Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

Commission file number 0-13092

SPECTRASCIENCE, INC.

(Exact name of registrant as specified in its charter)

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

11568 Sorrento Valley Rd., Suite 11

San Diego, California 92121

(Address of principal executive offices, including zip code)

(858) 847-0200

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer [ ]	Accelerated filer [ ]

Non-accelerated filer [ ]	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on November 8, 2016 was 752,171,222.

SPECTRASCIENCE, INC.

FORM 10-Q

For the Nine Months Ended September 30, 2016

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	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	29

SIGNATURES		30

2

PART I FINANCIAL INFORMATION:

Item 1. Financial Statements

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	September 30, 2016			December 31, 2015
	(Unaudited)

ASSETS
Current assets:
Cash	$	1,927		$	127,493
Accounts receivable, net		950			7,061
Inventory, current portion		157,631			111,887
Prepaid expenses and other current assets		318,475			284,305
Total current assets		478,983			530,746

Fixed assets, net		—			316
Long-term inventory		150,000			150,000
Patents, net		1,064,761			1,185,472
	$	1,693,744		$	1,866,534

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	1,165,255		$	941,106
Secured convertible notes payable		850,000			—
Note payable		137,982			137,982
Notes payable- related parties		35,000			—
Convertible debt, net of discounts and costs of $188,070 as of September 30, 2016 and $430,156 as of December 31, 2015		6,241,726			5,744,604
Derivative liability		584,274			620,321
Accrued expenses		1,968,516			1,411,333
Total current liabilities		10,982,753			8,855,346

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, 2016 and December 31, 2015; liquidation value of $517,000 plus accumulated and and unpaid dividends of $106,931 as of September 30, 2016 and December 31, 2015, respectively		25,850			25,850
Series C Convertible Preferred Stock, $.01 par value; 500,000 shares authorized, issued and outstanding as of September 30, 2016 and December 31, 2015; liquidation value of $100,000 as of September 30, 2016 and December 31, 2015, respectively		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, 2016 and December 31, 2015		—			—
Series AA Super Voting Preferred Stock, $.001 par value; 3,000 and 0 shares authorized, issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		3			—
Common stock, $.01 par value;1,246,912,000 and 746,915,000 shares authorized; 736,525,000 and 431,247,207 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		7,365,250			4,312,472
Additional paid in capital		35,735,456			38,166,818
Accumulated deficit		(52,420,568	)		(49,498,952	)
Total shareholders' deficit		(9,319,859	)		(7,019,662	)
	$	1,693,744		$	1,866,534

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

3

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Operation

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015

Revenue	$	4,200		$	-		$	5,150		$	-
Cost of revenue		2,100			-			2,968			(12,000)
Gross profit		2,100			-			2,182			12,000

Operating expenses:
Research and development		127,428			172,405			515,590			504,415
General and administrative		281,993			284,724			896,047			1,010,989
Sales and marketing		90,303			50,700			270,930			184,660
		499,724			507,829			1,682,567			1,700,064

Loss from operations		(497,624	)		(507,829	)		(1,680,385	)		(1,688,064	)

Other income (expense)
Interest expense		(169,743	)		(183,184	)		(749,042	)		(474,727	)
Change in fair value of derivative and warrant liabilities		(156,769	)		753,538			(419,390	)		353,315
Amortization of derivative and warrant liabilities discount		(115,027	)		(176,661	)		(351,323	)		(699,957	)
Amortization of deferred debt issuance costs and original issue discount		(43,481	)		(90,130	)		(168,931	)		(262,520	)
Gain on extinguishment of debt		213,584			-			460,658			119,369
Income on foreign exchange transactions		(6,079	)		-			(1,388	)		-
Other expense, net		(1,961	)		(4,893	)		(11,815	)		(9,527	)
		(279,476	)		298,670			(1,241,231	)		(974,047	)

Net loss	$	(777,100	)	$	(209,159	)	$	(2,921,616	)	$	(2,662,111	)

Basic and diluted loss per share	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)

Weighted average common shares outstanding:
Basic and diluted		712,309,055			198,039,192			664,896,833			196,519,704

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

4

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statement of Shareholders' Deficit

For the nine months ended September 30, 2016

(unaudited)

