2015   38,064,635   $0.02    8.40   $- 
                     
Exercisable at September 30, 2015   18,728,251   $0.02    8.29   $- 
                     
Weighted average fair value of options granted during the period   5,900,002   $0.01           

 

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

 

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

 

15

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

At September 30, 2015, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is $415,052, which we expect to be recognized over the next four years.

 

5. Fair Value Measurements

 

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines

required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

 

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

 

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

 

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

 

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

 

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

 

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

 

   Fair Value Measurements Using 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable     
   Identical Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
                 
As of September 30, 2015                    
Derivative liability  $-   $-   $744,642   $744,642 
Warrant liability   -    -    362,474    362,474 
Total  $-   $-   $1,107,116   $1,107,116 

 

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

 

16

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

 

   Warrant   Derivative   Total 
   Liability   Liability   Liability 
Balance December 31, 2014  $764,958   $296,881   $1,061,839 
                
Elimination on extinguishment of debt   -    (57,732)   (57,732)
Initial value on issuance of debt   -    456,324    456,324 
Change in estimated fair value (1)   (402,484)   49,169    (353,315)
Balance September 30, 2015  $362,474   $744,642   $1,107,116 

 

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

 

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

 

    Derivative Liability   Warrant Liability
Expected term   1 year   5 years
Exercise price   $0.01 - $0.099   $0.075 - $0.1287
Expected volatility   286% to 322%   219% to 234%
Expected dividends   None   None
Risk-free interest rate   0.22% to 0.33%   1.32% to 1.63%
Forfeitures   None   None

 

In computing the fair value of the derivative and warrant liability at September 30, 2015 for instruments under the Binomial Lattice option-pricing model, management estimated a 60% probability of a down round financing event at a price of $0.025 and a 9% to 34% probability that existing note holders with exchange privileges would exchange their existing debentures and warrants for new debentures and warrants.

 

6. Contingencies

 

None

 

7. Subsequent Events

 

Convertible Debentures and Warrants

 

During October and November 2015, the Company sold $380,556 of Unsecured Convertible Debentures (the “Debentures”) to accredited investors for aggregate consideration of $350,000. The Debentures mature in twelve months, carry fixed conversion prices ranging from $0.03 to $0.045, an annual interest rate of 10% and are convertible into 10,462,967 shares of common stock at maturity. The Company received net cash proceeds of approximately $319,000 after payment of fees and expenses of $31,000. In addition, the Company issued the holder of the Debentures detachable five-year warrants to purchase 7,453,706 additional shares of common stock at exercise prices ranging from $0.06 to $0.09 per share.

 

During October 2015, a holder of a Convertible Debenture with a face value of $52,632 converted his debenture into 531,636 shares of restricted common stock. In addition, associated with this debenture, the Company paid $25,356 in accrued interest by issuing 256,118 shares of restricted common stock

 

During October and November 2015, two holders of variable rate convertible notes issued to the Company exercise notices totalling 11,788,065 shares of common stock. The common stock was issued for the payment of $39,352 of principal and $11,460 of accrued interest.

 

17

 

 

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

 

Forward-Looking Statements

 

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

 

Business

 

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

 

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

 

Plan of Operation

 

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

 

18

 

 

Over the next 12 months, SpectraScience intends to:

 

·Market and sell the WavSTAT4 Optical Biopsy System colon cancer diagnostic application through PENTAX and other distribution channels in the European Union;

 

·Conduct country-specific evaluation trials to demonstrate the effectiveness and cost benefit of the WavSTAT4 Optical Biopsy System in each relevant European jurisdiction;

 

·Coordinate the creation and publication of scientific papers and presentations related to the country-specific evaluation trials to support widespread education and adoption of the WavSTAT4 ;

 

·Pursue the introduction of the WavSTAT4 colon cancer application in other international markets, in particular China, Saudi Arabia and India;

 

·Begin meeting with the FDA towards the preparation and submission of a Supplemental PMA filing with the FDA and plan for additional clinical trials to support eventual approval for sale in the United States;

 

·Begin the design and planning for the next generation of multi-modal fluorescence and broadband spectroscopy systems at our facility in San Diego, California.

 

·Continue to expand and refine our intellectual property portfolio.

 

Results of Operations

 

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

 

   Three Months Ended September 30,   Favorable     
   2015   2014   (Unfavorable)   % 
                 
Revenue  $-   $-   $-    NM 
Cost of revenue   -    -    -    NM 
Gross profit   -    -    -    NM 
                     
Operating expenses:                    
Research and development   172,405    138,806    (33,599)   -24.2%
General and administrative   284,724    280,000    (4,724)   1.7%
Sales and marketing   50,700    114,178    63,478    55.6%
    507,829    532,984    25,155    4.7%
                     
Loss from operations   (507,829)   (532,984)   25,155    4.7%
                     
Other income (expense)   298,670    1,491,472    (1,192,802)   80.0%
                     
Net loss  $(209,159)  $958,488   $(1,167,647)   121.8%

 

Revenues

 

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

 

19

 

 

Cost of Revenue

 

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

 

Research and Development Expenses

 

Research and development expenses increased by $33,599, 24.2%, to $172,405 for the quarter ended September 30, 2015 from $138,806 for the quarter ended September 30, 2014. This increase was due to an increase in clinical trial costs over the previous year’s quarter of approximately $30,000. We anticipate that clinical costs will increase as we proceed with our introduction of the WaveSTAT4 in Europe.

 

General and Administrative Expenses

 

General and administrative expenses remained stable at $284,724 for the quarter ended September 30, 2015 compared to $280,000 for the quarter ended September 30, 2014. We anticipate that general and administrative expenses will increase as we increase our activity in Europe.

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by $63,478, 55.6%, to $50,700 for the quarter ended September 30, 2015 from $114,178 for the quarter ended September 30, 2014. The primary reason for the decrease was a decrease in payroll costs as a result of a favorable change in exchange rates. We anticipate that sales and marketing expenses will increase as we increase our activity in Europe.

 

Other Income (Expense)

 

Other income (expense) for the quarter ended September 30, 2015 was income of $298,670 compared to income of $1,491,472 for the quarter ended September 30, 2014. This change was due primarily to a change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluating these obligations.

 

20

 

 

Comparison of the Nine months Ended September 30, 2015 and 2014

 

   Nine Months Ended September 30,   Favorable     
   2015   2014   (Unfavorable)   % 
                 
Revenue  $-   $-   $-    NM 
Cost of revenue   (12,000)   (6,000)   6,000    100.0%
Gross profit   12,000    6,000    6,000    100.0%
                     
Operating expenses:                    
Research and development   504,415    673,173    168,758    25.1%
General and administrative   1,010,989    1,092,689    81,700    7.5%
Sales and marketing   184,660    344,529    159,869    46.4%
    1,700,064    2,110,391    410,327    19.4%
                     
Loss from operations   (1,688,064)   (2,104,391)   416,327    19.8%
                     
Other income (expense)   (974,047)   (1,357,621)   383,574    28.3%
                     
Net loss  $(2,662,111)  $(3,462,012)  $799,901    23.1%

 

Revenues

 

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

 

Cost of Revenue

 

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

 

Research and Development Expenses

 

Research and development expenses decreased by $168,758, 25.1%, to $504,415 for the nine months ended September 30, 2015 from $673,173 for the nine months ended September 30, 2014. This decrease was due to a decrease in clinical trial costs over the previous year’s period of approximately $52,000, a decrease in payroll over the previous year’s period of approximately $76,000 and a decrease in non-cash stock option expense of approximately $51,000. We anticipate that clinical costs will increase as we proceed with our introduction of the WaveSTAT4 in Europe.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $81,700, 7.5%, to $1,010,989 for the nine months ended September 30, 2015 from $1,092,689 for the nine months ended September 30, 2014. The primary reasons for the decrease was a decrease during the current period compared to the same period of the previous year in investor relations expense of approximately $48,000 and a decrease in travel related expenses of approximately $22,000. We anticipate that general and administrative expenses will increase as we increase our activity in Europe.

