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 March 31, 2013

 

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 o

 

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 o

 

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        o	Accelerated filer                  o
Non-accelerated filer           o	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 May 20, 2013 was 159,253,139.

 

   

SPECTRASCIENCE, INC.

 

FORM 10-Q

For the Quarterly Period Ended March 31, 2013

 

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		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		17
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		18
Item 1A.	Risk Factors		18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3.	Defaults Upon Senior Securities		18
Item 4.	Mine Safety Disclosures		18
Item 5.	Other Information		18
Item 6.	Exhibits		18
SIGNATURES			19

  

  

PART I     FINANCIAL INFORMATION:

 

Item 1. Financial Statements (Unaudited)

 

SpectraScience, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

		March 31, 2013				December 31, 2012
		(Unaudited)
ASSETS
Current assets:
Cash		$	237,162			$	90,192
Inventories			205,475				202,077
Deferred debt issuance costs			284,050				165,649
Prepaid expenses and other current assets			175,212				191,030
Total current assets			901,899				648,948
Fixed assets, net			67,151				85,592
Patents, net			1,637,425				1,678,787
TOTAL ASSETS		$	2,606,475			$	2,413,327
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	897,279			$	861,698
Convertible debt			1,857,894				1,129,473
Discount			(886,241	)			(520,851	)
Convertible debt, net			971,653				608,622
Derivative liability			4,388,830				2,335,560
Accrued expenses			214,677				183,855
Total current liabilities			6,472,439				3,989,735
COMMITMENTS
SHAREHOLDERS’ EQUITY (DEFICIT)
Series B Convertible Preferred Stock, $.01 par value:
Authorized – 2,585,000 shares; shares issued and outstanding - 2,585,000 shares at March 31, 2013 and December 31, 2012, liquidation value of $517,000 plus accumulated and unpaid dividends of $106,931 as of March 31, 2013 and December 31, 2012			25,850				25,850
Series C Convertible Preferred Stock, $.01 par value:
Authorized – 1,000,000 shares; shares issued and outstanding -1,000,000 shares at March 31, 2013 and December 31, 2012, $200,000 liquidation value			10,000				10,000
Common stock, $.01 par value:
Authorized — 275,000,000 shares; Issued and outstanding -157,654,565 shares at March 31, 2013 and 152,229,665 shares at December 31, 2012			1,576,546				1,522,297
Additional paid-in capital			35,770,894				35,491,603
Accumulated deficit			(41,249,254	)			(38,626,158	)
TOTAL SHAREHOLDERS’ (DEFICIT)			(3,865,964	)			(1,576,408	)
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)		$	2,606,475			$	2,413,327

 

Note: The balance sheet at December 31, 2012 has been derived from the audited financial statements at that date but does not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements.

 

See accompanying notes to unaudited financial statements.

  

 

SpectraScience, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended  March 31,
		2013				2012
Revenue		$	-			$	-
Cost of revenue			-				-
Gross profit			-				-
Operating expenses:
Research and development			187,457				380,286
General and administrative			497,703				547,645
Sales and marketing			77,374				108,696
Total operating expenses			762,545				1,036,627
Loss from operations			(762,545	)			(1,036,627	)
Other expense (income)
Interest expense			56,581				38,028
Change in fair value of derivative liabilities			1,116,019				1,582,406
Amortization of debt liability discount			464,068				351,425
Amortization of deferred debt issuance costs and original issue discount			190,569				143,571
Loss on extinguishment of debt			30,796				-
Other expense (income), net			2,518				(56	)
			1,860,551				2,115,374
Net (Loss)		$	(2,623,096	)		$	(3,152,001	)
Basic and diluted net (loss) per share		$	(0.02	)		$	(0.03	)
Weighted average common shares outstanding - basic and diluted			155,871,102				108,041,084

 

See accompanying notes to unaudited financial statements.

 

  

SpectraScience, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

For the three months ended March 31, 2013

(Unaudited)

 

		Preferred Stock								Common Stock								Additional Paid-In				Accumulated				Total Shareholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				Equity
Balance, December 31, 2012			3,585,000			$	35,850				152,229,665			$	1,522,297			$	35,491,603			$	(38,626,158	)		$	(1,576,408	)
Stock based compensation – consultants																			2,106								2,106
Stock based compensation – employees																			99,642								99,642
Common stock issued for services											3,000,000				30,000				25,149								55,149
Conversion of convertible debt											2,424,900				24,249				152,394								176,643
Net loss																							(2,623,096	)			(2,623,096	)
Balance, March 31, 2013			3,585,000			$	35,850				157,654,565			$	1,576,546			$	35,770,894			$	(41,249,254	)		$	(3,865,964	)

  

See accompanying notes to unaudited financial statements.  