									Additional						Total
	Series AA Super Voting Preferred				Common Stock				Paid-In			Accumulated			Shareholders'
	Shares		Amount		Shares		Amount		Capital			Deficit			Deficit

Balance December 31, 2015		-	$	-		431,247,207	$	4,312,472	$	38,166,818		$	(49,498,952	)	$	(7,019,662	)

Conversion of convertible debt		-		-		305,277,793		3,052,778		(2,553,014	)		-			499,764
Non cash stock option expense		-		-		-		-		120,003			-			120,003
Non cash issuance of warrant for consulting services		-		-		-		-		1,652			-			1,652
Issuance of Series AA Super Voting Preferred Stock		3,000		3		-		-		24,997			-			25,000
Special dividend related to Series AA Super
Voting Preferred Stock		-		-		-		-		(25,000	)		-			(25,000	)
Net loss		-		-		-		-		-			(2,921,616	)		(2,921,616	)

Balance September 30, 2016		3,000	$	3		736,525,000	$	7,365,250	$	35,735,456		$	(52,420,568	)	$	(9,319,859	)

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

5

SpectraScience, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2016			2015
Operating activities:
Net loss	$	(2,921,616	)	$	(2,662,111	)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization and depreciation		121,026			124,329
Non-cash interest		31,364			-
Non-cash issuance of stock options and warrants		120,004			140,370
Non-cash expense related to commitment of common stock in excess of authorized shares		107,107			-
Loss on issuance of variable rate notes		84,584			-
Amortization of derivative and warrant liabilities discount		351,323			699,957
Amortization of deferred debt issuance costs and original issue discount		168,931			262,520
Issuance of common stock for services		700			-
Change in fair value of derivative and warrant liabilities		419,390			(353,315	)
Gain on extinguishment of debt		(460,658	)		(119,369	)
Changes in assets and liabilities:
Accounts receivable		6,111			-
Inventory		(45,744	)		(20,224	)
Prepaid expense and other assets		(34,170	)		(64,146	)
Accounts payable		244,149			(43,245	)
Accrued expenses		580,645			481,516
Net cash used in operating activities		(1,246,854	)		(1,553,718	)

Investing activities:
Net cash used in investing activities		-			-

Financing activities:
Proceeds from issuance of convertible notes payable		300,000			1,520,250
Proceeds from issuance of notes payable to related parties		35,000			-
Proceeds from issuance of secured notes payable		850,000			-
Proceeds from exercise of stock options		-			4,500
Debt issuance costs		(63,712	)		(139,500	)
Net cash provided by financing activities		1,121,288			1,385,250

Net decrease in cash		(125,566	)		(168,468	)

Cash, beginning of year		127,493			223,529

Cash, end of period	$	1,927		$	55,061

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	-		$	8,000
Income taxes	$	-		$	-
Non Cash Investing and Financing Activities:
Conversion of convertible notes and accrued interest to common stock	$	499,763		$	157,839
Exchange of convertible notes and accrued interest to new notes	$	103,551		$	-
Warrant valuation on issuance of convertible debentures	$	-		$	225,700
Valuation of Series AA Super Voting Preferred Stock	$	25,000			-
Conversion of accrued interest to note payable	$	-		$	15,000

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

6

S pectraScience, Inc.

Notes to Unaudited Condensed Financial Statements

1. Nature of Business and Basis of Presentation

Description of Business

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

The Company has developed and received the European CE mark approval to market a proprietary, minimally invasive technology that optically illuminates tissue in real-time to distinguish between normal, pre-cancerous or cancerous cells without the need to remove the subject cell tissue from the body to make such determinations. The WavSTAT System operates by using cool, safe laser light to optically illuminate and analyze tissue, enabling the physician to make an instant diagnosis during endoscopy when screening for cancer, and if warranted, to begin immediate treatment during the same procedure. Beginning in December 2011, the WavSTAT 4 version of the product began to be sold in the European Union for 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 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 three and nine month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These statements should be read in conjunction with the financial statements and related notes, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