 

21

 

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by $159,869, 46.4%, to $184,660 for the nine months ended September 30, 2015 from $344,529 for the nine months ended September 30, 2014. The primary reason for the decrease was a decrease in travel costs of approximately $43,000 and a decrease in payroll costs of approximately $107,000 as a result of favorable changes in the exchange rate. We anticipate that sales and marketing expenses will increase as we increase our activity in Europe.

 

Other Income (Expense)

 

Other income (expense) for the nine months ended September 30, 2015 was expense of $974,047 compared to expense of $1,357,621 for the nine months ended September 30, 2014. This change was due primarily to a gain on the extinguishment of convertible debentures for approximately $119,000 coupled with the change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluating these obligations.

 

22

 

 

Liquidity and Capital Resources

 

   As of   Increase 
   September 30, 2015   December 31, 2014   (Decrease) 
Working Capital               
                
Current assets  $645,684   $858,962   $(213,278)
Current liabilities   8,568,819    6,591,087    1,977,732 
Working capital deficit  $(7,923,135)  $(5,732,125)  $2,191,010 
                
Long-term debt  $-   $-   $- 
                
Stockholders' deficit  $(6,575,905)  $(4,380,566)  $2,195,339 
             
   Nine Months Ended September 30,   Increase 
   2015   2014   (Decrease) 
Statements of Cash Flows Select Information               
                
Net cash provided (used) by:               
Operating activities  $(1,553,718)  $(1,873,681)  $(319,963)
Investing activities  $-   $(6,275)  $(6,275)
Financing activities  $1,385,250   $1,687,000   $(301,750)
             
   As of   Increase 
   September 30, 2015   December 31, 2014   (Decrease) 
Balance Sheet Select Information               
                
Cash  $55,061   $223,529   $(168,468)
                
Inventory  $303,848   $283,624   $20,224 
                
Accounts payable and accrued expenses  $1,905,357   $1,509,148   $396,209 

 

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

 

23

 

 

As of September 30, 2015, the Company had a working capital deficit of $7,923,135 and cash of $55,061, compared to a working capital deficit of $5,732,125 and cash of $223,529 as of December 31, 2014. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two year period from the date of the Engagement Agreement. Subsequent to March 31, 2013, the Company has engaged other agents to assist the Company with raising capital and has commenced raising capital on its own. During the nine months ended September 30, 2015, The Company raised $1,380,750, net of transaction costs of $139,500, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

In light of the material weakness described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Management has identified the following one material weakness which caused management to conclude that as of September 30, 2015 our disclosure controls and procedures were not effective at the reasonable assurance level:

 

1.  In valuing the derivative liability related to variable rate convertible notes, we failed to recognize additional expense related to the initial valuation of the derivative. In addition, management’s estimates were not at a sufficient level to properly evaluate the derivative at the quarter ended September 30, 2015.  Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

To address this material weakness, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

Changes in Internal Financial Controls

 

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

 

PART IIOTHER INFORMATION

 

Item 1.Legal Proceedings

 

None

 

Item 1A.Risk Factors

 

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

 

24

 

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.Defaults Upon Senior Securities

 

As of November 16, 2015 there are Unsecured Convertible Debentures with a face value of $3,660,275 held by 58 individual Holders in default. As a result, the outstanding principal amount of these Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing shall become immediately due and payable in cash at the election of the Holders. As of November 16, 2015, none of the Holders of these Debentures have elected to provide notice of default.

 

Item 4.Mine Safety Disclosures

 

None

 

 

Item 5.Other Information

 

None

 

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

 

25

 

 

SIGNATURES

 

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

 

  SpectraScience, Inc.
  (Registrant)
     
Date: November 16, 2015   /s/ Michael P. Oliver
    Michael P. Oliver
    President and Chief Executive Officer
    (Principal executive officer)
     
Date: November 16, 2015   /s/ Lowell W. Giffhorn
    Lowell W. Giffhorn
    Chief Financial Officer
    (Principal financial officer and
    principal accounting officer)

 

26

 

 EX-31.1 2 s102109_ex31-1.htm EXHIBIT 31.1

 

Exhibit 31.1

CERTIFICATION PURSUANT TO

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

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Michael P. Oliver, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  /s/ Michael P. Oliver
  Name: Michael P. Oliver
  Title: Chief Executive Officer
  Date: November 16, 2015

 

 

 

 EX-31.2 3 s102109_ex31-2.htm EXHIBIT 31.2

 

Exhibit 31.2

CERTIFICATION PURSUANT TO

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

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Lowell W. Giffhorn, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  /s/ Lowell W. Giffhorn
  Name: Lowell W. Giffhorn
  Title: Chief Financial Officer
  Date: November 16, 2015

 

 

 

 EX-32.1 4 s102109_ex32-1.htm EXHIBIT 32.1

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

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

 

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

 

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

 

  /s/ Michael P. Oliver
  Michael P. Oliver
  Chief Executive Officer
  Date: November 16, 2015

 

 

 

 EX-32.2 5 s102109_ex32-2.htm EXHIBIT 32.2

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

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

 

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

 

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

 

  /s/ Lowell W. Giffhorn
  Lowell W. Giffhorn
  Chief Financial Officer
  Date: November 16, 2015

 

 

 

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Fair Value Measurements (Details 2)
 9 Months Ended
Sep. 30, 2015
$ / shares
Derivative liability [Member]  
Expected term 1 year
Expected dividends
Forfeitures
Derivative liability [Member] | Maximum [Member]  
Exercise price $ 0.099
Expected volatility 322.00%
Risk-free interest rate 0.33%
Derivative liability [Member] | Minimum [Member]  
Exercise price $ 0.01
Expected volatility 286.00%
Risk-free interest rate 0.22%
Warrant liability [Member]  
Expected term 5 years
Expected dividends
Forfeitures
Warrant liability [Member] | Maximum [Member]  
Exercise price $ 0.1287
Expected volatility 234.00%
Risk-free interest rate 1.63%
Warrant liability [Member] | Minimum [Member]  
Exercise price $ 0.075
Expected volatility 219.00%
Risk-free interest rate 1.32%
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Liabilities (Details Narrative) - USD ($)
 1 Months Ended 9 Months Ended
Nov. 30, 2014
Sep. 30, 2015
Dec. 31, 2014
Debt Instrument [Line Items]      
Debt instrument, face amount   $ 109,444 $ 128,071
Adjustments to additional paid in capital, other   $ 225,700  
Convertible Debentures [Member]      
Debt Instrument [Line Items]      
Warrant term   5 years  
Debentures outstanding   $ 5,499,159  
Convertible Debentures [Member] | Minimum [Member]      
Debt Instrument [Line Items]      
Debentures payment term   9 months  
Accrued interest rate per year   10.00%  
Original issue discount, percent   5.00%  
Convertible debentures exercise price   $ 0.06  
Common stock conversion price per share   0.03  
Warrant exercise price   $ 0.0745  
Convertible Debentures [Member] | Maximum [Member]      
Debt Instrument [Line Items]      
Debentures payment term   1 year  
Accrued interest rate per year   20.00%  
Original issue discount, percent   10.00%  
Convertible debentures exercise price   $ 0.1287  
Common stock conversion price per share   0.099  
Warrant exercise price   $ 0.1287  
Variable Debentures [Member]      
Debt Instrument [Line Items]      
Debentures outstanding   $ 496,361  
Variable Debentures [Member] | Minimum [Member]      
Debt Instrument [Line Items]      
Debentures payment term   9 months  
Accrued interest rate per year   0.00%  
Original issue discount, percent   0.00%  
Variable issue discount, percent   40.00%  
Variable Debentures [Member] | Maximum [Member]      
Debt Instrument [Line Items]      
Debentures payment term   1 year  
Accrued interest rate per year   10.00%  
Original issue discount, percent   10.00%  
Variable issue discount, percent   50.00%  
Notes Payable, Other Payables [Member]      
Debt Instrument [Line Items]      
Accrued interest rate per year 20.00%    
Debt instrument, face amount $ 100,000    
Stock Issued curing period shares for debt offering costs 50,000    
Warrant exercise price $ 0.09    
Remaining balance of notes payable $ 115,000    
Increased principal balance note payable 115,000    
Warrants valued $ 1,659    
Warrant term 5 years    
XML 16 R9.htm IDEA: XBRL DOCUMENT v3.3.0.814
Liabilities
 9 Months Ended
Sep. 30, 2015
Liabilities [Abstract]  
Liabilities