 

 

SpectraScience, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended  March 31,
		2013				2012
OPERATING ACTIVITIES:
Net loss		$	(2,623,096	)		$	(3,152,001	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization			59,803				88,906
Amortization of derivative and warrant liabilities discount			464,068				351,425
Amortization of deferred debt issuance costs and original issue discount			190,569				143,571
Change in fair value of derivative and warrant liabilities			1,116,019				1,582,406
Loss on extinguishment of debt			30,796				-
Stock-based compensation employees			99,642				92,457
Stock-based compensation consultants			2,106				7,121
Fair market value of common stock issued for services			55,149				-
Changes in operating assets and liabilities:
Accounts receivable			-				-
Inventories			(3,398	)			(76,932	)
Prepaid expenses and current other assets			15,818				(2,050	)
Accounts payable			35,581				(99,833	)
Accrued expenses			50,413				(30,288	)
Net cash (used in) operating activities			(506,590	)			(1,095,218	)
INVESTING ACTIVITIES:
Purchases of fixed assets			-				(4,170	)
Net cash from (used in) investing activities			-				(4,170	)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes payable			812,000				2,233,000
Debt issuance costs			(158,440	)			(379,402	)
Net cash provided by financing activities			653,560				1,853,598
Net increase in cash			146,970				754,210
CASH AT BEGINNING OF PERIOD			90,192				250,723
CASH AT END OF PERIOD		$	237,162			$	1,004,933
Non Cash investing and financing activities
Convertible debt and accrued interest converted to common stock		$	138,948				-
Convertible debt and warrant liability discounts recorded at issuance		$	812,000			$	2,212,928
Deferred debt issuance costs recorded at issuance		$	125,251			$	435,788

  

See accompanying notes to unaudited financial statements.

  

  

SpectraScience, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

March 31, 2013

 

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”) and Spectra Science International, Inc. (“International”). From 1996, the Company primarily focused on developing the WavSTAT Optical Biopsy System (the “WavSTAT System”). 

 

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

 

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

 

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

 

Basis of Presentation

 

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q as they are prescribed for smaller reporting companies. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the three-month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.

 

Liquidity and Capital Resources

 

Historically, the Company’s sources of cash have come from the issuance and sales of equity securities, convertible debentures and interest income. 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 2013, 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, the Company may be unable to continue as a going concern. The Company may incur unknown expenses or may not be able to meet its revenue forecast, and one or more of these circumstances would require the Company to seek additional capital. The Company may not be able to obtain equity capital or debt funding on terms that are acceptable. Even if the Company receives additional funding, such proceeds may not be sufficient to allow the Company to sustain operations until it becomes profitable and begins to generate positive cash flows from operations.

 

 

As of March 31, 2013, the Company had a working capital deficit of approximately $5.6 million and cash of approximately $237,000, compared to working capital deficit of approximately $3.3 million and cash of approximately $90,000 as of December 31, 2012. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two year period from the date of the Engagement Agreement. During the fiscal quarter ended March 31, 2013, the Company raised approximately $654,000, net of transaction costs, under this agreement. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreement occur as expected, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

  

The Company paid principal and interest owing on Convertible Debentures that have been converted by issuing shares of common stock. 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 these remaining matured, but unconverted, Convertible Debentures. The holders of these unconverted Convertible Debentures have the option to declare their Convertible Debentures in default. In the event of such default, principal, accrued interest and other related costs are immediately due and payable in cash.

 

During the three months ended March 31, 2013, Convertible Debentures with a face value of approximately $479,000 held by thirteen individual investors matured. These remain outstanding, but none of these thirteen investors have served notice of default on the Convertible Debentures held by them.

 

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

 

2.     Summary of Significant Accounting Policies

 

Revenue recognition

 

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

 

Consolidation

 

The accompanying consolidated financial statements include the accounts of SpectraScience, Inc. and its wholly-owned subsidiaries LUMA, and International. 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 records its inventories 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 fixed assets 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 fair value and is amortized over its estimated useful life. The Company believes the useful lives assigned to these assets are reasonable. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in management’s estimate of future cash flows to determine recoverability of these assets. If management’s assumptions about these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss.  

