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, 2017

 

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	[  ]	(Do not check if a smaller reporting company)	Smaller reporting company	[X]
			Emerging growth company	[X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [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 14, 2017 was 4,923,795,415.

 

 

 

SPECTRASCIENCE, INC.

 

FORM 10-Q

For the Nine Months Ended September 30, 2017

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION:	3
Item 1.	Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II	OTHER INFORMATION	26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
SIGNATURES		29

 

 

PART I FINANCIAL INFORMATION:

 

Item 1. Financial Statements

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

		September 30,				December 31,
		2017				2016
		(unaudited)
ASSETS
Current assets:
Cash		$	27,882			$	3,550
Accounts receivable, net			-				950
Inventory, net			97,423				90,594
Prepaid expenses and other current assets			187,456				266,749
Total current assets			312,761				361,843
Patents, net			905,014				1,024,524
		$	1,217,775			$	1,386,367
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	1,823,245			$	1,318,737
Accrued expenses			2,801,248				2,278,042
Secured convertible debt			100,000				-
Notes payable- related parties			39,500				35,000
Note payable			112,982				137,982
Convertible debt, net of discounts of $157,418 as of September 30, 2017 and $203,444 as of December 31, 2016			6,253,433				6,211,861
Derivative liability			1,675,067				819,928
Total current liabilities			12,805,475				10,801,550
Long-term secured convertible debt			1,410,000				1,100,000
COMMITMENTS AND CONTINGENCIES
Mezzanine equity
Series B Convertible Preferred Stock, $.01 par value; 2,585,000 shares authorized, issued and outstanding as of September 30, 2017 and December 31, 2016; liquidation value of $517,000 plus accumulated and and unpaid dividends of $106,931 as of September 30, 2017 and December 31, 2016			25,850				25,850
Series C Convertible Preferred Stock, $.01 par value; 500,000 shares authorized, issued and outstanding as of September 30, 2017 and December 31, 2016; liquidation value of $100,000 as of September 30, 2017 and December 31, 2016			5,000				5,000
Total mezzanine equity			30,850				30,850
Shareholders’ deficit
Series A Convertible Preferred Stock, $.01 par value; 0 shares authorized, issued and outstanding as of September 30, 2017 and December 31, 2016			-				-
Series AA Super Voting Preferred Stock, $.001 par value; 3,000 shares authorized, issued and outstanding as of September 30, 2017 and December 31, 2016			3				3
Common stock, $.01 par value; 4,996,000,000 shares authorized; 4,823,923,779 and 883,671,222 shares issued and outstanding as of September 30, 2017 and December 31, 2016			48,239,237				8,836,712
Additional paid in capital			(3,499,578	)			34,582,771
Accumulated deficit			(57,768,212	)			(53,965,519	)
Total shareholders’ deficit			(13,028,550	)			(10,546,033	)
		$	1,217,775			$	1,386,367

 

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

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Operation

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Revenue		$	-			$	4,200			$	-			$	5,150
Cost of revenue			-				2,100				-				2,968
Gross profit			-				2,100				-				2,182
Operating expenses:
Research and development			117,576				127,428				377,077				515,590
General and administrative			221,539				281,993				806,831				896,047
Sales and marketing			57,430				90,303				206,064				270,930
			396,545				499,724				1,389,972				1,682,567
Loss from operations			(396,545	)			(497,624	)			(1,389,972	)			(1,680,385	)
Other income (expense)
Interest expense			(611,963	)			(169,743	)			(1,427,193	)			(749,042	)
Change in fair value of derivative and warrant liabilities			(594,752	)			(156,769	)			(878,983	)			(419,390	)
Amortization of derivative and warrant liabilities discount			(130,835	)			(115,027	)			(398,860	)			(351,323	)
Amortization of deferred debt issuance costs and original issue discount			(9,729	)			(43,481	)			(24,440	)			(168,931	)
Gain on extinguishment of debt			224,541				213,584				396,666				460,658
Loss on foreign exchange transactions			(20,218	)			(6,079	)			(58,747	)			(1,388	)
Other expense, net			(8,209	)			(1,961	)			(21,164	)			(11,815	)
			(1,151,165	)			(279,476	)			(2,412,721	)			(1,241,231	)
Net loss		$	(1,547,710	)		$	(777,100	)		$	(3,802,693	)		$	(2,921,616	)
Basic and diluted loss per share		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average common shares outstanding:
Basic and diluted			2,928,091,428				712,309,055				1,842,993,093				664,896,833

 

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

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Deficit

For the nine months ended September 30, 2017

(unaudited)

 