3. Liabilities

 

Note Payable

 

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

 

Convertible Debentures

 

As of September 30, 2015, the Company has issued and outstanding Convertible Debentures (“Debentures”) with original terms of nine months to one year, an interest rate ranging from 10-20% per year and an original issue discount ranging from 5% to 10% which, at the option of the holder, may convert into common stock at an initial conversion price ranging from $0.03 to $0.099 per share. The Debentures were issued with detachable five year cashless Holders Warrants that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.06 to $0.1287 per share. In addition, the Company issued five year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price ranging from $0.0745 to $0.1287 per share. For debentures issued through March 31, 2013, at the option of the Debenture holder, the terms of the Debentures and Holders Warrants are subject to an exchange feature in the event that the Company issues securities with terms more favorable than those of the then outstanding Debentures and Holders Warrants. Debentures issued subsequent to March 31, 2013 do not contain such an exchange clause. The gross amount of Debentures outstanding is $5,499,159 as of September 30, 2015.

 

During the nine months ended September 30, 2015, the Company has issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year, an interest rate ranging from 0-10% per year and original issue discount rate ranging from 0-10% which contain variable conversion rates ranging from discounts of 40-50% of the Company’s common stock based on the lowest trading prices ranging from 10-25 days previous to conversion. The Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods of 0-180 days subsequent to issuance at premiums ranging from 0-50%. The gross amount of Variable Debentures outstanding is $496,361 as of September 30, 2015.

 

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

 

    September 30,     December 31,  
    2015     2014  
             
Balance at beginning of period   $ 4,496,602     $ 2,951,629  
Issuance of debentures for cash     1,520,250       2,506,376  
Original issue discount     109,444       128,071  
Debentures converted to common stock     (130,777 )     (1,089,474 )
Convertible debt     5,995,519       4,496,602  
Less unamortized costs of financing     554,173       576,502  
Convertible debt, net of unamortized costs   $ 5,441,346     $ 3,920,100  
                 
Convertible debt in default   $ 3,660,275     $ 1,862,160  

 

Derivative Liability

 

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

  

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

 

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

 

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

 

          Conversion        
    Warrants     Feature     Total  
                   
Balance at December 31, 2013   $ 803,484     $ 300,939     $ 1,104,423  
Elimination on extinguishment of debt     -       (197,482 )     (197,482 )
Change in fair value at year end     (38,526 )     193,424       154,898  
Balance at December 31, 2014     764,958       296,881       1,061,839  
                         
Elimination on extinguishment of debt     -       (57,732 )     (57,732 )
Initial value on issuance of debt     -       456,324       456,324  
Change in fair value at period end     (402,484 )     49,169       (353,315 )
Balance at September 30, 2015   $ 362,474     $ 744,642     $ 1,107,116  

 

Debentures with warrants attached issued subsequent to March 31, 2013 did not contain an exchange provision and were accounted for using the equity method of valuing the note and warrant. For the nine months ended September 30, 2015, $225,700 was recorded as additional paid-in capital.
XML 17 R29.htm IDEA: XBRL DOCUMENT v3.3.0.814
Shareholders' Deficit (Details) - Warrants [Member]
 9 Months Ended
Sep. 30, 2015
$ / shares
shares
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]  
Outstanding at January 1, 2015 | shares 103,430,075
Granted | shares 14,281,485
Exchanged cancelled | shares
Exchanged issued | shares
Cancelled | shares (9,459,694)
Exercised | shares
Outstanding at September 30, 2015 | shares 108,251,866
Exercisable at September 30, 2015 | shares 108,251,866
Share Based Compensation Arrangement by Share Based Payment Award Equity Instruments Other Than Options Nonvested Weighted Average Exercise Price [Roll Forward]  
Outstanding at January 1, 2015 $ 0.11
Granted $ 0.08
Exchanged cancelled
Exchanged issued
Cancelled $ 0.31
Exercised
Outstanding at September 30, 2015 $ 0.08
Exercisable at September 30, 2015 $ 0.08
XML 18 R28.htm IDEA: XBRL DOCUMENT v3.3.0.814
Shareholders' Deficit (Details Narrative)
 1 Months Ended 3 Months Ended 9 Months Ended
Jan. 31, 2015
USD ($)
shares
Sep. 30, 2015
USD ($)
shares
Sep. 30, 2014
USD ($)
Sep. 30, 2015
USD ($)
N
$ / shares
shares
Sep. 30, 2014
USD ($)
Dec. 31, 2014
USD ($)
Debt instrument, face amount   $ 109,444   $ 109,444   $ 128,071
Gain on extinguishment of debt   $ 227,259 $ 119,369 $ 227,259  
Exercised | shares       (450,000)    
Exercised (in dollars per share) | $ / shares       $ 0.01    
Total unrecognized estimated employee compensation cost   $ 415,052   $ 415,052    
Recognized period       4 years    
Two Directors [Member]            
Exercised | shares       450,000    
Exercised (in dollars per share) | $ / shares       $ 0.01    
Warrants [Member]            
Warrant term       5 years    
Value of shares issued for consultant services $ 2,848          
Warrants [Member] | Maximum [Member]            
Number of shares called | shares   13,981,485   13,981,485    
Warrants exercise price | $ / shares       $ 0.09    
Number of shares issued for consultant services | shares 300,000          
Warrants [Member] | Minimum [Member]            
Warrants exercise price | $ / shares       $ 0.06    
Common Stock [Member]            
Exercised | shares       450,000    
Convertible Debentures [Member] | Common Stock [Member]            
Debt instrument, face amount   $ 130,777   $ 130,777    
Number of common stock converted | N       2,705,306    
Accrued interest paid       $ 27,062    
Number of common stock converted for accrued interest | shares       528,609    
Gain on extinguishment of debt       $ 119,369    
XML 19 R30.htm IDEA: XBRL DOCUMENT v3.3.0.814
Shareholders' Deficit (Details 1)
 9 Months Ended
Sep. 30, 2015
USD ($)
$ / shares
shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]  
Outstanding at January 1, 2015 | shares 34,293,800
Granted | shares 5,900,002
Cancelled | shares (1,679,167)
Exercised | shares (450,000)
Outstanding at September 30, 2015 | shares 38,064,635
Exercisable at September 30, 2015 | shares 18,728,251
Weighted average fair value of options granted during the period | shares 5,900,002
Weighted Average Exercise Price Per Share  
Outstanding at January 1, 2015 $ 0.02
Granted 0.01
Cancelled 0.03
Exercised 0.01
Outstanding at September 30, 2015 0.02
Exercisable at September 30, 2015 0.02
Weighted average fair value of options granted during the period $ 0.01
Weighted Average Remaining Contractual Term (years)  
Outstanding at January 1, 2015 8 years 5 months 26 days
Granted 9 years 4 months 9 days
Outstanding at September 30, 2015 8 years 4 months 24 days
Exercisable at September 30, 2015 8 years 3 months 14 days
Aggregate Intrinsic Value  
Outstanding at September 30, 2015 | $ [1]
Exercisable at September 30, 2015 | $ [1]
[1] These amounts represent the excess, if any, between the exercise price and $0.01, the closing market price of the Company's common stock on September 30, 2015 as quoted on the Over-the-Counter Bulletin Board under the symbol "SCIE".
XML 20 R31.htm IDEA: XBRL DOCUMENT v3.3.0.814
Fair Value Measurements (Details) - Fair Value, Measurements, Recurring [Member]
Sep. 30, 2015
USD ($)
Total Liability $ 1,107,116
Derivative liability [Member]  
Total Liability 744,642
Warrant liability [Member]  
Total Liability $ 362,474
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]  
Total Liability
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Derivative liability [Member]  
Total Liability
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Warrant liability [Member]  
Total Liability
Significant Other Observable Inputs (Level 2) [Member]  
Total Liability
Significant Other Observable Inputs (Level 2) [Member] | Derivative liability [Member]  
Total Liability
Significant Other Observable Inputs (Level 2) [Member] | Warrant liability [Member]  
Total Liability
Significant Unobservable Inputs (Level 3) [Member]  
Total Liability $ 1,107,116
Significant Unobservable Inputs (Level 3) [Member] | Derivative liability [Member]  
Total Liability 744,642
Significant Unobservable Inputs (Level 3) [Member] | Warrant liability [Member]  
Total Liability $ 362,474
XML 21 R8.htm IDEA: XBRL DOCUMENT v3.3.0.814
Summary of Significant Accounting Policies
 9 Months Ended
Sep. 30, 2015
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies

 

Revenue recognition

 

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

 

Consolidation

 

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

 

Risks and Uncertainties

 

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

 

Use of Estimates

 

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

 

Inventory Valuation

 

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

 

Valuation of Long-lived Assets

 

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

  

Stock-Based Compensation

 

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

 

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

 

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

 

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

 

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

 

    Three months ended September 30,   Nine months ended September 30,
    2015   2014   2015   2014
                 
Expected term   1 year   None   1-5 years   5 years
Exercise price   $0.01   None   $0.01   $0.02
Expected volatility   285% to 322%   None   210% to 322%   187%
Expected dividends   None   None   None   None
Risk-free interest rate   0.26% to 0.33%   None   0.26% to 1.48%   1.64%
Forfeitures   None   None   None   None

 

Earnings (Loss) Per Share

 

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

 

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

 

    September 30,     September 30,  
    2015     2014  
             
Preferred Stock     3,085,000       3,085,000  
Convertible debentures     117,229,747       94,767,062  
Options     38,064,635       35,168,800  
Warrants     108,251,866       109,942,469  
Total     266,631,248       242,963,331  

 

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

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2015     2014     2015     2014  
                         
Numerator:                                
Net income (loss) for basic earnings per share   $ (209,159 )   $ 958,488     $ (2,662,111 )   $ (3,462,012 )
Net income (loss) for diluted earnings per share   $ (209,159 )   $ 958,488     $ (2,662,111 )   $ (3,462,012 )
                                 
Denominator:                                
Weighted average basic shares outstanding     198,039,192       171,996,818       196,519,704       169,070,461  
Denominator for diluted earnings per share-                                
Adjusted weighted average shares     198,039,192       186,965,778       196,519,704       169,070,461  
                                 
Income (loss) per share                                
Basic   $ (0.00 )   $ 0.01     $ (0.01 )   $ (0.02 )
Diluted   $ (0.00 )   $ 0.01     $ (0.01 )   $ (0.02 )

 

Inventory

 

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

 

    September 30,     December 31,  
    2015     2014  
                 
Raw materials   $ 239,884     $ 238,441  
Finished goods     63,964       45,183  
      303,848       283,624  
Reserve for obsolescence     -       -  
      303,848       283,624  
Less long-term portion     120,000       -  
    $ 183,848     $ 283,624  
XML 22 R32.htm IDEA: XBRL DOCUMENT v3.3.0.814
Fair Value Measurements (Details 1) - USD ($)
 9 Months Ended 12 Months Ended
Sep. 30, 2015
Dec. 31, 2014
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]    
Balance $ 1,061,839 $ 1,104,423
Initial value on issuance of debt 456,324  
Change in estimated fair value 353,315 (154,898)
Balance 1,107,116 1,061,839
Significant Unobservable Inputs (Level 3) [Member]    
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]    
Balance 1,061,839  
Elimination on extinguishment of debt (57,732)  
Initial value on issuance of debt 456,324  
Change in estimated fair value [1] (353,315)  
Balance 1,107,116 1,061,839
Significant Unobservable Inputs (Level 3) [Member] | Warrant liability [Member]    
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]    
Balance $ 764,958  
Elimination on extinguishment of debt  
Initial value on issuance of debt  
Change in estimated fair value [1] $ (402,484)  
Balance 362,474 764,958
Significant Unobservable Inputs (Level 3) [Member] | Derivative liability [Member]    
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]    
Balance 296,881  
Elimination on extinguishment of debt (57,732)  
Initial value on issuance of debt 456,324  
Change in estimated fair value [1] 49,169  
Balance $ 744,642 $ 296,881
[1] Included in the Condensed Statements of Operation on the line "Change in fair value of derivative and warrant liabilities."
XML 23 R2.htm IDEA: XBRL DOCUMENT v3.3.0.814
Condensed Consolidated Balance Sheets (Unaudited) - USD ($)
Sep. 30, 2015
Dec. 31, 2014
Current assets:    
Cash $ 55,061 $ 223,529
Inventory, current portion 183,848 283,624
Deferred debt issuance costs 98,456 107,636
Prepaid expenses and other current assets 308,319 244,173
Total current assets 645,684 858,962
Fixed assets, net 1,153 $ 3,665
Long-term inventory 120,000
Patents, net 1,226,077 $ 1,347,894
TOTAL ASSETS 1,992,914 2,210,521
Current liabilities:    
Accounts payable 792,891 836,136
Note payable 115,000 100,000
Convertible debt, net of discounts of $554,173 as of September 30, 2015 and $576,502 as of December 31, 2014 5,441,346 3,920,100
Derivative liability 1,107,116 1,061,839
Accrued expenses 1,112,466 673,012
Total current liabilities $ 8,568,819 $ 6,591,087
COMMITMENTS AND CONTINGENCIES
Stockholders' deficit    
Common stock, $.01 par value; 746,915,000 shares authorized; 198,039,192 and 194,355,277 shares issued and outstanding as of September 30, 2015 and December 31, 2014 $ 1,980,392 $ 1,943,553
Additional paid in capital 39,939,048 39,509,115
Accumulated deficit (48,526,195) (45,864,084)
Total stockholders' deficit (6,575,905) (4,380,566)
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) $ 1,992,914 $ 2,210,521
Series A Convertible Preferred Stock [Member]    
Stockholders' deficit    
Convertible Preferred Stock, value
Series B Convertible Preferred Stock [Member]    
Stockholders' deficit    
Convertible Preferred Stock, value $ 25,850 $ 25,850
Series C Convertible Preferred Stock [Member]    
Stockholders' deficit    
Convertible Preferred Stock, value $ 5,000 $ 5,000
XML 24 R6.htm IDEA: XBRL DOCUMENT v3.3.0.814
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Operating activities:    
Net loss $ (2,662,111) $ (3,462,012)
Adjustments to reconcile net loss to cash used in operating activities:    
Amortization and depreciation 124,329 140,836
Non-cash issuance of stock options and warrants 140,370 349,853
Amortization of derivative and warrant liabilities discount 699,957 850,691
Amortization of deferred debt issuance costs and original issue discount 262,520 197,608
Change in fair value of derivative and warrant liabilities (353,315) 168,471
Gain on extinguishment of debt $ (119,369) (227,259)
Fair market value of common stock issued for services 50,000
Changes in assets and liabilities:    
Accounts receivable 60,000
Inventory $ (20,224) (69,247)
Prepaid expense and other assets (64,146) (26,966)
Accounts payable (43,245) (222,927)
Accrued expenses 481,516 317,271
Net cash used in operating activities $ (1,553,718) (1,873,681)
Investing activities:    
Purchases of fixed assets (6,275)
Net cash used in investing activities (6,275)
Financing activities:    
Proceeds from issuance of convertible notes payable $ 1,520,250 1,856,376
Payments against note payable to affiliate (30,000)
Proceeds from exercise of stock options $ 4,500 18,624
Debt issuance costs (139,500) (158,000)
Net cash provided by financing activities 1,385,250 1,687,000
Net decrease in cash (168,468) (192,956)
Cash, beginning of year 223,529 236,597
Cash, end of period 55,061 $ 43,641
Cash paid during the period for:    
Interest $ 8,000
Income taxes
Non Cash Investing and Financing Activities:    
Conversion of convertible notes to common stock $ 130,777 $ 236,842
Conversion of interest due on convertible notes to common stock 27,062 52,972
Warrant valuation on issuance of convertible debentures 225,700 $ 897,712
Conversion of accrued interest to note payable $ 15,000
Elimination of derivative liabilities on conversion $ 190,337
XML 25 R22.htm IDEA: XBRL DOCUMENT v3.3.0.814
Summary of Significant Accounting Policies (Details 1) - shares
 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Antidilutive securities excluded from computation of earnings per share, amount 266,631,248 242,963,331
Preferred Stock [Member]    
Antidilutive securities excluded from computation of earnings per share, amount 3,085,000 3,085,000
Convertible Debentures [Member]    
Antidilutive securities excluded from computation of earnings per share, amount 117,229,747 94,767,062
Options [Member]    
Antidilutive securities excluded from computation of earnings per share, amount 38,064,635 35,168,800
Warrants [Member]    
Antidilutive securities excluded from computation of earnings per share, amount 108,251,866 109,942,469
XML 26 R24.htm IDEA: XBRL DOCUMENT v3.3.0.814
Summary of Significant Accounting Policies (Details 3) - USD ($)
Sep. 30, 2015
Dec. 31, 2014
Accounting Policies [Abstract]    
Raw materials $ 239,884 $ 238,441
Finished goods 63,964 45,183
Inventory, gross $ 303,848 $ 283,624
Reserve for obsolescence
Inventories, net $ 303,848 $ 283,624
Less long-term portion 120,000
Long-term portion,current $ 183,848 $ 283,624
XML 27 Show.js IDEA: XBRL DOCUMENT /** * Rivet Software Inc. * * @copyright Copyright (c) 2006-2011 Rivet Software, Inc. All rights reserved. * Version 2.4.0.3 * */ var Show = {}; Show.LastAR = null, Show.hideAR = function(){ Show.LastAR.style.display = 'none'; }; Show.showAR = function ( link, id, win ){ if( Show.LastAR ){ Show.hideAR(); } var ref = link; do { ref = ref.nextSibling; } while (ref && ref.nodeName != 'TABLE'); if (!ref || ref.nodeName != 'TABLE') { var tmp = win ? win.document.getElementById(id) : document.getElementById(id); if( tmp ){ ref = tmp.cloneNode(true); ref.id = ''; link.parentNode.appendChild(ref); } } if( ref ){ ref.style.display = 'block'; Show.LastAR = ref; } }; Show.toggleNext = function( link ){ var ref = link; do{ ref = ref.nextSibling; }while( ref.nodeName != 'DIV' ); if( ref.style && ref.style.display && ref.style.display == 'none' ){ ref.style.display = 'block'; if( link.textContent ){ link.textContent = link.textContent.replace( '+', '-' ); }else{ link.innerText = link.innerText.replace( '+', '-' ); } }else{ ref.style.display = 'none'; if( link.textContent ){ link.textContent = link.textContent.replace( '-', '+' ); }else{ link.innerText = link.innerText.replace( '-', '+' ); } } }; XML 28 R7.htm IDEA: XBRL DOCUMENT v3.3.0.814
Nature of Business and Basis of Presentation
 9 Months Ended
Sep. 30, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Nature of Business and Basis of Presentation