  

Convertible Debentures/Warrants

 

We account for our Convertible Debentures, associated warrants and related conversion features under the provisions of FASB Topic 470, Debt, or ASC 470, which requires the measurement and recognition of the fair values for all components related to the Convertible Debentures at the end of each reporting period. We estimate the fair value of the resulting Beneficial Conversion Feature ("BCF"), holders warrants and agent warrants at each measurement date using a combination of the Black-Scholes-Merton and modified Binomial Lattice option-pricing models. These standards require us to record the fair value of the Convertible Debentures, BCF and warrants at the time of issuance and to remeasure these values and record associated income statement expense or benefit at the end of each reporting period.

 

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 March 31, 2013, 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 15,000,000 shares of common stock.  At March 31, 2013, the Company had outstanding 19,491,667 options under the EIP and the Company’s prior Amended 2001 Stock Plan representing approximately 13% of the Company’s outstanding shares (10,141,979 of which were exercisable), with 6,453,333 available for future issuance under the 2011 EIP. Awards under the Company’s EIP generally vest over four years.

 

The fair value of options granted were estimated at the date of grant using a Black-Scholes Model which includes several variables including expected life, risk free interest rate, expected stock price volatility, stock option exercise patterns and expected dividend yield. The Company also must estimate forfeitures for employee stock options. These models and assumptions are complex and may change future expenses by increasing or decreasing stock-based compensation expense. There were no stock options granted during the three month period ended March 31, 2013. Management used the following weighted average assumptions to value stock options granted during the three months ended March 31, 2013 and 2012:

 

  

		2013				2012
Expected life		-				5 Years
Risk-free interest rate			-				.85	%
Expected volatility			-				113	%
Expected dividend yield			-				0	%

  

Management believes estimated forfeitures for employee stock options granted under the EIP would have a negligible effect on expenses because such forfeitures would be a very small percentage. Stock option grants have been to a group of individuals that have a high desire to see the Company succeed and have aligned themselves to that end.  

 

The expected lives used in the calculations were selected by management based on past experience, forward looking profit forecasts and estimates of what the trading price of the Company’s stock might be at different future dates.

 

The risk-free interest rates used in the calculations are the five-year U.S. Treasury rates as published on the date of the applicable stock option grant.

 

Volatility is a calculation based on fluctuations in the Company’s stock price over a historical time period consistent with the estimated life of the option.

 

Options outstanding that have vested and those that remain unvested as of March 31, 2013 are as follows:

 

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual Term in				Intrinsic
		Shares				Price				Years				Value(1)
Vested			10,414,979			$	0.23				6.56			$	-
Unvested			9,349,688				0.13				8.69				-
Total			19,491,667			$	0.18				7.58			$	-

 

(1) These amounts represent the excess, if any, between the exercise price and $0.05, the closing market price of the Company’s common stock on March 31, 2013 as quoted on the Over-the-Counter Bulletin Board under the symbol “SCIE”.

 

Additional information with respect to stock option activity is as follows: 

 

						Outstanding Options
		Options Available For Grant				Plan Options Outstanding				Weighted Average Exercise Price Per Share				Weighted-Average Remaining Contractual  Term (years)				Aggregate Intrinsic Value
December 31, 2012			6,453,333				19,491,667			$	0.18				8.20				-
Options granted			-				-				-				-				-
Options exercised			-				-				-				-				-
Options forfeited			-				-				-				-				-
Additional options authorized			-				-				-				-				-
Outstanding at March 31, 2013			6,453,333				19,491,667			$	0.18				7.58				-
Exercisable at March 31, 2013			-				10,141,979			$	0.23				6.56				-

 

There were no options exercised during the three months ended March 31, 2013 and 2012. At March 31, 2013, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is approximately $739,000, which is expected to be recognized over the next four years.

 

  

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period of computation. Diluted earnings (loss) per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and only if the additional common shares would be dilutive. Potentially dilutive shares of common stock that have been excluded from the calculation of the weighted average number of dilutive common shares for the three-months ended March 31, 2013 include common stock purchase warrants to acquire 70,210,121 shares of common stock, stock options to purchase 19,491,667 shares of common stock and preferred stock convertible into 3,585,000 shares of common stock.