7

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

Going Concern

Historically, the Company’s sources of cash have come from the issuance and sale of equity securities and debentures. The Company’s historical cash outflows have been primarily used for operating activities including research, development, administrative and sales activities. Fluctuations in the Company’s working capital due to timing differences of its cash receipts and cash disbursements also impact its cash flow. The Company expects to incur significant additional operating losses through at least the end of 2016, as it completes proof-of-concept trials, conducts outcome-based clinical studies and increases sales and marketing efforts to commercialize the WavSTAT4 System in Europe. If the Company does not receive sufficient funding, there is substantial doubt that the Company will be able to continue as a going concern. The Company may incur unknown expenses or may not be able to meet its revenue forecast, and one or more of these circumstances would require the Company to seek additional capital. The Company may not be able to obtain equity capital or debt funding on terms that are acceptable. Even if the Company receives additional funding, such proceeds may not be sufficient to allow the Company to sustain operations until it becomes profitable and begins to generate positive cash flows from operations.

As of September 30, 2016, the Company had a working capital deficit of $10,503,770 and cash of $1,927, compared to a working capital deficit of $8,324,600 and cash of $127,493 as of December 31, 2015. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two-year period from the date of the Engagement Agreement. Subsequent to March 31, 2013, the Company has engaged other agents to assist the Company with raising capital and has commenced raising capital on its own. During the nine months ended September 30, 2016, the Company raised $1,185,000, net of transaction costs of $34,000, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

The holders of Convertible Debentures control the conversion of the Convertible Debentures and certain of the Convertible Debentures were not converted at their maturity constituting a potential default on the matured, but unconverted, Convertible Debentures. In the event of such default, principal, accrued interest and other related costs are immediately due and payable in cash. As of September 30, 2016, Convertible Debentures with a face value of $5,473,032 held by 75 individual investors are in default. None of these investors have served notice of default on the Convertible Debentures held by them.

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

8

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

2. Summary of Significant Accounting Policies

Revenue recognition

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

Consolidation

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

Risks and Uncertainties

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

Use of Estimates

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

Inventory Valuation

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

9

SpectraScience, Inc.

Notes to Unaudited Condensed 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 as a result 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 method and a liability is recorded as though the obligations would be settled using some means other than stock.

Stock-Based Compensation

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

The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards

10

SpectraScience, Inc.

Notes to Unaudited Condensed 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, 2016, the Company had one stock-based employee compensation plan under which it makes grants, the 2011 Equity Incentive Plan (the “EIP”). The EIP provides for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”) and restricted stock awards to full-time employees (who may also be directors) and NQSOs and restricted stock awards to non-employee directors, consultants, customers, vendors or providers of services. The exercise price of any ISO may not be less than the fair market value of the common stock on the date of grant and the term shall not exceed ten years. The amount reserved under the 2011 EIP is 40,000,000 shares of common stock. At September 30, 2016, the Company had options outstanding exercisable into up to 34,168,800 shares of stock under the EIP and the Company’s prior Amended 2001 Stock Plan of which up to 24,059,921 shares were exercisable. Awards under the Company’s EIP generally vest over four years.

The fair value of options granted are estimated at the date of grant using a Black-Scholes Model which includes several variables including expected life, risk free interest rate, expected stock price volatility, stock option exercise patterns and expected dividend yield. The Company also must estimate forfeitures for employee stock options. Management used the following weighted average assumptions to value stock options granted during the three and nine month periods ended September 30, 2016 and 2015:

Three months ended September 30,

Nine months ended September 30,

2016

2015

2016

2015

Expected term

None

5 years

Exercise price

None

$

0.01

Expected volatility

None

210

%

Expected dividends

None

Risk-free interest rate

None

1.48

%

Forfeitures

None

Earnings (Loss) Per Share

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

For the nine month periods ended September 30, 2016 and 2015, the following common equivalent shares were excluded from the computation of loss per share since their effects are anti-dilutive.