1.     Nature of Business and Basis of Presentation

 

Description of Business

 

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

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

 

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

 

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

 

Basis of Presentation

 

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

 

Going Concern

 

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

 

As of September 30, 2015, the Company had a working capital deficit of $7,923,135 and cash of $55,061, compared to a working capital deficit of $5,732,125 and cash of $223,529 as of December 31, 2014. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two year period from the date of the Engagement Agreement. Subsequent to March 31, 2013, the Company has engaged other agents to assist the Company with raising capital and has commenced raising capital on its own. During the nine months ended September 30, 2015, the Company raised $1,380,750, net of transaction costs of $139,500, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

 

The holders of Convertible Debentures control the conversion of the Convertible Debentures and certain of the Convertible Debentures were not converted at their maturity constituting a potential default on the matured, but unconverted, Convertible Debentures. In the event of such default, principal, accrued interest and other related costs are immediately due and payable in cash. As of September 30, 2015, Convertible Debentures with a face value of $3,660,275 held by 58 individual investors are in default. None of these investors have served notice of default on the Convertible Debentures held by them.

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
XML 29 R3.htm IDEA: XBRL DOCUMENT v3.3.0.814
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)
Sep. 30, 2015
Dec. 31, 2014
Convertible debt, net of discounts (in dollars) $ 554,173 $ 576,502
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, authorized 746,915,000 746,915,000
Common stock, shares issued 198,039,192 194,355,277
Common stock, shares outstanding 198,039,192 194,355,277
Series A Convertible Preferred Stock [Member]    
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, authorized
Preferred stock, shares issued
Preferred stock, shares outstanding
Preferred stock, liquidation value
Preferred stock, accumulated and unpaid dividends
Series B Convertible Preferred Stock [Member]    
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, authorized 2,585,000 2,585,000
Preferred stock, shares issued 2,585,000 2,585,000
Preferred stock, shares outstanding 2,585,000 2,585,000
Preferred stock, liquidation value $ 517,000 $ 517,000
Preferred stock, accumulated and unpaid dividends $ 106,931 $ 106,931
Series C Convertible Preferred Stock [Member]    
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, authorized 1,000,000 1,000,000
Preferred stock, shares issued 500,000 500,000
Preferred stock, shares outstanding 500,000 500,000
Preferred stock, liquidation value $ 100,000 $ 100,000
Preferred stock, accumulated and unpaid dividends
XML 30 R17.htm IDEA: XBRL DOCUMENT v3.3.0.814
Shareholders' Deficit (Tables)
 9 Months Ended
Sep. 30, 2015
Equity [Abstract]  
Schedule of warrants outstanding

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

 

    Warrants   Weighted
Average
Exercise
Price		  
Outstanding at January 1, 2015     103,430,075     $ 0.11  
Granted     14,281,485     $ 0.08  
Exchanged cancelled     —     $ —  
Exchanged issued     —     $ —  
Cancelled     (9,459,694 )   $ 0.31  
Exercised     —     $ —  
Outstanding at September 30, 2015     108,251,866     $ 0.08  
                 
Exercisable at September 30, 2015     108,251,866     $ 0.08  
Schedule of stock options outstanding

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

                           
    Options   Weighted Average
Exercise Price
Per Share		   Weighted Average
Remaining Contractual
Term (years)		   Aggregate
Intrinsic
Value (1)		  
Outstanding at January 1, 2015     34,293,800   $ 0.02     8.49        
Granted     5,900,002   $ 0.01     9.36        
Cancelled     (1,679,167 ) $ 0.03     —        
Exercised     (450,000 ) $ 0.01     —        
Outstanding at September 30, 2015     38,064,635   $ 0.02     8.40   $ —  
                           
Exercisable at September 30, 2015     18,728,251   $ 0.02     8.29   $ —  
                           
Weighted average fair value of options granted during the period     5,900,002   $ 0.01              

 