		Series AA																Additional								Total
		Super Voting Preferred								Common Stock								Paid-In				Accumulated				Shareholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance December 31, 2016			3,000			$	3				883,671,222			$	8,836,712			$	34,582,771			$	(53,965,519	)		$	(10,546,033	)
Non cash issuance of stock options			-				-				-				-				120,003				-				120,003
Conversion of convertible debt			-				-				3,940,252,557				39,402,525				(38,202,936	)			-				1,199,589
Non cash issuance of warrant for consulting services			-				-				-				-				584				-				584
Net loss			-				-				-				-				-				(3,802,693	)			(3,802,693	)
Balance September 30, 2017			3,000			$	3				4,823,923,779			$	48,239,237			$	(3,499,578	)		$	(57,768,212	)		$	(13,028,550	)

 

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

 

 

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended September 30,
		2017				2016
Operating activities:
Net loss		$	(3,802,693	)		$	(2,921,616	)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization and depreciation			119,510				121,026
Non-cash interest			30,911				31,364
Non-cash issuance of stock options and warrants			120,003				120,004
Non-cash expense related to commitment of common stock in excess of authorized shares			(52,664	)			107,107
Loss on issuance of variable rate notes			821,585				84,584
Amortization of derivative and warrant liabilities discount			398,860				351,323
Amortization of deferred debt issuance costs and original issue discount			24,440				168,931
Issuance of debt for services			24,750				-
Issuance of common stock for services			3,500				700
Change in fair value of derivative and warrant liabilities			878,983				419,390
Gain on extinguishment of debt			(396,666	)			(460,658	)
Changes in assets and liabilities:
Accounts receivable			950				6,111
Inventory			(6,829	)			(45,744	)
Prepaid expense and other assets			79,293				(34,170	)
Accounts payable			713,296				224,149
Accrued expenses			556,773				580,645
Net cash used in operating activities			(485,998	)			(1,246,854	)
Investing activities:
Net cash used in investing activities			-				-
Financing activities:
Proceeds from issuance of convertible notes payable			143,750				300,000
Proceeds from issuance of notes payable to related parties			4,500				35,000
Proceeds from issuance of secured notes payable			399,000				850,000
Payment against convertible notes payable			(669	)			-
Debt issuance costs			(36,251	)			(63,712	)
Net cash provided by financing activities			510,330				1,121,288
Net increase (decrease) in cash			24,332				(125,566	)
Cash, beginning of year			3,550				127,493
Cash, end of period		$	27,882			$	1,927
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	1,000			$	-
Income taxes		$	-			$	-
Non Cash Investing and Financing Activities:
Conversion of convertible notes and accrued interest to common stock		$	301,416			$	499,763
Exchange of convertible notes and accrued interest to new notes		$	25,000			$	103,551
Convertible note payable for extinguishment of accounts payable		$	51,500			$	-
Valuation of Series AA Super Voting Preferred Stock		$	-				25,000
Conversion of accrued interest to note payable		$	13,767			$	-

 

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

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated 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 clinical trials related to colon cancer detection. In June 2012, the Company entered into a distribution agreement with PENTAX Europe, GmbH.

 

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 condensed consolidated 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 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 nine-month period ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Going Concern

 

Historically, the Company’s sources of cash have come from the issuance and sale of equity securities and 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 2017, 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, 2017, the Company had a working capital deficit of $12,492,714 and cash of $27,882, compared to a working capital deficit of $10,439,707 and cash of $3,550 as of December 31, 2016. The Company uses agents to assist it with raising capital and has commenced raising capital on its own. During the nine months ended September 30, 2017, the Company raised $510,999, net of transaction costs of $36,251, 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, 2017, Convertible Debentures with a face value of $6,076,026 held by 84 individual investors are in default. None of these investors have served notice of default on the Convertible Debentures held by them.

 

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

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated 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 many 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 unaudited condensed 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.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

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 because of events or circumstances, the Company may be required to record an impairment loss.

 

Variable Conversion Rate Debentures

 

Starting in 2015, the Company entered into convertible debentures with floating exercise prices discounted to market prices. As a result, a significant number of shares were either issued or may be issued at deeply discounted variable conversion prices. The downward pressure placed on the Company’s stock as a result of these conversions can be classified as “death spirals” since the investors have no incentive to maintain a stable stock price. The Company accounts for these debentures as derivative liabilities which means the debentures are revalued at the end of each period and gains and losses are recognized at the issuance of the debentures and on the conversion of the debentures.

 

Over Commitment of Shares

 

Since the number of shares issuable under convertible debentures with floating exercise prices is undeterminable, the Company may be required to issue shares in excess of the number of shares authorized by its shareholders. As a result, when the Company determines that is does not have sufficient shares to meet the obligations of derivative unexercised debentures, warrants and options, the derivatives must be valued using the Black Scholes option pricing model and a liability is recorded as though the obligations would be settled using some means other than stock.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black Scholes 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

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

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, 2017, 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, 2017, the Company had options outstanding exercisable into up to 34,168,800 shares of stock under the EIP of which up to 29,391,592 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. There were no stock options granted during the nine-month periods ended September 30, 2017 and 2016.

