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 March 31, 2012

Commission file number 0-13092

SPECTRASCIENCE, INC.

(Exact name of registrant

as specified in its charter)

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

11568 Sorrento Valley Rd., Suite 11

San Diego, California 92121

(Address of principal executive offices, including zip code)

(858) 847-0200

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer        o	Accelerated filer                  o
Non-accelerated filer           o	Smaller reporting company        x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on May 10, 2012 was 108,041,084.

SPECTRASCIENCE, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2012

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	15
Item 5.	Other Information	15
Item 6.	Exhibits	15
SIGNATURES		16

PART I     FINANCIAL INFORMATION:

Item 1. Financial Statements (Unaudited)

SpectraScience, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	1,004,933		$	250,723
Accounts receivable, net		26,735			26,735
Inventories		444,770			367,838
Deferred debt issuance costs		690,487			-
Prepaid expenses and other current assets		26,543			24,493
Total current assets		2,193,468			669,789
Fixed assets, net		214,034			244,275
Patents, net		2,378,237			2,432,732
TOTAL ASSETS	$	4,785,739		$	3,346,796
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	595,976		$	695,809
Convertible debt		2,350,526			-
Discount		(1,960,161	)		-
Convertible debt, net		390,365			-
Derivative liability		2,025,559			-
Accrued expenses		115,068			145,356
Total current liabilities		3,126,968			841,165
Warrant liability		2,205,563			-
TOTAL LIABILITIES		5,332,531			841,165
COMMITMENTS
SHAREHOLDERS’ EQUITY
Series B Convertible Preferred Stock, $.01 par value:
Authorized – 2,585,000 shares; shares issued and outstanding – 2,585,000 shares at March 31, 2012 and December 31, 2011, liquidation value of $517,000 plus accumulated and unpaid dividends of $106,931 as of March 31, 2012 and December 31, 2011		25,850			25,850
Series C Convertible Preferred Stock, $.01 par value:
Authorized – 1,000,000 shares; shares issued and outstanding 1,000,000 shares at March 31, 2012 and December 31, 2011, $200,000 liquidation value		10,000			10,000
Common stock, $.01 par value:
Authorized — 175,000,000 shares; Issued and outstanding—108,041,084 shares at March 31, 2012 and December 31, 2011		1,080,411			1,080,411
Additional paid-in capital		31,022,508			30,922,930
Accumulated deficit		(32,685,561	)		(29,533,560	)
TOTAL SHAREHOLDERS’ EQUITY		(546,792	)		2,505,631
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,785,739		$	3,346,796

Note: The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements.

See accompanying notes to unaudited financial statements.

1

SpectraScience, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Revenue	$	-		$	-
Cost of revenue		-			-
Gross profit		-			-
Operating expenses:
Research and development		380,286			211,679
General and administrative		547,645			547,110
Sales and marketing		108,696			95,899
Total operating expenses		1,036,627			854,688
Loss from operations		(1,036,627	)		(854,688	)
Other expense (income)
Interest expense		38,028			-
Change in fair value of derivative and warrant liabilities		1,582,406			-
Amortization of derivative and warrant liability discount		351,425			-
Amortization of deferred debt issuance costs and original issue discount		143,571			-
Other expense, net		(56	)		(157	)
		(2,115,374	)		(157	)
Net (Loss)	$	(3,152,001	)	$	(854,845	)
Basic and diluted net (loss) per share	$	(0.03	)	$	(0.01	)
Weighted average common shares outstanding		108,041,084			108,019,251

See accompanying notes to unaudited financial statements.

2

SpectraScience, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2012

(Unaudited)

	Preferred Stock				Common Stock				Additional Paid-In		Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity
Balance, December 31, 2011		3,585,000	$	35,850		108,041,084	$	1,080,411	$	30,922,930	$	(29,533,560	)	$	2,505,631
Stock based compensation – consultants										7,121					7,121
Stock based compensation – employees										92,457					92,457
Net loss												(3,152,001	)		(3,152,001	)
Balance, March 31, 2012		3,585,000	$	35,850		108,041,084	$	1,080,411	$	31,022,508	$	(32,685,561	)	$	(546,792	)

See accompanying notes to unaudited financial statements.