(1) These amounts represent the excess, if any, between the exercise price and $0.01, the closing market price of the Company’s common stock on September 30, 2015 as quoted on the Over-the-Counter Bulletin Board under the symbol “SCIE”.
XML 31 R1.htm IDEA: XBRL DOCUMENT v3.3.0.814
Document and Entity Information - shares
 9 Months Ended
Sep. 30, 2015
Nov. 16, 2015
Document And Entity Information    
Entity Registrant Name SPECTRASCIENCE INC  
Entity Central Index Key 0000727672  
Document Type 10-Q  
Document Period End Date Sep. 30, 2015  
Trading Symbol SCIE  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity a Well-known Seasoned Issuer No  
Entity a Voluntary Filer No  
Entity's Reporting Status Current Yes  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   210,615,011
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2015  
XML 32 R18.htm IDEA: XBRL DOCUMENT v3.3.0.814
Fair Value Measurements (Tables)
 9 Months Ended
Sep. 30, 2015
Fair Value Disclosures [Abstract]  
Schedule of balances of liabilities measured at fair value on recurring basis

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

 

    Fair Value Measurements Using  
    Quoted Prices in     Significant Other     Significant        
    Active Markets for     Observable     Unobservable        
    Identical Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
                         
As of September 30, 2015                                
Derivative liability   $ -     $ -     $ 744,642     $ 744,642  
Warrant liability     -       -       362,474       362,474  
Total   $ -     $ -     $ 1,107,116     $ 1,107,116  
Schedule changes in liabilities with significant unobservable inputs

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

  

    Warrant     Derivative     Total  
    Liability     Liability     Liability  
Balance December 31, 2014   $ 764,958     $ 296,881     $ 1,061,839  
                         
Elimination on extinguishment of debt     -       (57,732 )     (57,732 )
Initial value on issuance of debt     -       456,324       456,324  
Change in estimated fair value (1)     (402,484 )     49,169       (353,315 )
Balance September 30, 2015   $ 362,474     $ 744,642     $ 1,107,116  

 

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

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

 

    Derivative Liability   Warrant Liability
Expected term    1 year   5 years
Exercise price   $0.01 - $0.099   $0.075 - $0.1287
Expected volatility   286% to 322%   219% to 234%
Expected dividends   None   None
Risk-free interest rate   0.22% to 0.33%   1.32% to 1.63%
Forfeitures   None   None
XML 33 R4.htm IDEA: XBRL DOCUMENT v3.3.0.814
Condensed Consolidated Statements of Operation (Unaudited) - USD ($)
 3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Income Statement [Abstract]        
Revenue
Cost of revenue $ (12,000) $ (6,000)
Gross profit 12,000 6,000
Operating expenses:        
Research and development $ 172,405 $ 138,806 504,415 673,173
General and administrative 284,724 280,000 1,010,989 1,092,689
Sales and marketing 50,700 114,178 184,660 344,529
Total operating expenses 507,829 532,984 1,700,064 2,110,391
Loss from operations (507,829) (532,984) (1,688,064) (2,104,391)
Other income (expense)        
Interest expense (183,184) (131,846) (474,727) (347,587)
Change in fair value of derivative and warrant liabilities 753,538 1,883,289 353,315 (168,471)
Amortization of derivative and warrant liabilities discount (176,661) (396,853) (699,957) (850,691)
Amortization of deferred debt issuance costs and original issue discount $ (90,130) (85,034) (262,520) (197,608)
Gain on extinguishment of debt 227,259 119,369 227,259
Other income (expense), net $ (4,893) (5,343) (9,527) (20,523)
Total Other income (expense) 298,670 1,491,472 (974,047) (1,357,621)
Net income (loss) $ (209,159) $ 958,488 $ (2,662,111) $ (3,462,012)
Income (loss) per share:        
Basic (in dollars per share) $ (0.00) $ 0.01 $ (0.01) $ (0.02)
Fully diluted (in dollars per share) $ (0.00) $ 0.01 $ (0.01) $ (0.02)
Weighted average common shares outstanding:        
Basic (in shares) 198,039,192 171,996,818 196,519,704 169,070,461
Fully diluted (in shares) 198,039,192 186,965,778 196,519,704 169,070,461
XML 34 R12.htm IDEA: XBRL DOCUMENT v3.3.0.814
Contingencies
 9 Months Ended
Sep. 30, 2015
Commitments and Contingencies Disclosure [Abstract]  
Contingencies

6. Contingencies

 

None
XML 35 R11.htm IDEA: XBRL DOCUMENT v3.3.0.814
Fair Value Measurements
 9 Months Ended
Sep. 30, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements

5. Fair Value Measurements

 

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines

required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

 

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

 

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

 

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

 

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

 

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

 

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

 

    Fair Value Measurements Using  
    Quoted Prices in     Significant Other     Significant        
    Active Markets for     Observable     Unobservable        
    Identical Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
                         
As of September 30, 2015                                
Derivative liability   $ -     $ -     $ 744,642     $ 744,642  
Warrant liability     -       -       362,474       362,474  
Total   $ -     $ -     $ 1,107,116     $ 1,107,116  

 

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

  

    Warrant     Derivative     Total  
    Liability     Liability     Liability  
Balance December 31, 2014   $ 764,958     $ 296,881     $ 1,061,839  
                         
Elimination on extinguishment of debt     -       (57,732 )     (57,732 )
Initial value on issuance of debt     -       456,324       456,324  
Change in estimated fair value (1)     (402,484 )     49,169       (353,315 )
Balance September 30, 2015   $ 362,474     $ 744,642     $ 1,107,116  

 

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

 

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

 

    Derivative Liability   Warrant Liability
Expected term   1 year   5 years
Exercise price   $0.01 - $0.099   $0.075 - $0.1287
Expected volatility   286% to 322%   219% to 234%
Expected dividends   None   None
Risk-free interest rate   0.22% to 0.33%   1.32% to 1.63%
Forfeitures   None   None

 

In computing the fair value of the derivative and warrant liability at September 30, 2015 for instruments under the Binomial Lattice option-pricing model, management estimated a 60% probability of a down round financing event at a price of $0.025 and a 9% to 34% probability that existing note holders with exchange privileges would exchange their existing debentures and warrants for new debentures and warrants.
XML 36 R23.htm IDEA: XBRL DOCUMENT v3.3.0.814
Summary of Significant Accounting Policies (Details 2) - USD ($)
 3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Numerator:        
Net income (loss) for basic earnings per share $ (209,159) $ 958,488 $ (2,662,111) $ (3,462,012)
Net income (loss) for diluted earnings per share $ (209,159) $ 958,488 $ (2,662,111) $ (3,462,012)
Denominator:        
Weighted average basic shares outstanding (in shares) 198,039,192 171,996,818 196,519,704 169,070,461
Denominator for diluted earnings per share - Adjusted weighted average shares (in shares) 198,039,192 186,965,778 196,519,704 169,070,461
Income (loss) per share        
Basic (in dollars per share) $ (0.00) $ 0.01 $ (0.01) $ (0.02)
Diluted (in dollars per share) $ (0.00) $ 0.01 $ (0.01) $ (0.02)
XML 37 R19.htm IDEA: XBRL DOCUMENT v3.3.0.814
Nature of Business and Basis of Presentation (Details Narrative)
 9 Months Ended 12 Months Ended
Jul. 12, 2012
USD ($)
Sep. 30, 2015
USD ($)
N
Dec. 31, 2014
USD ($)
Sep. 30, 2014
USD ($)
Dec. 31, 2013
USD ($)
Working capital deficit   $ 7,923,135 $ 5,732,125    
Cash and cash equivalents   55,061 223,529 $ 43,641 $ 236,597
Debt face amount   3,660,275 $ 1,862,160    
Laidlaw & Company (UK) Ltd [Member]          
Maximum capital raising $ 20,000,000 1,380,750      
Agreement period 2 years        
Payments of transaction costs   139,500      
Convertible Debentures [Member]          
Debt face amount   $ 3,660,275      
Number of individual default | N   58      
XML 38 R15.htm IDEA: XBRL DOCUMENT v3.3.0.814
Summary of Significant Accounting Policies (Tables)
 9 Months Ended
Sep. 30, 2015
Accounting Policies [Abstract]  
Schedule of weighted average assumptions to value stock options granted