 

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 like basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.

 

For the three and nine months ended September 30, 2017 and 2016, the following common equivalent shares were excluded from the computation of loss per share since their effects are anti-dilutive.

 

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

		September 30, 2017				September 30, 2016
Preferred Stock			3,088,000				3,088,000
Convertible debentures			8,562,318,402				111,110,776
Options			34,168,800				34,168,800
Warrants			113,900,039				131,389,332
Total			8,713,475,241				279,756,908

 

The following table sets forth the computation of basic and diluted loss per share for the three and nine-month periods ended September 30, 2017 and 2016:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Numerator:
Net loss for basic earnings per share		$	(1,547,710	)		$	(777,100	)		$	(3,802,693	)		$	(2,921,616	)
Net loss for diluted earnings per share		$	(1,547,710	)		$	(777,100	)		$	(3,802,693	)		$	(2,921,616	)
Denominator:
Weighted average basic shares outstanding			2,928,091,428				712,309,055				1,842,993,093				664,896,833
Denominator for diluted earnings per share-Adjusted weighted average shares			2,928,091,428				712,309,055				1,842,993,093				664,896,833
Loss per share
Basic		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)

 

Inventory

 

Inventory consisted of the following at September 30, 2017 and December 31, 2016:

 

		September 30, 2017				December 31, 2016
Raw materials		$	256,163			$	256,163
Finished goods			37,697				30,868
			293,860				287,031
Reserve for obsolescence			196,437				196,437
		$	97,423			$	90,594

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

During the year ended December 31, 2016, the Company purchased the inventory of Oncoscope, Inc. from the Trustee of Ondoscope’s bankruptcy proceeding for a total of $40,000. This amount, net of amounts sold of $2,100, has been included in raw materials.

 

Recently Adopted and Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effective for the Company in the first quarter of fiscal 2018. The Company is currently expecting to use the modified retrospective method to adopt this standard and is continuing to assess all the potential impacts of the new standard on its consolidated financial statements and related disclosures, although we do not expect the implementation to have a material impact.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short term leases) at the commencement date. Lessor accounting under ASU 2016-02 is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. Under ASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The ASU will be effective for the Company starting on January 1, 2019. The Company is continuing to evaluate the impact of the application of this ASU on our consolidated financial statements and disclosures. We expect to recognize right of use assets and lease liabilities.

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update intends to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The new standard affects all entities that hold financial assets or owe financial liabilities. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is evaluating the impact of the adoption of these changes will have on the consolidated financial statements.

 

Reclassifications

 

Certain reclassifications have been made to the 2016 financial statements in order for them to conform to the 2017 presentation. Such reclassifications have no impact on the Company’s financial position or results of operations.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

3. Liabilities

 

Note Payable

 

In November 2014, the Company issued for cash of $100,000 an unsecured note payable and a five-year warrant with an exercise price of $0.09 per share for the purchase of up to 50,000 shares of common stock. The terms of the note were a repayment of $115,000 if paid by February 18, 2015 and, if paid thereafter, the principal balance of the note was to be increased to $137,982 as of October 1, 2015 and interest accrues at 20% from October 1, 2015 until paid. During the nine months ended September 30, 2017, $25,000 principal of this note was assigned to a third party who paid a like amount to the holder of the note. The balance of the note outstanding at September 30, 2017, $112,982, continues to accrue interest at 20%.

 

Notes Payable- Related Parties

 

During the nine months ended September 30, 2016, two affiliates of the Company advanced to the Company cash in an accumulated amount of $35,000 in exchange for six-month 10% promissory notes.

 

During the nine months ended September 30, 2017, three affiliates of the Company advanced to the Company cash in an accumulated amount of $4,500.

 

The balance of the notes at September 30, 2017 is $39,500.

 

Convertible Debentures

 

As of September 30, 2017, the Company has issued and outstanding fixed rate Convertible Debentures (“Debentures”) with original terms of three months to one year, an interest rate ranging from 10-20% per year and an original issue discount ranging from 5% to 10% which, at the option of the holder, may convert into common stock at initial conversion prices ranging from $0.01 to $0.099 per share.