11

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

	September 30, 2016		September 30, 2015

Preferred Stock		3,088,000		3,085,000
Convertible debentures		111,110,776		117,229,747
Options		34,168,800		38,064,635
Warrants		131,389,332		108,251,866

Total		279,756,908		266,631,248

The following table sets forth the computation of basic and diluted loss per share for the three and nine month periods ended September 30, 2016 and 2015:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015

Numerator:
Net income (loss) for basic earnings per share	$	(777,100	)	$	(209,159	)	$	(2,921,616	)	$	(2,662,111	)
Net income (loss) for diluted earnings per share	$	(777,100	)	$	(209,159	)	$	(2,921,616	)	$	(2,662,111	)

Denominator:
Weighted average basic shares outstanding		712,309,055			198,039,192			664,896,833			196,519,704
Denominator for diluted earnings per share-
Adjusted weighted average shares		712,309,055			198,039,192			664,896,833			196,519,704

Income (loss) per share
Basic	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)
Diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)

Inventory

Inventory consisted of the following at September 30, 2016 and December 31, 2015:

	September 30, 2016		December 31, 2015

Raw materials	$	255,014	$	216,704
Finished goods		52,617		45,183
		307,631		261,887
Reserve for obsolescence		-		-
		307,631		261,887
Less long-term portion		150,000		150,000
	$	157,631	$	111,887

12

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

During the nine months ended September 30, 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 April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amended Interest – Imputation of Interest of the Accounting Standards Codification. The amended guidance requires that debt issuance costs related to a recognized debt liability, which were presented as deferred charges (assets), be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments. The accounting guidance for lessors is largely unchanged. The ASU is effective for annual and interim periods beginning after December 15, 2018. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of this guidance will have on the Company’s financial statements.

Reclassifications

Certain reclassifications have been made to the 2015 financial statements in order for them to conform to the 2016 presentation. Such reclassifications have no impact on the Company’s financial position or results of operations.

3. Liabilities

Note Payable

In November 2014, the Company issued for cash of $100,000 an unsecured note payable and a five-year warrant with an exercise price of $0.09 per share for the purchase of up to 50,000 shares of common stock. The terms of the note were a repayment of $115,000 if paid by February 18, 2015 and, if paid thereafter, the principal balance of the note was to be increased to $137,982 as of October 1, 2015 and interest accrues at 20% from October 1, 2015 until paid. The note remained outstanding at September 30, 2016 and is accruing interest at 20%. The warrant was valued at $1,659 using the Black-Scholes Pricing Model and was recorded as additional paid-in capital and expensed to non-cash interest in 2014.

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. The balance of the notes remains $35,000 at September 30, 2016.

Convertible Debentures

As of September 30, 2016, the Company has issued and outstanding Convertible Debentures (“Debentures”) with original terms of three months to one year, an interest rate ranging from 10-20% per year and an original issue discount ranging from 5% to 10% which, at the option of the holder, may convert

13

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

into common stock at initial conversion prices ranging from $0.01 to $0.099 per share. The Debentures were issued with detachable five year cashless Holders Warrants that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.02 to $0.1287 per share. In addition, the Company issued five-year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at exercise prices ranging from $0.0745 to $0.1287 per share. For debentures issued through March 31, 2013, at the option of the Debenture holder, the terms of the Debentures and Holders Warrants are subject to an exchange feature in the event that the Company issues securities with terms more favorable than those of the then outstanding Debentures and Holders Warrants. Debentures issued subsequent to March 31, 2013 do not contain such an exchange clause. The gross amount of Debentures outstanding is $6,232,345 as of September 30, 2016.

During the nine months ended September 30, 2016, the Company has issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year, interest rates ranging from 0-10% per year and original issue discounts ranging from 0-10% which contain variable conversion rates ranging from discounts of 40-50% of the Company’s common stock based on the Company’s common stock trading prices ranging from 10-25 days previous to conversion. The Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods of 0-180 days subsequent to issuance at premiums ranging from 0-50%. The gross amount of Variable Debentures outstanding is $197,451 as of September 30, 2016.

As of September 30, 2016 and December 31, 2015, the balances of the Debentures are as follows:

	September 30, 2016			December 31, 2015

Balance at beginning of period	$	6,174,760		$	4,496,602
Issuance of debentures for cash		300,000			1,970,250
Original issue discount		-			145,263
Issuance of debentures for forbearance		29,712			-
Debentures converted to common stock		(196,944	)		(437,355	)
Debentures exchanged for new debentures		122,268			-
Convertible debt		6,429,796			6,174,760
Less unamortized costs of financing		188,070			430,156
Convertible debt, net of unamortized costs	$	6,241,726		$	5,744,604

Convertible debt in default	$	5,473,032		$	4,313,199

Secured Convertible Note

During the nine months ended September 30, 2016, the Company issued for cash of $850,000 Secured Convertible Debentures (the “Debentures”) to two accredited investors. The terms of the Debentures are for three years, a conversion price of $0.01 per share and an annual interest rate of 8%. The secured interest is on all of the assets of the Company.