Management used the following weighted average assumptions to value stock options granted during the three and nine month periods ended September 30, 2015 and 2014:

 

    Three months ended September 30,   Nine months ended September 30,
    2015   2014   2015   2014
             
Expected term   1 year   None   1-5 years   5 years
Exercise price   $0.01   None   $0.01   $0.02
Expected volatility   285% to 322%   None   210% to 322%   187%
Expected dividends   None   None   None   None
Risk-free interest rate   0.26% to 0.33%   None   0.26% to 1.48%   1.64%
Forfeitures   None   None   None   None
Schedule of antidilutive securities excluded from computation of earnings per share

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

 

    September 30,     September 30,  
    2015     2014  
                 
Preferred Stock     3,085,000       3,085,000  
Convertible debentures     117,229,747       94,767,062  
Options     38,064,635       35,168,800  
Warrants     108,251,866       109,942,469  
Total     266,631,248       242,963,331  

 
Schedule of earnings per share basic and diluted

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

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2015     2014     2015     2014  
                         
Numerator:                                
Net income (loss) for basic earnings per share   $ (209,159 )   $ 958,488     $ (2,662,111 )   $ (3,462,012 )
Net income (loss) for diluted earnings per share   $ (209,159 )   $ 958,488     $ (2,662,111 )   $ (3,462,012 )
                                 
Denominator:                                
Weighted average basic shares outstanding     198,039,192       171,996,818       196,519,704       169,070,461  
Denominator for diluted earnings per share-                                
Adjusted weighted average shares     198,039,192       186,965,778       196,519,704       169,070,461  
                                 
Income (loss) per share                                
Basic   $ (0.00 )   $ 0.01     $ (0.01 )   $ (0.02 )
Diluted   $ (0.00 )   $ 0.01     $ (0.01 )   $ (0.02 )
Schedule of inventory

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

 

    September 30,     December 31,  
    2015     2014  
                 
Raw materials   $ 239,884     $ 238,441  
Finished goods     63,964       45,183  
      303,848       283,624  
Reserve for obsolescence     -       -  
      303,848       283,624  
Less long-term portion     120,000       -  
    $ 183,848     $ 283,624  
XML 39 R13.htm IDEA: XBRL DOCUMENT v3.3.0.814
Subsequent Events
 9 Months Ended
Sep. 30, 2015
Subsequent Events [Abstract]  
Subsequent Events

7. Subsequent Events

 

Convertible Debentures and Warrants

 

During October and November 2015, the Company sold $380,556 of Unsecured Convertible Debentures (the “Debentures”) to accredited investors for aggregate consideration of $350,000. The Debentures mature in twelve months, carry fixed conversion prices ranging from $0.03 to $0.045, an annual interest rate of 10% and are convertible into 10,462,967 shares of common stock at maturity. The Company received net cash proceeds of approximately $319,000 after payment of fees and expenses of $31,000. In addition, the Company issued the holder of the Debentures detachable five-year warrants to purchase 7,453,706 additional shares of common stock at exercise prices ranging from $0.06 to $0.09 per share.

 

During October 2015, a holder of a Convertible Debenture with a face value of $52,632 converted his debenture into 531,636 shares of restricted common stock. In addition, associated with this debenture, the Company paid $25,356 in accrued interest by issuing 256,118 shares of restricted common stock

 

During October and November 2015, two holders of variable rate convertible notes issued to the Company exercise notices totalling 11,788,065 shares of common stock. The common stock was issued for the payment of $39,352 of principal and $11,460 of accrued interest.
XML 40 R14.htm IDEA: XBRL DOCUMENT v3.3.0.814
Summary of Significant Accounting Policies (Policies)
 9 Months Ended
Sep. 30, 2015
Accounting Policies [Abstract]  
Revenue recognition

Revenue recognition

 

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

Consolidation

 

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

Risks and Uncertainties

 

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

Use of Estimates

 

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

Inventory Valuation

 

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

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.
Stock-Based Compensation

Stock-Based Compensation

 

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

 

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

 

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

 

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

 

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

 

    Three months ended September 30,   Nine months ended September 30,
    2015   2014   2015   2014
             
Expected term   1 year   None   1-5 years   5 years
Exercise price   $0.01   None   $0.01   $0.02
Expected volatility   285% to 322%   None   210% to 322%   187%
Expected dividends   None   None   None   None
Risk-free interest rate   0.26% to 0.33%   None   0.26% to 1.48%   1.64%
Forfeitures   None   None   None   None
Earnings (Loss) Per Share

Earnings (Loss) Per Share

 

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

 

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

 

    September 30,     September 30,  
    2015     2014  
             
Preferred Stock     3,085,000       3,085,000  
Convertible debentures     117,229,747       94,767,062  
Options     38,064,635       35,168,800  
Warrants     108,251,866       109,942,469  
Total     266,631,248       242,963,331  

 

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

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2015     2014     2015     2014  
                         
Numerator:                                
Net income (loss) for basic earnings per share   $ (209,159 )   $ 958,488     $ (2,662,111 )   $ (3,462,012 )
Net income (loss) for diluted earnings per share   $ (209,159 )   $ 958,488     $ (2,662,111 )   $ (3,462,012 )
                                 
Denominator:                                
Weighted average basic shares outstanding     198,039,192       171,996,818       196,519,704       169,070,461  
Denominator for diluted earnings per share-                                
Adjusted weighted average shares     198,039,192       186,965,778       196,519,704       169,070,461  
                                 
Income (loss) per share                                
Basic   $ (0.00 )   $ 0.01     $ (0.01 )   $ (0.02 )
Diluted   $ (0.00 )   $ 0.01     $ (0.01 )   $ (0.02 )
Inventory

Inventory

 

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

 

    September 30,     December 31,  
    2015     2014  
                 
Raw materials   $ 239,884     $ 238,441  
Finished goods     63,964       45,183  
      303,848       283,624  
Reserve for obsolescence     -       -  
      303,848       283,624  
Less long-term portion     120,000       -  
    $ 183,848     $ 283,624  
XML 41 R16.htm IDEA: XBRL DOCUMENT v3.3.0.814
Liabilities (Tables)
 9 Months Ended
Sep. 30, 2015
Liabilities [Abstract]  
Schedule of balance of debentures

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

 

    September 30,     December 31,  
    2015     2014  
                 
Balance at beginning of period   $ 4,496,602     $ 2,951,629  
Issuance of debentures for cash     1,520,250       2,506,376  
Original issue discount     109,444       128,071  
Debentures converted to common stock     (130,777 )     (1,089,474 )
Convertible debt     5,995,519       4,496,602  
Less unamortized costs of financing     554,173       576,502  
Convertible debt, net of unamortized costs   $ 5,441,346     $ 3,920,100  
                 
Convertible debt in default   $ 3,660,275     $ 1,862,160  
Schedule of balances of derivative liability

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

 

          Conversion        
    Warrants     Feature     Total  
                   
Balance at December 31, 2013   $ 803,484     $ 300,939     $ 1,104,423  
Elimination on extinguishment of debt     -       (197,482 )     (197,482 )
Change in fair value at year end     (38,526 )     193,424       154,898  
Balance at December 31, 2014     764,958       296,881       1,061,839  
                         