 

The Debentures were issued with detachable five-year cashless Holders Warrants that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.02 to $0.1287 per share. In addition, the Company issued five-year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at exercise prices ranging from $0.0745 to $0.1287 per share. For debentures issued through June 30, 2013, at the option of the Debenture holder, the terms of the Debentures and Holders Warrants are subject to an exchange feature if the Company issues securities with terms more favorable than those of the then outstanding Debentures and Holders Warrants. Debentures issued subsequent to June 30, 2013 do not contain such an exchange clause. During the nine months ended September 30, 2017, Debentures with an accumulated principal balance of $150,000 and $13,767 of accrued interest were assigned to a third party note holder. The new notes contain variable conversion rates discussed below. The gross amount of Debentures with fixed conversion rates outstanding is $5,977,082 as of September 30, 2017.

 

As of September 30, 2017, the Company has issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year, interest rates ranging from 0-10% per year and original issue discounts ranging from 0-10% which contain variable conversion rates ranging from discounts of 40-50% of the Company’s common stock based on the Company’s common stock trading prices ranging from 10-25 days previous to conversion. The Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods of 0-180 days subsequent to issuance at premiums ranging from 0-50%. The gross amount of Variable Debentures outstanding is $433,769 as of September 30, 2017.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

As of September 30, 2017 and December 31, 2016, the balances of the Debentures and Variable Debentures are as follows:

 

		September 30, 2017				December 31, 2016
Balance at beginning of period		$	6,415,305			$	6,174,760
Issuance of debentures for cash			143,750				320,000
Issuance of debentures for services			23,750				15,000
Issuance of debentures for forbearance			16,064				65,282
Issuance of debentures for accounts payable			51,500				-
Original issue discounts			4,000				-
Debentures repaid in cash			(669	)			-
Debentures converted to common stock			(281,616	)			(291,754	)
Debentures exchanged for new debentures			38,767				132,017
Convertible debt			6,410,851				6,415,305
Less unamortized costs of financing			157,418				203,444
Convertible debt, net of unamortized costs		$	6,253,433			$	6,211,861

 

Secured Convertible Note

 

During the nine months ended September 30, 2017, the Company issued for cash of $400,000 Secured Convertible Debentures (the “Secured Debentures”) to two accredited investors. The terms of the Debentures are for two months to three years, a conversion price of $0.01 per share and an annual interest rate of 8%. The secured interest is on all the assets of the Company. In addition, the Company issued to the holder of $150,000 Secured Debentures, five-year common stock purchase warrants to purchase up to 8,000,000 shares of common stock with exercise prices of $0.02 per share. The value of these warrants, $584, was determined using the Black Sholes option pricing model and was reflected as a discount to the Secured Debenture.

 

Derivative Liability

 

Since the Company issued Convertible Debentures which included Holders Warrants, Agent Warrants and a conversion option that includes a possible exchange feature in the event of a future financing on terms more favorable than those of the existing warrants and debentures, this results in the warrants and conversion feature of the debentures being recorded as a liability and measured at fair value. In addition, outstanding Variable Debentures contain variable conversion rates based on unknown future prices of the Company’s common stock resulting in a conversion feature. The Company measures these warrants and conversion features using the Black Scholes option pricing model. The period over which the Company will be required to evaluate the fair value of the warrants is approximately five years and the 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 the Company’s control. Therefore, the resulting effect on net loss is subject to significant fluctuation and

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

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 of cash. Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its stock price increases and non-cash income when its stock price decreases.

 

In addition, since the number of shares issuable under the Variable Debentures are undeterminable, the Company may be required to issue shares in excess of the number of shares authorized by its shareholders. As a result, when the Company determines that is does not have sufficient shares to meet the obligations of derivative unexercised debentures, warrants and options, the derivatives must be valued using the Black Scholes option pricing model and a liability is recorded as though the obligations would be settled using some means other than stock. For the nine months ended September 30, 2017, the Company determined that it was over committed to the number of shares issuable on the exercise of outstanding debentures, stock options and warrants for approximately 8,537,000,000 shares.

 

As of September 30, 2017 and December 31, 2016, the balances of the Derivative Liability are as follows:

 

										Commitment
										In Excess of
		Warrants				ConversionFeature				Authorized Stock				Total
Balance at January 1, 2016		$	60,420			$	495,473			$	64,428			$	620,321
Liability on issuance of debt and warrants			44,394				697,256				-				741,650
Change in fair value at year end			(22,378	)			718,458				-				696,080
Elimination of liability on conversion			-				(1,232,151	)			-				(1,232,151	)
Over commitment of stock			-				-				(5,972	)			(5,972	)
Balance at December 31, 2016		$	82,436			$	679,036			$	58,456			$	819,928
Liability on issuance of debt and warrants			4,268				1,233,352				-				1,237,620
Change in fair value at year end			(76,208	)			955,191				-				878,983
Elimination of liability on conversion			-				(1,208,800	)			-				(1,208,800	)
Over commitment of stock			-				-				(52,664	)			(52,664	)
Balance at September 30, 2017		$	10,496			$	1,658,779			$	5,792			$	1,675,067

 

Debentures with warrants attached issued subsequent to June 30, 2013 did not contain an exchange provision and were accounted for using the equity method of valuing the note and warrant.