 

The following table sets forth the computation of basic and diluted earnings per share and incorporates any additional income related to the change in fair value of derivative securities for the three-month period ending March 31, 2013:

   

		For the Three				For the Three
		Months Ended				Months Ended
		March 31,				March 31,
		2013				2012
Numerator:
Net (loss) for basic earning per share			(2,623,096	)			(3,152,001	)
Subtractions:
Change in fair value of derivative securities			-				-
Net (loss) for diluted earnings per share			(2,623,096	)			(3,152,001	)
Denominator:
Weighted average basic shares outstanding			155,871,102				108,041,084
Assumed conversion of dilutive securities
Warrants			-				-
Conversion feature - Convertible Debentures			-				-
Potentially dilutive common shares			-				-
Denominator for diluted earnings per share - Adjusted weighted average shares			155,871,102				108,041,084
(Loss) per share
Basic		$	(0.02	)		$	(0.03	)
Diluted		$	(0.02	)		$	(0.03	)

 

Inventories

 

Inventories consisted of the following at March 31, 2013 and December 31, 2012:

 

		March 31, 2013				December 31, 2012
Raw materials		$	158,420			$	155,022
Finished goods			47,055				47,055
Totals		$	205,475			$	202,077

 

 

3. Liabilities

 

Convertible Debentures

 

For the three-month period ended March 31, 2013, the Company issued Convertible Debentures (“Debentures”) at a face amount of $854,737. At March 31, 2013, the unamortized discount of $886,241 consisted of a discount on the derivative liability of $495,203, discount on the warrant liability of $345,596 and original issue discount of $45,442. The discounts will be amortized over the remaining term of the Debentures. The Debentures have an original term of six months, accrue interest at rates ranging from 16-20% per year, carry an original issue discount of 5% and will convert into common stock at an initial conversion price ranging from $0.0573 to $0.099 per share at maturity. The Debentures were issued with detachable five-year cashless warrants (“Holders Warrants”) that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.0745 to $0.1287 per share. In addition, the Company issued five-year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price ranging from $0.0745 to $0.1287 per share. At March 31, 2013, there were Debentures, Holders Warrants and Agent Warrants convertible or exercisable into 27,796,733, 34,409,070 and 9,824,338 shares of common stock, respectively. The conversion price of the Debentures and Holders Warrants are subject to an adjustment feature in the event that the Company issues securities for less than the conversion price of the Debentures. The Holders and Agent Warrants contain a provision under which the Warrants, under certain circumstances, could be acquired for a presently undetermined consideration at a future date. The accounting for the adjustment features of the conversion price for the debt and the warrant exercise price for the Holders’ Warrants is described separately below under, “Warrant Liability” and “Derivative Liability”. For the three-month period ended March 31, 2013, upon issuance of the Debentures the Company received net cash proceeds of $653,560, net of $158,440 in transaction costs and $42,737 of original issue discount. For the three-month period ended March 31, 2013, Debentures with a face value of $126,316 and accrued interest of $12,632 were converted at a price of $0.0573 into 2,424,900 shares of common stock. At March 31, 2013, Debentures with a face value of approximately $479,000 were in default and accruing interest at a default rate of 20% per year.

 

Warrant Liability

 

The Company issued Convertible Debentures, which included Holders Warrants (“Securities”). In addition, the Company issued Agent warrants to Laidlaw & Co. Ltd. as compensation related to the sale of the Securities. The Holders Warrants include a possible adjustment feature in the event of a future financing on terms more favorable than those of the existing Securities. Additionally, the Holders and Agent Warrants also contain a provision that provides for specific consideration in the event of certain all cash or private change of control transactions. This results in the Holders and Agent Warrants being classified as “Derivative Warrants”. The accounting guidance requires that these warrants be recorded as a liability and measured at fair value on a recurring basis. The Company records the fair value of these warrants in its statement of operations in the line “Change in fair value of derivative liabilities.” The Company measures these warrants 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.” At March 31, 2013, there were exercisable warrants to purchase 44,233,408 shares of common stock. The time period over which the Company will be required to evaluate the fair value of these warrants is approximately five years. For the three-month period ended March 31, 2013, upon issuance of the Debentures, the Company recorded an additional Warrant Liability of $762,111 of which $306,640 was recognized as an immediate non-cash expense and the remaining amount is being amortized over the life of the associated Debentures (generally, six-months).