Elimination on extinguishment of debt     -       (57,732 )     (57,732 )
Initial value on issuance of debt     -       456,324       456,324  
Change in fair value at period end     (402,484 )     49,169       (353,315 )
Balance at September 30, 2015   $ 362,474     $ 744,642     $ 1,107,116  
XML 42 R34.htm IDEA: XBRL DOCUMENT v3.3.0.814
Subsequent Events (Details Narrative) - USD ($)
 1 Months Ended 2 Months Ended 9 Months Ended
Oct. 31, 2015
Nov. 30, 2015
Sep. 30, 2015
Sep. 30, 2014
Dec. 31, 2014
Net cash proceeds of debentures     $ 1,520,250 $ 1,856,376  
Face value of convertible debenture     $ 109,444   $ 128,071
Subsequent Event [Member] | 10% Unsecured Convertible Debentures [Member]          
Face value of convertible debenture $ 52,632        
Accrued interest paid $ 25,356        
Subsequent Event [Member] | 10% Unsecured Convertible Debentures [Member] | Accredited Investor [Member]          
Sale of debenture   $ 380,556      
Aggregate consideration of debentures   $ 350,000      
Maturity period   12 months      
Annual interest rate   10.00%      
Convertible shares of common stock   10,462,967      
Net cash proceeds of debentures   $ 319,000      
Payment of fees and expenses   $ 31,000      
Warrant term   5 years      
Purchase of additional shares   7,453,706      
Subsequent Event [Member] | 10% Unsecured Convertible Debentures [Member] | Accredited Investor [Member] | Two Holders of Variable Rate [Member]          
Convertible shares of common stock   11,788,065      
Accrued interest paid   $ 11,460      
Common stock issued against principal amount   $ 39,352      
Subsequent Event [Member] | 10% Unsecured Convertible Debentures [Member] | Accredited Investor [Member] | Maximum [Member]          
Conversion price (in dollars per share)   $ 0.045      
Exercise price (in dollars per share)   0.09      
Subsequent Event [Member] | 10% Unsecured Convertible Debentures [Member] | Accredited Investor [Member] | Minimum [Member]          
Conversion price (in dollars per share)   0.03      
Exercise price (in dollars per share)   $ 0.06      
Subsequent Event [Member] | 10% Unsecured Convertible Debentures [Member] | Restricted Stock [Member]          
Convertible shares of common stock 531,636        
Stock issued during the period 256,118        
XML 43 R21.htm IDEA: XBRL DOCUMENT v3.3.0.814
Summary of Significant Accounting Policies (Details) - $ / shares
 3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Expected term 1 year     5 years
Exercise price $ 0.01 $ 0.02 $ 0.01 $ 0.02
Expected volatility     187.00%
Expected dividends
Risk-free interest rate     1.64%
Forfeitures  
Minimum [Member]        
Expected term     1 year  
Expected volatility 285.00%   210.00%  
Risk-free interest rate 0.26%   0.26%  
Maximum [Member]        
Expected term     5 years  
Expected volatility 322.00%   322.00%  
Risk-free interest rate 0.33%   1.48%  
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Liabilities (Details) - USD ($)
Sep. 30, 2015
Dec. 31, 2014
Liabilities [Abstract]    
Balance at beginning of period $ 4,496,602 $ 2,951,629
Issuance of debentures for cash 1,520,250 2,506,376
Original issue discount 109,444 128,071
Debentures converted to common stock (130,777) (1,089,474)
Convertible debt 5,995,519 4,496,602
Less unamortized costs of financing 554,173 576,502
Convertible debt, net of unamortized costs 5,441,346 3,920,100
Convertible debt in default $ 3,660,275 $ 1,862,160

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Condensed Consolidated Statement of Stockholders' Deficit (unaudited) - 9 months ended Sep. 30, 2015 - USD ($)
Series B Preferred Stock [Member]
Series C Preferred Stock [Member]
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Total
Balance at beginning at Dec. 31, 2014 $ 25,850 $ 5,000 $ 1,943,553 $ 39,509,115 $ (45,864,084) $ (4,380,566)
Balance at beginning (in shares) at Dec. 31, 2014 2,585,000 500,000 194,355,277      
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Conversion of convertible debt $ 32,339 $ 63,863 96,202
Conversion of convertible debt (in shares)     3,233,915      
Exercise of stock options $ 4,500   $ 4,500
Exercise of stock options (in shares)     450,000     (450,000)
Non cash issuance of stock options $ 137,522 $ 137,522
Non cash issuance of warrant for consulting services 2,848 2,848
Warrant valuation on issuance of convertible debt $ 225,700 225,700
Net loss $ (2,662,111) (2,662,111)
Balance at ending at Sep. 30, 2015 $ 25,850 $ 5,000 $ 1,980,392 $ 39,939,048 $ (48,526,195) $ (6,575,905)
Balance at ending (in shares) at Sep. 30, 2015 2,585,000 500,000 198,039,192  
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Shareholders' Deficit
 9 Months Ended
Sep. 30, 2015
Stockholders' Equity Note [Abstract]  
Shareholders' Deficit

4. Shareholders’ Deficit

 

Common Stock  

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

 

Warrants 

During the nine months ended September 30, 2015, in conjunction with the sale of Convertible Debentures, the Company issued five year common stock purchase warrants to acquire up to 13,981,485 shares to holders of the Debentures. These warrants have exercise prices ranging from $0.06 to $0.09 per share.

 

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

 

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

 

    Warrants   Weighted
Average
Exercise
Price		  
Outstanding at January 1, 2015     103,430,075     $ 0.11  
Granted     14,281,485     $ 0.08  
Exchanged cancelled     —     $ —  
Exchanged issued     —     $ —  
Cancelled     (9,459,694 )   $ 0.31  
Exercised     —     $ —  
Outstanding at September 30, 2015     108,251,866     $ 0.08  
                 
Exercisable at September 30, 2015     108,251,866     $ 0.08  

 

Stock Options

 

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

                           
    Options   Weighted Average
Exercise Price
Per Share		   Weighted Average
Remaining Contractual
Term (years)		   Aggregate
Intrinsic
Value (1)		  
Outstanding at January 1, 2015     34,293,800   $ 0.02     8.49        
Granted     5,900,002   $ 0.01     9.36        
Cancelled     (1,679,167 ) $ 0.03     —        
Exercised     (450,000 ) $ 0.01     —        
Outstanding at September 30, 2015     38,064,635   $ 0.02     8.40   $ —  
                           
Exercisable at September 30, 2015     18,728,251   $ 0.02     8.29   $ —  
                           
Weighted average fair value of options granted during the period     5,900,002   $ 0.01              

 

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

 

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

 

At September 30, 2015, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is $415,052, which we expect to be recognized over the next four years.
XML 48 R27.htm IDEA: XBRL DOCUMENT v3.3.0.814
Liabilities (Details 1) - USD ($)
 9 Months Ended 12 Months Ended
Sep. 30, 2015
Dec. 31, 2014
Debt Instrument [Line Items]    
Balance $ 1,061,839 $ 1,104,423
Elimination on extinguishment of debt (57,732) (197,482)
Initial value on issuance of debt 456,324  
Change in fair value at year end (353,315) 154,898
Balance 1,107,116 1,061,839
Warrants [Member]    
Debt Instrument [Line Items]    
Balance $ 764,958 $ 803,484
Elimination on extinguishment of debt
Initial value on issuance of debt  
Change in fair value at year end $ (402,484) $ (38,526)
Balance 362,474 764,958
Conversion Feature [Member]    
Debt Instrument [Line Items]    
Balance 296,881 300,939
Elimination on extinguishment of debt (57,732) (197,482)
Initial value on issuance of debt 456,324  
Change in fair value at year end 49,169 193,424
Balance $ 744,642 $ 296,881
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Summary of Significant Accounting Policies (Details Narrative) - shares
 9 Months Ended
Sep. 30, 2015
Dec. 31, 2014
Options outstanding exercisable 38,064,635 34,293,800
2011 Equity Incentive Plan [Member]    
Number of shraes reserved 40,000,000  
Options outstanding exercisable 39,718,802  
Vesting period 4 years  
Amended 2001 Equity Incentive Plan [Member]    
Options outstanding exercisable 18,454,489