 

4. Shareholders’ Deficit

 

Common Stock

 

During the three months ended September 30, 2017, holders of Convertible Debentures with a face value of $116,680 and accrued interest of $6,171 converted their debentures into 2,861,138,200 shares of common stock. In addition, associated with these debentures, the Company recorded a gain on extinguishment of debt of $67,255.

 

During the nine months ended September 30, 2017, holders of Convertible Debentures with a face value of $281,616 and accrued interest of $19,800 converted their debentures into 3,940,252,557 shares of common stock. In addition, associated with these debentures, the Company recorded a gain on extinguishment of debt of $239,379.

 

Warrants

 

During the nine months ended September 30, 2017, in conjunction with the sale of Convertible Debentures, the Company issued five-year common stock purchase warrants to acquire up to 8,000,000 shares to holders of the Debentures. In addition, the Company issued five-year common stock purchase warrants to acquire up to 1,050,000 shares to an agent who assisted in this financing. These warrants have an exercise

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

price of $0.02 per share. The value of the warrants was determined using the Black Sholes option pricing model. The value of the warrants issued to the note holder, $4,386, were reflected as a discount to the notes and the value of the warrants issued to the agent, $584, were reflected as a non-cash operating expense.

 

In March 2016, the Company issued a warrant exercisable into up to 1,000,000 shares of common stock in exchange for services provided by a consultant. The value of these warrants, $1,652, was determined using the Black Scholes option pricing model and was included as non-cash expense and additional paid-in capital during the nine months ended September 30, 2016.

 

The balance of all warrants outstanding as of September 30, 2017 is as follows:

 

						Weighted				Weighted
						Average				Average
						Exercise				Fair
		Warrants				Price				Value
Outstanding at January 1, 2017			132,278,221			$	0.0765
Granted			9,050,000			$	0.0200			$	0.0005
Cancelled			(27,428,182	)		$	0.0722
Exercised			-			$	-
Outstanding at September 30, 2017			113,900,039			$	0.0721
Exercisable at September 30, 2017			113,900,039			$	0.0721

 

Stock Options

 

Options outstanding as of September 30, 2017 are as follows:

 

						Weighted				Weighted Average
						Average Exercise Price				Remaining Contractual				Aggregate Intrinsic
		Options				Per Share				Term (years)				Value (1)
Outstanding at January 1, 2017			34,168,800			$	0.02				7.03
Granted			-			$	-				-
Cancelled			-			$	-				-
Exercised			-			$	-				-
Outstanding at September 30, 2017			34,168,800			$	0.02				6.28			$	-
Exercisable at September 30, 2017			29,391,592			$	0.02				6.28			$	-
Weighted average fair value of options granted during the period			-			$	-

 

(1)	These amounts represent the excess, if any, between the exercise price and $0.0002, the closing market price of the Company’s common stock on September 29, 2017 as quoted on the Pink Sheets under the symbol “SCIE”.

 

At September 30, 2017, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is $53,321, which we expect to be recognized over the next year.

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Series AA Preferred Shares

 

On April 15, 2016, the Board of Directors of the Company authorized an amendment to the Company’s Articles of Incorporation, as amended (the “Articles of Incorporation”), in the form of a Certificate of Designation that authorized the issuance of up to three thousand (3,000) shares of a new series of preferred stock, par value $0.001 per share, designated “Series AA Super Voting Preferred Stock,” for which the board of directors established the rights, preferences and limitations thereof.

 

Each holder of outstanding shares of Series AA Super Voting Preferred Stock shall be entitled to one million (1,000,000) votes for each share of Series AA Super Voting Preferred Stock held on the record date for the determination of stockholders entitled to vote at each meeting of stockholders of the Company. The holders are restricted from voting the preferred shares for any proposal on the election of directors. The Company recorded a special dividend and valued the Series AA Super Voting Preferred Stock at $25,000 as of September 30, 2017 and December 31, 2016.

 

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. The Black Sholes option pricing model was used to determine the fair value with similar assumptions to those described under “Stock-Based Compensation”. The Company records derivative and warrant liabilities on the condensed consolidated balance sheets at fair value with changes in fair value recorded in the condensed consolidated statements of operation.