 

The Company computes the fair value of the warrant 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 warrant liability is the Company’s stock price, which is subject to significant fluctuation and is not under the Company’s control. The resulting effect on the Company’s net loss is therefore subject to significant fluctuation and will continue to be so until the Derivative Warrants expire (approximately five years from the date of issuance). 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.

 

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.

 

 

Derivative Liability

 

During the three-month period ended March 31, 2013, the Company issued convertible Debentures with a conversion price that includes a possible exercise adjustment feature in the event that it issues securities for consideration less than that offered with the convertible Debentures (referred to as “Derivative Liabilities”). The Company records the fair value of the conversion feature in its statement of operations in the line “Change in fair value of derivative liabilities.” The Company measures the conversion feature using a Binomial Lattice option valuation model using similar assumptions to those described under “Stock-Based Compensation.” At March 31, 2013, there were convertible shares to purchase 27,796,733 shares of common stock subject to this price adjustment feature. The time period over which the Company will be required to evaluate the fair value of this conversion feature is the lesser of six months or conversion. For the three-month period ended March 31, 2013, upon issuance of the Debentures, the Company recorded a derivative liability of $929,156 and an initial fair value non-cash expense of $447,376. Convertible Debentures with a face value of $126,316 converted into approximately 2,425,000 shares of Common Stock.

  

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, mature. 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.

 

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, the Company’s fair value estimates could be materially different in the future.

 

4. Shareholders’ Equity

 

Common Stock

 

In January 2013, the Company issued 3,000,000 shares of restricted common stock to two vendors for services. The fair value of the vested portion of these shares was determined to be $55,149.

 

In February of 2013, holders of Convertible Debentures with a face value of $126,316 converted their debentures into 2,204,453 shares of restricted common stock. In addition, associated with these debentures, the Company paid $12,632 in accrued interest by issuing 220,447 shares of restricted common stock.

 

Warrants

 

During the three-months ended March 31, 2013, in conjunction with the sale of Convertible Debentures, the Company issued five-year common stock purchase warrants to acquire 7,458,437 shares to holders of the Debentures and 2,237,531 similar warrants as compensation to Agents. These warrants have an exercise price of $0.0745 per share.

 

Convertible Debentures

 

During the three-months ended March 31, 2013, the Company entered into subscription agreements with accredited investors to purchase an aggregate principal amount of $854,737 of Convertible Debentures initially convertible into shares of restricted common stock at a conversion price of $0.0573.

 

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. Binomial Lattice and Black Scholes option valuation models were used to determine the fair value with similar assumptions to those described under “Stock-Based Compensation”. The Company records derivative and warrant liabilities on the consolidated balance sheets at fair value with changes in fair value recorded in the consolidated statements of operations.

 

The following table presents the balances of liabilities measured at fair value on a recurring basis by level as of December 31, 2012 and March 31, 2013:

 

 

		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 December 31, 2012
Derivative liability		$	-			$	-			$	605,516			$	605,516
Warrant liability			-				-				1,730,044				1,730,044
Total		$	-			$	-			$	2,335,560			$	2,335,560

 

		Fair Value Measurements Using
		Quoted Prices in				Significant Other				Significant
		Active Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
As of March 31, 2013
Derivative liability		$	-			$	-			$	1,752,974			$	1,752,974
Warrant liability			-				-				2,635,856				2,635,856
Total		$	-			$	-			$	4,388,830			$	4,388,830

 

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the three months ended March 31, 2013:

 

		Warrant				Derivative				Total
		Liability				Liability				Liability
Balance, December 31, 2012		$	1,730,044			$	605,516			$	2,335,560
Issuance of convertible debt and warrants			762,111				929,156				1,691,267
Initial value of instruments in excess of face value of debt			(306,640	)			(447,376	)			(754,016	)
Change in estimated fair value			450,341				665,678				1,116,019
Balance, March 31, 2013		$	2,635,856			$	1,752,974			$	4,388,830

 

Management used the following inputs to value the Derivative and Warrant Liabilities for the three-months ended March 31, 2013:

 

		Derivative Liability		Warrant Liability
Exercise Price		$0.0573 - $0.099		$0.075 - $0.1287
Risk Free rate		.11% - .14%		.77% - .88%
Expected Volatility		192.6% - 201.0%		173.1% - 177.6%
Expected Dividend Yield		-		-

 

In computing the fair value of the derivative and warrant liability at March 31, 2013 for instruments under the Binomial Lattice option-pricing model, management assumed between a 80% and 95% probability of a down round financing event at various assumed stock prices of between $0.039 and $0.030. On average, a 10% change in the probability of a down round financing event would change the recorded derivative liability by approximately 7%. 