3

SpectraScience, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended  March 31,
	2012			2011
OPERATING ACTIVITIES:
Net loss	$	(3,152,001	)	$	(854,845	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		88,906			79,968
Amortization of derivative and warrant liabilities discount		351,425			-
Amortization of deferred debt issuance costs and original issue discount		143,571			-
Change in the fair value of derivative and warrant liabilities		1,582,406			-
Stock-based compensation employees		92,457			165,774
Stock-based compensation consultants		7,121			6,051
Impairment of LUMA Equipment		-			12,364
Fair market value of common stock and warrants issued for services		-			8,000
Changes in operating assets and liabilities:
Inventory		(76,932	)		5,251
Prepaid expenses and other assets		(2,050	)		36,616
Accounts payable		(99,833	)		42,961
Accrued expenses		(30,288	)		(78,286	)
Net cash (used in) operating activities		(1,095,218	)		(576,146	)
INVESTING ACTIVITIES:
Redemption of certificates of deposit		-			1,998,974
Purchases of fixed assets		(4,170	)		-
Net cash provided by (used in) investing activities		(4,170	)		1,998,974
FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt		2,233,000			-
Payment of debt issuance costs		(379,402	)		-
Net cash provided by financing activities		1,853,598			-
Net increase in cash and cash equivalents		754,210			1,422,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		250,723			1,764,803
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,004,933		$	3,187,631

See accompanying notes to unaudited financial statements.

4

SpectraScience, Inc.

Notes to Unaudited Condensed Financial Statements

March 31, 2012

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 subsidiary Luma Imaging Corp. (“LUMA”). From 1996, the Company primarily focused on developing the WavSTAT Optical Biopsy System (the “WavSTAT System”).

The Company has developed and received 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 WavSTAT4 Optical Biopsy System operates by using cool, safe UV laser light to optically illuminate and analyze tissue, enabling the physician to make an instant diagnosis during endoscopy when screening for cancer, and if warranted, to begin immediate treatment during the same procedure. Beginning in December 2011, the WavSTAT 4 began to be sold in the European Union for colon cancer detection.

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

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

Basis of Presentation

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q as they are prescribed for smaller reporting companies. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

Liquidity and Capital Resources

As of March 31, 2012, the Company had negative working capital of approximately $934,000 and cash and cash equivalents of approximately $1.0 million. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd. (“Laidlaw”). Under the Engagement Agreement, Laidlaw will assist the Company in raising up to $20.0 million in capital over the next two years. During the three-month period ended March 31, 2012, the Company raised approximately $1.85 million under this agreement. The Company anticipates that its convertible debt will be converted into shares of common stock and that, at the time of this conversion, any remaining derivative and warrant liabilities will be reclassified as equity. As a result, the Company expects that these liabilities will have no effect on our cash position. However, if the Company does not receive additional funds in a timely manner, the Company may not be able to continue as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreement occur as expected, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. Historically, the Company’s sources of cash have come from the issuance and sales of equity securities and interest income. The Company’s historical cash outflows have been primarily used for operating activities including research, development, administrative and sales activities. Fluctuations in the Company’s working capital due to timing differences of its cash receipts and cash disbursements also impact our cash flow. The Company expects to incur significant additional operating losses through at least the remainder of 2012, as it completes proof-of-concept trials, begin outcome-based clinical studies and increase sales and marketing efforts to commercialize the WavSTAT4 Systems in Europe. 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.

5

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

2. Summary of Significant Accounting Policies

Revenue recognition

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

Consolidation

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

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, assumptions used to value stock options and warrants, assumptions used to value the common stock issued and the assets acquired in the LUMA acquisition and the realization of intangible assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

Highly liquid investments with original maturities of three months or less when purchased are considered to be cash equivalents. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalent accounts

Inventory Valuation

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

6

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.