 

The following table presents the balances of derivative liabilities which are measured at fair value on a recurring basis by level as of September 30, 2017:

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

		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, 2017
Derivative liability		$	-			$	-			$	1,658,779			$	1,658,779
Warrant liability			-				-				10,496				10,496
Commitment in excess of authorized stock			-				-				5,792				5,792
Total		$	-			$	-			$	1,675,067			$	1,675,067

 

The following table presents changes in the derivative liabilities with significant unobservable inputs (Level 3) for the nine months ended September 30, 2017:

 

										Commitment
		Warrant				Derivative				In Excess of				Total
		Liability				Liability				Authorized Stock				Liability
Balance December 31, 2016		$	82,436			$	679,036			$	58,456			$	819,928
Liability on issuance of debt and warrants			4,268				1,233,352				-				1,237,620
Elimination of liability on conversion			-				(1,208,800	)			-				(1,208,800	)
Change in estimated fair value (1)			(76,208	)			955,191				-				878,983
Change in commitment in excess of authorized stock			-				-				(52,664	)			(52,664	)
Balance September 30, 2017		$	10,496			$	1,658,779			$	5,792			$	1,675,067

 

(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, 2017:

 

		Derivative Liability		Warrant Liability
Expected term		6 months to 2 years		5 years
Exercise price		$0.00005 - $0.074		$0.02 - $0.1287
Expected volatility		216% to 375%		242% to 282%
Expected dividends		None		None
Risk-free interest rate		0.79% to 1.31%		1.78% to 1.93%
Forfeitures		None		None

 

 

SpectraScience, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

In computing the fair value of the derivative and warrant liability at September 30, 2017, 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

 

Legal Proceedings

 

On July 7, 2016, Oakmore Opportunity Fund I LP, a variable rate noteholder of SprectraScience, filed for a preliminary judgement of $116, 500 in the Superior Court for the County of Los Angeles, case number BC622542, related to a Convertible Note. Oakmore asserts that SpectraScience breached the terms of the Convertible Note due to not having sufficient authorized shares to enable Oakmore to convert its Note with a balance of $22,500. The Company did not object to the preliminary judgement. On October 19, 2016, the Judge issued a final judgement of $521,100. The Company is retaining litigation counsel and intends to vigorously defend the amount of the judgement. The amount of ultimate liability with respect to the foregoing cannot be determined, however, the Company has established a $150,000 contingency to cover the costs of litigation and the judgement. Despite the inherent uncertainties of litigation, the Company at this time does not believe that Oakmore’s claim will have a material adverse impact on its financial condition, results of operations, or cash flows.

 

7. Subsequent Events

 

Variable Rate Convertible Debentures

 

In November 2017, a holder of a Variable Rate Convertible Debenture with principal of $5,280 and accrued interest of $213 converted a portion of their debenture into 99,871,636 shares of common stock.

 

Series AA Preferred Shares

 

On November 2, 2017, the Board of Directors of the Company authorized an amendment to the Company’s Articles of Incorporation, as amended (the “Articles of Incorporation”), in the form of a Certificate of Designation that authorized the issuance of up to six thousand (6,000) shares of Series AA Preferred Stock, par value $0.001 per share, which was an increase of 3,000 shares from the previously issued Series AA Preferred Stock.

 

Each holder of outstanding shares of Series AA Super Voting Preferred Stock continues to be entitled to one million (1,000,000) votes for each share of Series AA Super Voting Preferred Stock held on the record date for the determination of stockholders entitled to vote at each meeting of stockholders of the Company. The holders are restricted from voting the preferred shares for any proposal on the election of directors.

 

Increase in Authorized Shares

 

On November 2, 2017, the Company’s shareholders approved an increase in authorized capital stock from 5 billion shares to 8 billion shares. The increase in authorized shares will become effective 20 days after the mailing of a Definitive 14C to shareholders.

 

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

 

 

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

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q (the “Report”) contains forward-looking statements that are not related to historical results, including, without limitation, statements regarding our business strategy and objectives, our anticipated duration of periods of net loss, our near term operating goals, our expectations regarding the market for our products, the introduction of our products in new international markets and our beliefs with respect to opportunities and industry conditions in those markets, our beliefs about our products, product development, acquisition or licensing of complementary technologies and expectations with respect to our products’ performance and acceptance, the results of and our intentions with respect to our distribution agreement with PENTAX Europe GmbH, our beliefs about the strengths of our intellectual property portfolio, our regulatory goals and developments, anticipated clinical trials and research, our agreements with Laidlaw and other agents and their effect on our future capital resources and future financial position, our expectations with respect to stock option expense recognition, our future cash needs, the sufficiency of our working capital and our operating losses for the remainder of the current fiscal year. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause or contribute to such differences, including, but not limited to, changes in law or regulatory policies, unanticipated competition from other similar businesses, adverse outcomes from litigation, unexpected employee departures or disruptions, adverse market and general economic factors and other factors described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 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, 2016.