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

14

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

fair value. In addition, outstanding Variable Debentures contain variable conversion rates based on unknown future prices of the Company’s common stock resulting in a conversion feature. The Company measures these warrants and conversion features using a Black-Scholes option valuation model using similar assumptions to those described under “Stock-Based Compensation.” The 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 will continue to be so until the Company’s Debentures, which the convertible feature is associated with, are converted into common stock or paid in full with cash. Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its stock price increases and non-cash income when its stock price decreases.

In addition, since the number of shares issuable under the Variable Debentures are undeterminable, the Company may be required to issue shares in excess of the number of shares authorized by its shareholders. As a result, when the Company determines that is does not have sufficient shares to meet the obligations of derivative unexercised debentures, warrants and options, the derivatives must be valued using the Black Scholes Option Pricing method 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, 2016, the Company determined that it was over committed to the number of shares issuable on the exercise of outstanding debentures, stock options and warrants for approximately 266,000,000 shares. On October 23, 2016, there was an increase in authorized shares that was reflected on the September 30, 2016 Balance Sheet but was not used in the calculation to determine the over commitment of shares as of September 30, 2016.

As of September 30, 2016 and December 31, 2015, the balances of the Derivative Liability are as follows:

15

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

							Commitment
				Conversion			In Excess of
	Warrants			Feature			Authorized Stock		Total

Balance at January 1, 2015	$	764,958		$	296,881		$	-	$	1,061,839

Liability on issuance of debt and warrants		-			1,306,372			-		1,306,372
Change in fair value at year end		(704,538	)		(469,906	)		-		(1,174,444	)
Elimination of liability on conversion		-			(637,874	)		-		(637,874	)
Over commitment of stock		-			-			64,428		64,428
Balance at December 31, 2015		60,420			495,473			64,428		620,321

Liability on issuance of debt and warrants		44,394			407,209			-		451,603
Change in fair value at period end		80,395			80,495			-		160,890
Elimination of liability on conversion		-			(755,647	)		-		(755,647	)
Over commitment of stock		-			-			107,107		107,107
Balance at September 30, 2016	$	185,209		$	227,530		$	171,535	$	584,274

Debentures with warrants attached issued subsequent to March 31, 2013 did not contain an exchange provision and were accounted for using the equity method of valuing the note and warrant.

4. Shareholders’ Deficit

Common Stock

During the nine months ended September 30, 2016, holders of Convertible Debentures with a face value of $196,944 and accrued interest of $4,745 converted their debentures into 305,277,793 shares of common stock. In addition, associated with these debentures, the Company recorded a gain on extinguishment of debt of $53,038.

Warrants

During the nine months ended September 30, 2016, in conjunction with the sale of Convertible Debentures, the Company issued five-year common stock purchase warrants to acquire up to 15,000,000 shares to holders of the Debentures. These warrants have an exercise price of $0.02 per share.

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

16

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

The balance of all warrants outstanding as of September 30, 2016 is as follows:

				Weighted
				Average
				Exercise
	Warrants			Price
Outstanding at January 1, 2016		116,875,170		$	0.08
Granted		16,000,000		$	0.02
Cancelled		(1,485,838	)	$	0.08
Exercised		-		$	-
Outstanding at September 30, 2016		131,389,332		$	0.08

Exercisable at September 30, 2016		131,389,332		$	0.08

Stock Options

Options outstanding as of September 30, 2016 are as follows:

			Weighted		Weighted Average
			Average Exercise Price		Remaining Contractual		Aggregate Intrinsic
	Options		Per Share		Term (years)		Value (1)
Outstanding at January 1, 2016		34,168,800	$	0.02		8.03
Granted		-	$	-		-
Cancelled		-	$	-		-
Exercised		-	$	-		-
Outstanding at September 30, 2016		34,168,800	$	0.02		7.28	$	-

Exercisable at September 30, 2016		24,059,921	$	0.02		7.29	$	-

Weighted average fair value of options
granted during the period		-	$	-

(1)	These amounts represent the excess, if any, between the exercise price and $0.0035, the closing market price of the Company’s common stock on September 30, 2016 as quoted on the Over-the-Counter Bulletin Board under the symbol “SCIE”.