Warrants/Embedded Derivatives

The Company has outstanding Warrants in conjunction with its convertible debt.  Due to certain features of these instruments, the related liability warrants are recorded at fair value at issuance, using the Black-Scholes option valuation model, and will continue to be recorded at fair value each subsequent balance sheet date. Any change in value between reporting periods will be recorded on the statement of operations at each reporting date. The liability warrants will remain until such time as they are exercised or the related convertible debt matures when they will be adjusted to fair value and reclassified from liabilities to equity.

The Company has convertible features (embedded derivatives) in its convertible debt. Due to certain features of these instruments, the embedded derivatives are recorded at fair value and classified as liabilities on the balance sheet. The embedded derivatives will continue to be recorded at fair value each subsequent balance sheet date. Any change in value between reporting periods will be recorded on the statement of operations at each reporting date. These embedded derivatives will remain until such time as they are exercised or the convertible debt matures at which time they will be adjusted to fair value and reclassified from liabilities to equity.

Fair Value Measurement

In general, fair value measurements are based upon quoted market prices, where available. If quoted market prices are not available, fair value measurements are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and require some degree of judgment regarding interest rates, credit risk, prepayments and other factors. The use of different assumptions or estimation techniques may have a significant effect on the fair value amounts reported.

Recent Accounting Pronouncements

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards.  This guidance includes amendments that clarify the application of existing fair value measurement requirements, in addition to other amendments that change principles or requirements for measuring fair value and for disclosing information about fair value measurements.  This guidance is effective for interim and annual periods beginning after December 15, 2011.  The adoption of this guidance primarily impacted the Company’s disclosures, but otherwise did not have a material impact on the Company’s consolidated financial statements.

Stock-Based Compensation

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

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

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

7

As of March 31, 2012, 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 5,000,000 shares of common stock.  At March 31, 2012, the Company had outstanding 16,320,000 options under the EIP and the Company’s prior Amended 2001 Stock Plan representing approximately 15% of the Company’s outstanding shares (6,990,103 of which were exercisable), with 1,175,000 available for future issuance under the 2011 EIP. Awards under the Company’s EIP generally vest over four years.

The fair value of options granted were estimated at the date of grant using a Black-Scholes Model which includes several variables including expected life, risk free interest rate, expected stock price volatility, stock option exercise patterns and expected dividend yield. The Company also must estimate forfeitures for employee stock options. These models and assumptions are emerging and may change future expenses by increasing or decreasing stock-based compensation expense. Management used the following weighted average assumptions to value stock options granted during the three months ended March 31, 2012 and 2011:

	2012		2011
Expected life	5 Years		5 Years
Risk-free interest rate		.85%		2.19%
Expected volatility		113%		115%
Expected dividend yield		0%		0%

In addition to the above, management estimated the forfeitures on employee options under the EIP would have negligible effects because such forfeitures would be a very small percentage. Management believes that options granted have been to a group of individuals that have a high desire to see the Company succeed and have aligned themselves to that end.

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

The risk-free interest rates are the five-year U.S. Treasury rates as published at the time of making the calculations.

Volatility is a calculation based on the Company’s stock price since the beginning of the successor company. Management computed and tested this volatility calculation for reasonableness and found it to be acceptable based on a number of factors including the Company’s current market capitalization, comparison to other similar companies in its area of interest, the current early revenue stage of the Company and management’s estimate of the net present value of forward looking profits that has been compiled (for which there is no assurance).

Information with respect to stock option activity is as follows:

				Outstanding Options
	Options Available For Grant			Plan Options Outstanding		Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
December 31, 2011		1,700,000			15,795,000	$	0.20		8.20		-
Options granted		(525,000	)		525,000	$	0.09		9.90		-
Outstanding at March 31, 2012		1,175,000			16,320,000	$	0.20		8.01		-
Exercisable at March 31, 2012					6,990,103	$	0.28		6.91		-

There were no options exercised during the three months ended March 31, 2012 and 2011. At March 31, 2012, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is approximately $798,000, which we expect to be recognized over the next three years.