 

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, 2017, SpectraScience carried forward on the improvements made to the WavSTAT4 in fiscal 2011 and continued working with PENTAX Europe, GmbH (“PENTAX”) and other distributors, for distribution of its products in Europe, the Middle East and Africa.

 

 

Over the next 12 months, SpectraScience intends to:

 

	Market and sell the WavSTAT4 Optical Biopsy System colon cancer diagnostic application through PENTAX and other distribution channels in the European Union;
	Conduct country-specific evaluation trials to demonstrate the effectiveness and cost benefit of the WavSTAT4 Optical Biopsy System in each relevant European authority;
	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, 2017 and 2016

 

		Three Months Ended September 30,								Favorable
		2017				2016				(Unfavorable)				%
Revenue		$	-			$	4,200			$	(4,200	)			-100.0	%
Cost of revenue			-				2,100				2,100				-100.0	%
Gross profit			-				2,100				(2,100	)			-100.0	%
Operating expenses:
Research and development			117,576				127,428				9,852				7.7	%
General and administrative			221,539				281,993				60,454				-21.4	%
Sales and marketing			57,430				90,303				32,873				-36.4	%
			396,545				499,724				103,179				20.6	%
Loss from operations			(396,545	)			(497,624	)			101,079				20.3	%
Other income (expense)			(1,151,165	)			(279,476	)			(871,689	)			-311.9	%
Net loss		$	(1,547,710	)		$	(777,100	)		$	(770,610	)			-99.2	%

 

Gross Profit

 

There were no sales or associated cost of sales during the three months ended September 30, 2017 compared to minor sales for the three months ended September 30, 2016. We anticipate that revenue and cost of revenue will increase as we proceed with the introduction of the WaveSTAT4 in Europe.

 

 

Research and Development Expenses

 

Research and development expenses decreased by $9,852, 7.7%, to $117,576 for the quarter ended September 30, 2017 from $127,428 for the three months ended September 30, 2016. This decrease was due to a decrease in payroll costs. 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 $60,454, 21.4%, to $221,539 for the quarter ended September 30, 2017 from $281,993 for the three months ended September 30, 2016. The primary reasons for this decrease was a decrease in payroll and insurance costs. We anticipate that costs will increase as we proceed with our introduction of the WaveSTAT4 in Europe.

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by $32,873, 36.4%, to $57,430 for the quarter ended September 30, 2017 from $90,303 for the quarter ended September 30, 2016. The primary reason for this decrease was a reduction in foreign consultant and payroll costs. 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, 2017 was expense of $1,151,165 compared to expense of $279,476 for the quarter ended September 30, 2016. This change was due primarily to a change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense)

 

Comparison of the Nine Months Ended September 30, 2017 and 2016

 

		Nine Months Ended September 30,								Favorable
		2017				2016				(Unfavorable)				%
Revenue		$	-			$	5,150			$	(5,150	)			-100.0	%
Cost of revenue			-				2,968				2,968				-100.0	%
Gross profit			-				2,182				(2,182	)			-100.0	%
Operating expenses:
Research and development			377,077				515,590				138,513				26.9	%
General and administrative			806,831				896,047				89,216				10.0	%
Sales and marketing			206,064				270,930				64,866				23.9	%
			1,389,972				1,682,567				292,595				17.4	%
Loss from operations			(1,389,972	)			(1,680,385	)			290,413				17.3	%
Other income (expense)			(2,412,721	)			(1,241,231	)			(1,171,490	)			-94.4	%
Net loss		$	(3,802,693	)		$	(2,921,616	)		$	(881,077	)			-30.2	%

 

 

Gross Profit

 

There were no sales or associated cost of sales during the nine months ended September 30, 2017 compared to minor sales for the nine months ended September 30, 2016. We anticipate that revenue and cost of revenue will increase as we proceed with the introduction of the WaveSTAT4 in Europe.

 

Research and Development Expenses

 

Research and development expenses decreased by $138,513, 26.9%, to $377,077 for the nine months ended September 30, 2017 from $515,590 for the nine months ended September 30, 2016. This decrease was due to a decrease in clinical and payroll costs. 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 $89,216, 10.0%, to $806,831 for the nine months ended September 30, 2017 from $896,047 for the nine months ended September 30, 2016. This decrease was due primarily to a decrease in payroll, travel, and convention costs. We anticipate that costs will increase as we proceed with our introduction of the WaveSTAT4 in Europe.