At September 30, 2016, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is $213,325, which we expect to be recognized over the next four years.

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.

17

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

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

18

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

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, 2016:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
		Identical Assets		Inputs		Inputs
		(Level 1)		(Level 2)		(Level 3)		Total

As of September 30, 2016
Derivative liability	$	-	$	-	$	227,530	$	227,530
Warrant liability		-		-		185,209		185,209
Commitment in excess of authorized stock		-		-		171,535		171,535
Total	$	-	$	-	$	584,274	$	584,274

The following table presents changes in the derivative liabilities with significant unobservable inputs (Level 3) for the nine months ended September 30, 2016:

						Commitment
	Warrant		Derivative			In Excess of		Total
	Liability		Liability			Authorized Stock		Liability
Balance December 31, 2015	$	60,420	$	495,473		$	64,428	$	620,321

Liability on issuance of debt and warrants		44,394		407,209			-		451,603

Elimination of liability on conversion		-		(755,647	)		-		(755,647	)

Change in estimated fair value (1)		80,395		80,495			-		160,890

Commitment in excess of authorized stock		-		-			107,107		107,107

Balance September 30, 2016	$	185,209	$	227,530		$	171,535	$	584,274

(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, 2016:

	Derivative Liability	Warrant Liability
Expected term	6 months to 2 years	5 years
Exercise price	$0.00025 - $0.099	$0.02 - $0.1287
Expected volatility	272% to 334%	247% to 283%
Expected dividends	None	None
Risk-free interest rate	0.37% to 1.05%	1.14% to 1.49%
Forfeitures	None	None

In computing the fair value of the derivative and warrant liability at September 30, 2016, 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.

19

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements (continued)

6. Contingencies

None

7. Subsequent Events

Variable Rate Convertible Debentures

In October and November 2016, a holder of Variable Rate Convertible Debentures with principal of $13,772 and accrued interest of $498 converted a portion of their debentures into 15,646,222 shares of common stock.

Secured Convertible Debenture

In October 2016, the Company issued for cash of $150,000 a Secured Convertible Debenture (the “Debenture”) to an accredited investor. The terms of the Debenture are for three years, a conversion price of $0.01 per share and an annual interest rate of 8%. The secured interest is on all of the assets of the Company and is shared equally with a previous secured party.

Increase in Authorized Shares

On October 23, 2016, the increase in authorized capital stock from 750,000,000 shares to 1,250,000,000 shares became effective. The increase in authorized shares has been reflected on the Company’s Balance Sheet as of September 30, 2016.

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

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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, 2015. 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, 2015.

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, 2016, 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.

21

Over the next 12 months, SpectraScience intends to:

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

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

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

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

		Begin meeting with the FDA towards the preparation and submission of a Supplemental PMA filing with the FDA and plan for additional clinical trials to support eventual approval for sale in the nited 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, 2016 and 2015

	Three Months Ended September 30,						Favorable
	2016			2015			(Unfavorable)			%

Revenue	$	4,200		$	-		$	4,200			NM
Cost of revenue		2,100			-			(2,100	)		NM
Gross profit		2,100			-			2,100			NM

Operating expenses:
Research and development		127,428			172,405			44,977			26.1	%
General and administrative		281,993			284,724			2,731			-1.0	%
Sales and marketing		90,303			50,700			(39,603	)		-78.1	%
		499,724			507,829			8,105			1.6	%

Loss from operations		(497,624	)		(507,829	)		10,205			2.0	%

Other income (expense)		(279,476	)		298,670			(578,146	)		193.6	%

Net loss	$	(777,100	)	$	(209,159	)	$	(567,941	)		-271.5	%

Revenues

There was minimal revenue during the three months ended September 30, 2016 and no revenue during the three months ended September 30, 2015. We anticipate that revenue will increase as a result of our distribution agreement with PENTAX and continuing direct sales efforts in certain locations once sufficient information has been accumulated from our MORDIS trials in Europe.