8

Inventories

Inventories consisted of the following at March 31, 2012 and December 31, 2011:

	March 31, 2012		December 31, 2011
Raw materials	$	57,782	$	225,729
Finished goods		386,988		142,109
Totals	$	444,770	$	367,838

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period of computation. Diluted earnings (loss) per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and only if the additional common shares would be dilutive. Basic and diluted loss per share are the same for the three month periods ended March 31, 2012 and 2011, since any additional common stock equivalents would be antidilutive. Potentially dilutive shares of common stock that have been excluded from the calculation of the weighted average number of dilutive common shares for the three months ended March 31, 2012 include stock options to purchase 16,320,000 shares of common stock, stock options reserved for issuance of 1,175,000, warrants to purchase 53,397,411 shares of common stock, convertible debt convertible into 41,021,402 shares of common stock and preferred stock convertible into 3,585,000 shares of common stock. If converted under the treasury method, these instruments would have resulted in 31,257,478 additional equivalent common shares outstanding.

3. Liabilities

Convertible Debentures

For the three-month period ended March 31, 2012, the Company issued Convertible Debentures (“Debentures”) at a face amount of $2,350,526. At March 31, 2012, the unamortized discount of $1,960,161 consisted of a discount on the derivative liability of $966,340, discount on the warrant liability of $895,164 and original issue discount of $98,657. The discount will be amortized over the remaining term of the Debentures. The Debentures have a term of 6 months, accrue interest at a rate of 20% per year, carry an original issue discount of 5% and will convert into common stock at an initial conversion price of $0.0573 per share at maturity. The Debentures were issued with detachable five-year cashless warrants (“Holders Warrants”) that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price of $0.0745 per share. In addition, the Company issued five-year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price of $0.0745 per share. At March 31, 2012, there were Debentures, Holders Warrants and Agent Warrants convertible into 41,021,402, 20,510,701 and 6,153,210 shares of common stock, respectively. The conversion price of the Debentures and the exercise price of the warrants are subject to an adjustment feature in the event that the Company issues securities for less than the conversion price of the Debentures or the exercise price of the Holders Warrants and Agent Warrants. The accounting for the adjustment features of the conversion price and the warrant exercise price is described separately below under, “Warrant Liability” and “Derivative Liability”. The Company received cash proceeds of $1,851,098, net of $117,526 in original issue discount and $379,402 in transaction costs upon issuance of the Debentures. On March 31, 2012, if converted, the value of the Debentures would exceed their fair value by approximately $1,752,000.

Warrant Liability

The Company issued convertible Debentures with Holders Warrants and Agent Warrants that include a possible exercise adjustment feature in the event that we issue securities for consideration less than that offered with the warrants (referred to as “Derivative Warrants”). Effective January 1, 2009, the accounting guidance regarding derivative warrants changed and required that certain of the Company’s warrants be recorded as a liability and measured at fair value recorded in earnings. The Company records the fair value of these warrants in its statement of operations in the line “Change in fair value of derivative and warrant liabilities”. The Company measures these warrants using a modified Black-Scholes option valuation model using similar assumptions to those described herein under, “Stock Based Compensation.” For the three-month period ended March 31, 2012 the Company recorded non-cash expense and an adjustment to warrant liability related to these warrants of approximately $875,000. At March 31, 2012, there were exercisable warrants to purchase 26,663,911 shares of common stock subject to this price adjustment feature. The time period over which the Company will be required to evaluate the fair value of these warrants is approximately six months. Upon inception of the Debentures, the Company recorded a Warrant Liability of $1,508,081 and an initial fair value non-cash expense of $380,334. For the three-month period ending March 31, 2012, the Company recorded non-cash expense of $317,148 which represents the change in the fair value of the Warrant Liability from inception to March 31, 2012, resulting in a Warrant Liability amount of $2,205,563.