 

6. Contingencies

    

None

 

7. Subsequent Events

 

Series C Convertible Preferred Stock

 

In April 2013, a shareholder converted 500,000 shares of Series C Convertible Preferred stock into 500,000 shares of restricted common stock.

 

Common Stock

 

In April 2013, holders of Convertible Debentures with a face value of $90,854 converted their Convertible Debentures into 1,585,581 shares of restricted common stock. In addition, associated with these Convertible Debentures, the Company paid $749 in accrued interest by issuing 13,064 shares of common stock.

 

 

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 agreement with Laidlaw and its 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, 2012. 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, 2012.

 

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 three months ended March 31, 2013, SpectraScience carried forward on the improvements made to the WavSTAT4 in fiscal 2012 and continued working with PENTAX Europe, GmbH (“PENTAX”), for distribution of its products in Europe, the Middle East and Africa.

 

Over the next 12 months, SpectraScience intends to:

 

·

Market and sell the WavSTAT4 Optical Biopsy System colon cancer diagnostic application through PENTAX 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 Russia and India;

·

Begin meeting with the FDA towards the preparation and submission of a Supplemental PMA filing with the FDA for the WavSTAT4 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; and

 

·

Continue to expand and refine our intellectual property portfolio.

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2013 and 2012

 

The Company recognized no revenue for the three months ended March 31, 2013 and 2012.

 

Total operating expenses decreased from approximately $1,037,000 to $762,000, a decrease of approximately $275,000 for the three-month period ended March 31, 2013 as compared to the three-month period ended March 31, 2012. This overall decrease was comprised of approximate decreases in research and development expense of $193,000, general and administration expense of $50,000 and sales and marketing expense of $32,000.

 

Research and development expenses for the three months ended March 31, 2013 and 2012 were approximately $187,000 and $380,000, respectively. The approximate $193,000 decrease for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 was due to approximate decreases in engineering development expense of $135,000, clinical studies expense of $65,000, travel expense of $10,000, offset by increases in payroll expense of approximately $11,000 and other expense of $6,000. The decrease in engineering development expense reflected the increased expense in the prior period as a result of the re-engineering of the WavSTAT4 System. The decrease in clinical studies was a result of no clinical studies in Europe in the three-month period ended March 31, 2013 as compared to several clinical studies in the same period one year ago.

 

General and administrative expenses for the three months ended March 31, 2013 and 2012 were approximately $498,000 and $548,000, respectively. The approximate $50,000 decrease for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 was due to approximate decreases in payroll expense of $27,000, depreciation expense of $16,000, amortization expense of $13,000, investor relations expense of $10,000, travel expense of $9,000, accounting expense of $9,000 and other expense of $5,000, offset by approximate increases in investor relations consulting expense of $23,000 and stock compensation expense of $16,000. These expense decreases were a result of overall expense reductions due to cash availability constraints.

 

Sales and marketing expenses for the three months ended March 31, 2013 and 2012 were approximately $77,000 and $109,000, respectively. The decrease of approximately $32,000 was due to approximate decreases of $20,000 in stock compensation expense, $17,000 in travel expense, $7,000 in delivery expense, $7,000 in consulting expense and $1,000 in all other expenses offset by an approximate increase of $20,000 in payroll expense. The overall decreases were primarily a result of replacing a U.S.-based sales director with a Belgian-based sales director.

 

As a result of the above, the approximate net operating loss for the three months ended March 31, 2013 and 2012 was $762,000 and $1,037,000 respectively.  Of the net operating loss for the quarter ended March 31, 2013, approximately $101,000 was comprised of non-cash stock option expense.

 

Non-operating expense decreased approximately $254,000 as a result of non-cash income and expense related to our convertible debt issuance comprised of approximate decreases in the fair value of warrant and derivative liabilities of $466,000 offset by increases in amortization of derivative and warrant liability discount of approximately $113,000, increased amortization of debt issuance costs and original issue discount of approximately $47,000, loss on extinguishment of debt of $31,000, increased interest expense of approximately $19,000 and increases in other non-operating expense of approximately $2,000.