22

Cost of Revenue

There was minimal cost of revenue during the three months ended September 30, 2016 and no cost of sales during the three months ended September 30, 2015. We anticipate that as revenue increases as a result of our distribution agreement with PENTAX and continuing direct sales efforts in certain locations once sufficient information has been accumulated from our MORDIS trials in Europe, that associated costs will also increase.

Research and Development Expenses

Research and development expenses decreased by $44,977, 26.1%, to $127,428 for the quarter ended September 30, 2016 from $172,405 for the three months ended September 30, 2015. This decrease was due to a decrease in clinical 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 remained stable at $281,993 compared to $284,724 for the quarter ended September 30, 2015. We anticipate that general and administrative expenses will increase as we increase our activity in Europe.

Sales and Marketing Expenses

Sales and marketing expenses increased by $39,603, 78.1%, to $90,303 for the quarter ended September 30, 2016 from $54,700 for the quarter ended September 30, 2015. The primary reason for the increase was an increase in payroll costs related to the change in foreign currency values. 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, 2016 was expense of $279,476 compared to income of $298,670 for the quarter ended September 30, 2015. This change was due primarily to a change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluating these obligations.

23

Comparison of the Nine Months Ended September 30, 2016 and 2015

	Nine Months Ended September 30,						Favorable
	2016			2015			(Unfavorable)			%

Revenue	$	5,150		$	-		$	5,150			NM
Cost of revenue		2,968			(12,000	)		(14,968	)		-124.7	%
Gross profit		2,182			12,000			(9,818	)		-81.8	%

Operating expenses:
Research and development		515,590			504,415			(11,175	)		-2.2	%
General and administrative		896,047			1,010,989			114,942			11.4	%
Sales and marketing		270,930			184,660			(86,270	)		-46.7	%
		1,682,567			1,700,064			17,497			1.0	%

Loss from operations		(1,680,385	)		(1,688,064	)		7,679			0.5	%

Other income (expense)		(1,241,231	)		(974,047	)		(267,184	)		-27.4	%

Net loss	$	(2,921,616	)	$	(2,662,111	)	$	(259,505	)		-9.7	%

Revenues

There was minimal revenue during the nine months ended September 30, 2016 and no revenue during the nine months ended September 30, 2015. We anticipate that revenue will increase as a result of our distribution agreement with PENTAX and continuing direct sales efforts in certain locations once sufficient information has been accumulated from our MORDIS trials in Europe.

Cost of Revenue

There was minimal cost of revenue during the nine months ended September 30, 2016 compared to a negative cost of sales of $12,000 during the nine months ended September 30, 2015. The negative amount was the result of four systems coming off warranty with no associated costs. We anticipate that as revenue increases as a result of our distribution agreement with PENTAX and continuing direct sales efforts in certain locations once sufficient information has been accumulated from our MORDIS trials in Europe, that associated costs will also increase. The following table reflects the status of the warranty reserve as of September 30, 2016 and 2015:

	Three months ended September 30,
		2016		2015

Balance at the beginning of the period	$	-	$	-

Increase in warranty expense		-		-
Systems coming off warranty		-		-
Balance at the end of the period	$	-	$	-

24

Research and Development Expenses

Research and development expenses increased by $11,175, 2.2%, to $515,590 for the nine months ended September 30, 2016 from $504,415 for the nine months ended September 30, 2015. This increase was due to an increase in consulting 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 $114,942, 11.4%, to $896,047 for the nine months ended September 30, 2016 compared to $1,010,989 for the nine months ended September 30, 2015. This decrease was due primarily to a reduction in costs associated with the issuance of stock options in an amount of approximately $55,000, a reduction in legal and professional fees of approximately $45,000 and a reduction in travel and related expenses of approximately $5,000. We anticipate that general and administrative expenses will increase as we increase our activity in Europe.

Sales and Marketing Expenses

Sales and marketing expenses increased by $86,270, 46.7%, to $270,930 for the nine months ended September 30, 2016 from $184,660 for the nine months ended September 30, 2015. The primary reason for the increase was an increase in stock option expense of approximately $19,000 and an increase in payroll costs of approximately $59,000. 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, 2016 was expense of $1,241,231 compared to expense of $974,047 for the nine months ended September 30, 2015. This change was due primarily to a change in valuation of our derivative liabilities. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluating these obligations.