The Company computes the fair value of the warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the warrant liability is the Company’s stock price, which is subject to significant fluctuation and is not under the Company’s control. The resulting effect on the Company’s net loss is therefore subject to significant fluctuation and will continue to be so until the Company’s Convertible Debentures, which the warrants are associated with, matures (approximately six months). 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.

9

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, the Company’s fair value estimates could be materially different in the future.

Derivative Liability

During the three-month period ended March 31, 2012, the Company issued convertible Debentures with a conversion price that includes a possible exercise adjustment feature in the event that it issues securities for consideration less than that offered with the convertible Debentures (referred to as “Derivative Liabilities”). The Company records the fair value of the conversion feature in its income statement of operations in the line “Change in fair value of derivative and warrant liabilities.” The Company measures the conversion feature using a modified Black-Scholes option valuation model using similar assumptions to those described herein entitled, “Stock Based Compensation.” For the three-month period ended March 31, 2012 the Company recorded non-cash expense and liability related to this conversion feature of approximately $2,026,000. At March 31, 2012, there were convertible shares to purchase 41,021,402 shares of common stock subject to this price adjustment feature. The time period over which the Company will be required to evaluate the fair value of this conversion feature is approximately six months. Upon inception of the Debentures, the Company recorded a Derivative Liability of $1,140,635 and an initial fair value non-cash expense of $432,685. For the three-month period ending March 31, 2012, the Company recorded non-cash expense of $452,239 which represents the change in the fair value of the Derivative Liability from inception to March 31, 2012, resulting in a Derivative Liability amount of $2,025,559 at March 31, 2012.

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

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, the Company’s fair value estimates could be materially different in the future.

4. Shareholders’ Equity

Stock Options

In February 2012, the Company granted a stock option to purchase 500,000 shares of common stock at an exercise price of $0.09 per share to its European Director of Business Development. The option vests 25% at grant and 1/36 of the remaining grant amount monthly for three years. The grant was deemed to be exempt from registration under either Section 4(2) of the Securities Act of 1933 or Rule 506 under Regulation D as an issuance not involving a public offering.

In March 2012, the Company granted a stock option to purchase 25,000 shares of common stock at an exercise price of $0.10 per share to a contractor. The option vests 25% at March 31, 2013 and 1/36 of the remaining amount monthly for three years. The grant was deemed to be exempt from registration under either Section 4(2) of the Securities Act of 1933 or Rule 506 under Regulation D as an issuance not involving a public offering.

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.

10

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

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

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
As of March 31, 2012
Derivative liability	$	-	$	-	$	2,025,559	$	2,025,559
Warrant liability		-		-		2,205,563		2,205,563
Total	$	-	$	-	$	4,231,122	$	4,231,122

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the quarter ended March 31, 2012:

	Liabilities
Beginning balance, December 31, 2011	$	-
Issuance of convertible debt and warrants resulting in derivative and warrant liabilities		2,648,716
Change in the estimated fair value		1,582,406
Ending balance, March 31, 2012	$	4,231,122

6. Contingencies

None

7. Subsequent Events

None

11

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, near term operating goals, expectations regarding the market for our products and beliefs with respect to opportunities and industry conditions in those markets, beliefs about our products and expectations with respect to their performance and acceptance, regulatory goals and developments, future financial position, expectations with respect to future cash needs and the sufficiency of our working capital and expectations regarding operating losses for the remainder of the current fiscal year, and involve risks and uncertainties. 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. Factors that could cause or contribute to such differences include, but are not limited to, changes in law or regulatory policies, unanticipated competition from other similar businesses, adverse outcomes from litigation, unexpected employee departures or disruptions, adverse market and general economic factors and other factors described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. 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, 2011.