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by $64,866, 23.9%, to $206,064 for the nine months ended September 30, 2017 from $270,930 for the nine months ended September 30, 2016. The primary reason for the decrease was a reduction in foreign consultant and payroll costs. 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, 2017 was expense of $2,412,721 compared to expense of $1,241,231 for the nine months ended September 30, 2016. This change was due primarily to a change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense)

 

 

Liquidity and Capital Resources

 

		As of								Increase
		September 30, 2017				December 31, 2016				(Decrease)
Working Capital
Current assets		$	312,761			$	361,843			$	(49,082	)
Current liabilities			12,805,475				10,801,550				2,003,925
Working capital deficit		$	(12,492,714	)		$	(10,439,707	)		$	2,053,007
Long-term debt		$	1,410,000			$	1,100,000			$	310,000
Stockholders’ deficit		$	(13,028,550	)		$	10,546,033	)		$	2,482,517

 

		Nine Months Ended September 30,								Increase
		2017				2016				(Decrease)
Statements of Cash Flows Select Information
Net cash provided (used) by:
Operating activities		$	(485,998	)		$	(1,246,854	)		$	(760,856	)
Investing activities		$	-			$	-			$	-
Financing activities		$	510,330			$	1,121,288			$	(610,958	)

 

		As of								Increase
		September 30, 2017				December 31, 2016				(Decrease)
Balance Sheet Select Information
Cash		$	27,882			$	3,550			$	24,332
Accounts receivable		$	-			$	950			$	(950	)
Inventory		$	97,423			$	90,594			$	6,829
Accounts payable and accrued expenses		$	4,624,493			$	3,596,779			$	1,027,714

 

Historically, the Company’s sources of cash have come from the issuance and sales of equity securities and 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 2017, as it completes proof-of-concept trials, conducts outcome-based clinical studies, and increases sales and marketing efforts to commercialize the WavSTAT4 Systems in Europe. If the Company does not receive sufficient funding, there is substantial doubt that the Company will be able to continue as a going concern. The Company may incur unknown expenses or may not be able to meet its revenue forecast, and one or more of these circumstances would require the Company to seek additional capital. The Company may not be able to obtain equity capital or debt funding on terms that are acceptable. Even if the Company receives additional funding, such proceeds may not be sufficient to allow the Company to sustain operations until it becomes profitable and begins to generate positive cash flows from operations.

 

 

As of September 30, 2017, the Company had a working capital deficit of $12,492,714 and cash of $27,882, compared to a working capital deficit of $10,439,707 and cash of $3,550 as of December 31, 2016. The Company has engaged other agents to assist it Company with raising capital and has commenced raising capital on its own. During the nine months ended September 30, 2017, the Company raised $510,999, net of transaction costs of $36,251, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Financial Controls

 

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

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

Oakmore Suit

 

On July 7, 2016, Oakmore Opportunity Fund I LP, a variable rate noteholder of SprectraScience, filed for a preliminary judgement of $116, 500 in the Superior Court for the County of Los Angeles, case number BC622542, related to a Convertible Note. Oakmore asserts that SpectraScience breached the terms of the Convertible Note due to not having sufficient authorized shares to enable Oakmore to convert its Note with a balance of $22,500. The Company did not object to the preliminary judgement. On October 19, 2016, the Judge issued a final judgement of $521,100. The Company is retaining litigation counsel and intends to vigorously defend the amount of the judgement. The amount of ultimate liability with respect to the foregoing cannot be determined, however, the Company has established a $150,000 contingency to cover the costs of litigation and the judgement. Despite the inherent uncertainties of litigation, the Company at this time does not believe that Oakmore’s claim will have a material adverse impact on its financial condition, results of operations, or cash flows.

 

 

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, 2016.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

With respect to the above issuance of securities during the three months ended September 30, 2017, the Company relied on exemptions provided by Sections 4(a)(2) and 3(a)9 of the Securities Act of 1933, as amended (the “Securities Act”). No advertising or general solicitation was employed in offering the securities. The securities were issued to a limited number of persons all of whom were accredited investors as that term is defined in Rule 501 of Regulation D under the Securities Act. All were capable of analyzing the merits and risks of their investment, acknowledged in writing that they were acquiring the securities for investment and not with a view toward distribution or resale, and understood the speculative nature of their investment. All securities issued contained a restrictive legend prohibiting transfer of the shares except in accordance with federal securities laws.

 

Number of

Source of

Date of

Common

Payment

Issuance

Shares

Conversion

Common Stock

Various

Issued

of debt

Amount

2,861,138,200

$

638,840

 

Item 3.

Defaults Upon Senior Securities

 

As of November 14, 2017, there are Unsecured Convertible Debentures with a face value of $6,076,026 held by 84 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 14, 2017, 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, 2016, 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: November 14, 2017	/s/ Michael P. Oliver
	Michael P. Oliver
	President and Chief Executive Officer
	(Principal executive officer)
Date: November 14, 2017	/s/ Lowell W. Giffhorn
	Lowell W. Giffhorn
	Chief Financial Officer