25

Liquidity and Capital Resources

	As of						Increase
	September 30, 2016			December 31, 2015			(Decrease)
Working Capital

Current assets	$	478,983		$	530,746		$	(51,763	)
Current liabilities		10,982,753			8,855,346			2,127,407
Working capital deficit	$	(10,503,770	)	$	(8,324,600	)	$	2,179,170

Long-term debt	$	-		$	-		$	-

Stockholders' deficit	$	(9,319,859	)	$	(7,019,662	)	$	2,300,197

	Nine Months Ended September 30,						Increase
	2016			2015			(Decrease)
Statements of Cash Flows Select Information

Net cash provided (used) by:
Operating activities	$	(1,246,854	)	$	(1,553,718	)	$	(306,864	)
Investing activities	$	-		$	-		$	-
Financing activities	$	1,121,288		$	1,385,250		$	(263,962	)

	As of				Increase
	September 30, 2016		December 31, 2015		(Decrease)
Balance Sheet Select Information

Cash	$	1,927	$	127,493	$	(125,566	)

Accounts receivable	$	950	$	7,061	$	(6,111	)

Inventory	$	307,631	$	261,887	$	45,744

Accounts payable and accrued expenses	$	3,133,771	$	2,352,439	$	781,332

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 2016, 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.

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As of September 30, 2016, the Company had a working capital deficit of $10,503,770 and cash of $1,927, compared to a working capital deficit of $8,324,600 and cash of $127,493 as of December 31, 2015. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd., which Engagement Agreement was amended in July 2012. Under the Engagement Agreement, Laidlaw agreed to assist the Company in raising up to $20.0 million in capital over a two-year period from the date of the Engagement Agreement. Subsequent to March 31, 2013, the Company has engaged other agents to assist the Company with raising capital and has commenced raising capital on its own. During the nine months ended September 30, 2016, the Company raised $1,185,000, net of transaction costs of $34,000, under these agreements. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreements occur as expected, or if the Company is otherwise able to raise a similar level of funds, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise capital or debt on terms that are acceptable.

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, 2015.

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

	Date of		Common Shares		Source of
Common Stock	Issuance		Issued		Payment		Amount
		7/6/2016		3,400,000		Conversion of debt	$	13,600
		7/13/2016		4,626,797		Conversion of debt	$	18,507
		7/20/2016		5,700,000		Conversion of debt	$	21,090
		7/27/2016		3,000,000		Conversion of debt	$	9,300
		7/29/2016		5,838,957		Conversion of debt	$	22,188
		8/4/2016		8,000,000		Conversion of debt	$	25,600
		8/10/2016		12,000,000		Conversion of debt	$	42,000
		8/15/2016		15,782,365		Conversion of debt	$	47,347
		8/26/2016		5,000,000		Conversion of debt	$	17,500

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

Item 3. Defaults Upon Senior Securities

As of November 14, 2016, there are Unsecured Convertible Debentures with a face value of $5,473,032 held by 75 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, 2016, 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

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Item 6.		Exhibits

3.1		Amended and Restated Articles of Incorporation dated August 2, 2004

3.2		Certificate of Amendment to Articles of Incorporation dated September 21, 2009

3.3		Amendment to Amended and Restated Articles of Incorporation dated July 13, 2012

3.4		Amendment to Amended and Restated Articles of Incorporation dated August 21, 2014

3.5		Amendment to Amended and Restated Articles of Incorporation dated August 8, 2016

3.6		Amended Bylaws dated November 15, 2012

3.7		Certificate of Designations Series A dated June 12, 2007

3.8		Certificate of Designaitons Series B dated June 22, 2009

3.9		Certificate of Designations Serices C dated April 9, 2010

3.10		Certificate of Designations Series AA Super Voting dated April 15, 2016

3.11		Certificate of Designatins Series A, Series B, Series C, Series AA dated June 28, 2016

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.

101.0		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.

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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, 2016	/s/ Michael P. Oliver
	Michael P. Oliver
	President and Chief Executive Officer
	(Principal executive officer)

Date: November 14, 2016	/s/ Lowell W. Giffhorn
	Lowell W. Giffhorn
	Chief Financial Officer
	(Principal financial officer and principal accounting officer)