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 Laser Induced Fluorescence technology for worldwide clinical use. The WavSTAT System carries the CE mark designation which allows for its sale and marketing in the European Union for the diagnosis of cancer. The Company’s second planned application of this technology for detecting early stage esophageal cancer is presently undergoing a clinical trial to determine its marketability. Upon successful completion of the trial, the Company plans 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. The Company believes it has a strong intellectual property portfolio that will allow it to continue to expand its 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 past 12 months, SpectraScience spent a majority of its time and significant resources redesigning and manufacturing its improved WavSTAT4 Optical Biopsy System. Improvements included a redesign of the system to make it easier to use and the development of a new diagnostic algorithm that the Company believes is more accurate and reliable. The WavSTAT4 completed production and qualified for sale in the European Union under the CE Mark in December 2011.

Over the next 12 months, SpectraScience intends to:

· Market and sell the WavSTAT4 Optical Biopsy System colon cancer diagnostic application in the European Union;

· Work to establish a strategic distribution partnership, preferably with a large endoscope manufacturer, to market and sell the WavSTAT4 Optical Biopsy System in international markets for the detection and treatment of colon cancer and pre-cancer;

· Continue WavSTAT4 System clinical trials related to the diagnosis of esophageal cancer with a goal to introduce an esophageal application in the European Union in early 2013;

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

· Begin WavSTAT4 clinical trials for diagnosis of colon cancer, the goal of which is the preparation of a Supplemental PMA filing with the FDA for approval for sale in the United States;

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

· Continue to expand and refine our intellectual property portfolio.

12

Results of Operations

Three Months Ended March 31, 2012 and 2011

The Company recognized no revenue for the three months ended March 31, 2012 and 2011, respectively. The lack of revenue in the current three-month period is because of the Company’s focus on the introduction of the improved WavSTAT 4 System in Europe and its efforts to establish new distribution channels in the European Union.

Total operating expenses increased from approximately $855,000 to $1,037,000, an increase of approximately $182,000 for the three-month period ended March 31, 2012 as compared to the three-month period ended March 31, 2011. This overall increase was comprised of approximate increases in research and development expense of $168,000, $1,000 in general and administrative expense and $13,000 in sales and marketing expense. Non-operating expense increased approximately $2,115,000 as a result of non-cash expenses related to convertible Debenture issuance comprised of approximate increases in warrant and derivative liability expense of $1,582,000, increased amortization of debt discount of approximately $351,000 and increased amortization of debt issuance costs and original issue discount of approximately $144,000.

Research and development expenses increased approximately $168,000 for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. Overall research and development expenses for the comparative periods were approximately $380,000 and $212,000, respectively. The Company incurred approximate increases in engineering development expense of $116,000, payroll expense of $44,000, clinical trials expense of $13,000 and all other expense of $15,000, offset by approximate decreases in consulting expense of $20,000. The increase in engineering development expense reflected continued refinement of the WavSTAT4 System while the increase in all other expenses was a result of increased development efforts related to the development of our esophageal diagnostic application.

General and administrative expenses for the three months ended March 31, 2012 and 2011 were approximately $548,000 and $547,000, respectively. The approximate $1,000 increase for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was due to approximate increases in payroll expense of $38,000, investor relations expense of $34,000, depreciation expense of $17,000, rent expense of $14,000, insurance expense of $12,000 and all other expense of $7,000, offset by approximate decreases in stock option expense of $73,000, consulting expense of $28,000 and financial amortization expense of $20,000. Approximate expense increases were a result of increased overall business activity while the reduction in stock option expense reflected higher prior period expense because of stock option grants issued in the prior three-month period.

Sales and marketing expenses for the three months ended March 31, 2012 and 2011 were approximately $109,000 and $96,000, respectively. The increase of approximately $13,000 was primarily due to approximate increases of $12,000 in travel expense and $10,000 in stock compensation expense, offset by an approximate decrease of $9,000 in consulting expense. The increases are generally a result of the Company beginning the process of the introduction of the WavSTAT 4 System into the European Union.