 

As a result of the above, the approximate net loss decreased by $529,000 for the three months ended March 31, 2013 compared to March 31, 2012 from approximately ($3,152,000) to ($2,623,000).  

 

Liquidity and Capital Resources

 

Historically, our sources of cash have come from the issuance and sales of equity securities, convertible debentures, interest income and limited sales of our products. Our historical cash outflows have been primarily used for operating activities including research, development, administrative and sales activities. Fluctuations in our working capital due to timing differences of cash receipts and cash disbursements also impact cash flow. We expect to incur significant additional operating losses through at least the end of 2013, as we complete proof-of-concept trials, conduct outcome-based clinical studies and increase sales and marketing efforts to commercialize the WavSTAT4 Systems in Europe. If we do not receive sufficient funding, we may be unable to continue as a going concern. We may incur unknown expenses or may not be able to meet our revenue forecast, and one or more of these circumstances would require us to seek additional capital. We may not be able to obtain equity capital or debt funding on terms that are acceptable. Even if we receive additional funding, such proceeds may not be sufficient to allow us to sustain operations until we become profitable and begin to generate positive cash flows from operations.

 

  

As of March 31, 2013, we had a working capital deficit of approximately $5.6 million and cash of approximately $237,000, compared to a working capital deficit of approximately $3.3 million and cash of approximately $90,000 as of December 31, 2012. In December 2011, we 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 us in raising up to $20.0 million in capital over a two-year period from the date of the Engagement Agreement. During the fiscal quarter ended March 31, 2013, we raised approximately $654,000, net of transaction costs, under this agreement. However, if we do not receive additional funds in a timely manner, we could be in jeopardy as a going concern. We may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreement occur as expected, such proceeds will be sufficient to allow us to sustain operations until we attain profitability and positive cash flows from operations. However, we may incur unknown expenses or may not be able to meet our revenue expectations requiring us to seek additional capital. In such event, we may not be able to find capital or raise capital or debt on terms that are acceptable.

 

Since December 31, 2012, our net working capital deficit has increased from approximately $3,300,000 to $5,600,000. The primary cause of this increase in the deficit is a result of the accounting treatment required for the Convertible Debentures and warrants issued over the past twelve months. We have paid principal and interest on the Convertible Debentures that have converted by issuing shares of common stock. At March 31, 2013, adjusting for the non-cash effect of the Convertible Debentures on our net working capital deficit, the adjusted net working capital deficit would have been approximately ($494,000).

 

We paid principal and interest owing on Convertible Debentures that have been converted by issuing shares of common stock. 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 these remaining matured, but unconverted, Convertible Debentures. The holders of these unconverted Convertible Debentures have the option to declare their Convertible Debentures in default. In the event of such default, principal, accrued interest and other related costs are immediately due and payable in cash.

 

During the three months ended March 31, 2013, Convertible Debentures with a face value of approximately $479,000 held by thirteen individual investors matured. These remain outstanding, but none of these thirteen 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 we be unable to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

  

Changes in Internal Financial Controls

 

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

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

None

 

Item 1A.

Risk Factors

 

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

In January 2013, the Company issued 3,000,000 shares of restricted common stock to two vendors for services. The issuance of the shares was exempt from registration by virtue of section 4(2) of the Securities Act as an issuance not involving a public offering.

 

During the quarter ended March 31, 2013, the Company issued an aggregate of 2,424,900 shares of common stock pursuant to the conversion by purchasers of 5% Original Issue Discount Unsecured Convertible Debentures with a conversion price equal to $0.0573 per share. The issuance of the shares was exempt from registration by virtue of Section 3(a)(9) of the Securities Act.

 

Item 3.

Defaults Upon Senior Securities

 

As of May 13, 2013 there are 5% Original Issue Discount Unsecured Convertible Debentures with a face value of approximately $479,000 held by thirteen 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 (estimated to be approximately $23,000) shall become immediately due and payable in cash at the election of the Holders. As of May 13, 2013, 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 March 31, 2013, 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.

  

 

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: May 20, 2013		/s/ Michael P. Oliver
		Michael P. Oliver
		President and Chief Executive Officer
		(Principal executive officer)
Date: May 20, 2013		/s/ James Dorst
		James Dorst
		Chief Financial Officer and Chief Operating Officer
		(Principal financial officer and principal accounting officer)