As a result of the above, the approximate net operating loss for the three months ended March 31, 2012 and 2011 was $1,037,000 and $855,000, respectively.  Of the net operating loss for the quarter ended March 31, 2012, approximately $100,000 was comprised of non-cash stock-option expense.

Non-cash other expense increased approximately $2,115,000 for the three-month period ended March 31, 2012 as compared to the three-month period ended March 31, 2011. This increase was due to the issuance of approximately $2,351,000 face value of convertible debentures during the quarter ended March 31, 2012. Provisions of the convertible debentures required the classification of certain features as liabilities which are re-measured at fair value at the end of each reporting period. As a result, certain components of the convertible debentures have been classified as liabilities and debt discounts, with the change in fair value of some of these components and the amortization of resulting discounts being reflected on the income statement as non-cash interest expense. For the period ended March 31, 2012, the Company recognized increases of $1,582,000 as result of the change in warrant and derivative liabilities fair value, $351,000 in amortization of discounts, $144,000 in amortization of original issue discount and debt issuance costs and $38,000 in interest expense.

As a result of the above, the net loss increased by $2,297,000 for the three months ended March 31, 2012 and 2011 from $855,000 to $3,152,000.  Of the net loss for the quarter ended March 31, 2012, $2,215,000 was comprised of non-cash other expense.

13

Liquidity and Capital Resources

As of March 31, 2012, the Company had negative working capital of approximately $934,000 and cash and cash equivalents of approximately $1.0 million, compared to negative working capital of approximately $171,000 an cash and cash equivalents of approximately $251,000 as of December 31, 2011. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd. Under the Engagement Agreement, Laidlaw will assist the Company in raising up to $20.0 million in capital over the next two years. For the three-month period ending March 31, 2012, the Company issued Convertible Debentures (the “Debentures”) at a face amount of $2,350,526. The Debentures have a term of six months, accrue interest at a rate of 20% per year, carry and original issue discount of 5% and will convert into common stock at an initial conversion price of $0.0573 per share. The Debentures were issued with detachable five-year cashless warrants (Holders Warrants”) that allow the holders to purchase one share of common stock for each two shares available under the converted Debentures at an exercise price of $0.0745 per share. In addition, the Company issued five-year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price of $0.0745 per share. The Company anticipates that its convertible debt will be converted into shares of common stock and that, at the time of this conversion, any remaining derivative and warrant liabilities will be reclassified as equity. As a result, the Company expects that these liabilities will have no effect on our cash position.

During the three-month period ended March 31, 2012, the Company raised approximately $1.85 million under the Engagement Agreement pursuant to the offering of Debentures and Holders Warrants described above. However, if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreement occur as expected, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue expectations which 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 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.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

In addition to the critical policies disclosed in the Company’s 10-K for period ended December 31, 2011, the policy below related to warrants and embedded derivatives is considered a critical accounting policy.

Warrants/Embedded Derivatives

The Company has outstanding Warrants in conjunction with its convertible debt.  The related liability warrants are recorded at fair value at issuance, using the Black-Scholes option valuation model, and will continue to be recorded at fair value each subsequent balance sheet date. Any change in value between reporting periods will be recorded on the statement of operations at each reporting date. The liability warrants will remain until such time as they are exercised or the related convertible debt matures when they will be adjusted to fair value and reclassified from liabilities to equity.

The Company has convertible features (embedded derivatives) in its convertible debt. The embedded derivatives are recorded at fair value and classified as liabilities on the balance sheet. The embedded derivatives will continue to be recorded at fair value each subsequent balance sheet date. Any change in value between reporting periods will be recorded on the statement of operations at each reporting date. These embedded derivatives will remain until such time as they are exercised or the convertible debt matures at which time they will be adjusted to fair value and reclassified from liabilities to equity.

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.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

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.

14

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, 2011.

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

On December 16, 2011, the Company entered into an Engagement Agreement (the “Agreement”) with Laidlaw. Under the Agreement, Laidlaw will provide the Company financial advisory, strategic financial planning and fundraising services. The terms of the Agreement provide for the issuance of five-year warrants to Laidlaw to purchase 6,153,210 shares of Common Stock at an exercise price of $0.0745 per share. The warrants were issued on March 31, 2012. The issuance was deemed to be exempt from registration under either Section 4(2) of the Securities Act of 1933 or Rule 506 under Regulation D as an issuance not involving a public offering.

In February 2012, the Company granted a stock option to purchase 500,000 shares of common stock at an exercise price of $0.09 per share to its European Director of Business Development. The option vests 25% at grant and 1/36 of the remaining grant amount monthly for three years. The grant was deemed to be exempt from registration under either Section 4(2) of the Securities Act of 1933 or Rule 506 under Regulation D as an issuance not involving a public offering.

In March 2012, the Company granted a stock option to purchase 25,000 shares of common stock at an exercise price of $0.10 per share to a contractor. The option vests 25% at March 31, 2013 and 1/36 of the remaining amount monthly for three years. The grant was deemed to be exempt from registration under either Section 4(2) of the Securities Act of 1933 or Rule 506 under Regulation D as an issuance not involving a public offering.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

4.1 Form of Debenture issued by the Company to each Subscriber in the Company’s Convertible Debenture Offering, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 30, 2012.

4.2 Form of Warrant issued by the Company to each Subscriber in the Company’s Convertible Debenture Offering, incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed January 30, 2012.

10.1 Form of Subscription Agreement by and between the Company and each Subscriber for the Company’s Convertible Debenture Offering, incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101* Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended March 31, 2012, 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 tagged as blocks of text.

* Furnished herewith.

15

SIGNATURES

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

	SpectraScience, Inc. (Registrant)
Date: May 15, 2012		/s/ Michael P. Oliver
		Michael P. Oliver
		President and Chief Executive Officer
		(Principal executive officer)
Date: May 15, 2012		/s/ James Dorst
		James Dorst
		Chief Financial Officer and Chief Operating Officer
		(Principal financial officer and principal accounting officer)

16

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael P. Oliver, certify that:

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

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

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

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

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

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

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

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

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

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

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

/s/ Michael P. Oliver

Name: Michael P. Oliver

Title: Chief Executive Officer

Date:    May 15, 2012

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James Dorst, certify that:

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

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

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

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

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

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

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

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

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

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

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

/s/ James Dorst

Name: James Dorst

Title: Chief Financial Officer

Date:  May 15, 2012

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SpectraScience, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael P. Oliver, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Michael P. Oliver

Michael P. Oliver

Chief Executive Officer

Date: May 15, 2012

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SpectraScience, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James Dorst, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ James Dorst

James Dorst

Chief Financial Officer

Date: May 15, 2012

XML

Liabilities

3 Months Ended

Mar. 31, 2012

Liabilities

3. Liabilities

Convertible Debentures

For the three-month period ended March 31, 2012, the Company issued Convertible Debentures (“Debentures”) at a face amount of $2,350,526. At March 31, 2012, the unamortized discount of $1,960,161 consisted of a discount on the derivative liability of $966,340, discount on the warrant liability of $895,164 and original issue discount of $98,657. The discount will be amortized over the remaining term of the Debentures. The Debentures have a term of 6 months, accrue interest at a rate of 20% per year, carry an original issue discount of 5% and will convert into common stock at an initial conversion price of $0.0573 per share at maturity. The Debentures were issued with detachable five-year cashless warrants (“Holders Warrants”) that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price of $0.0745 per share. In addition, the Company issued five-year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price of $0.0745 per share. At March 31, 2012, there were Debentures, Holders Warrants and Agent Warrants convertible into 41,021,402, 20,510,701 and 6,153,210 shares of common stock, respectively. The conversion price of the Debentures and the exercise price of the warrants are subject to an adjustment feature in the event that the Company issues securities for less than the conversion price of the Debentures or the exercise price of the Holders Warrants and Agent Warrants. The accounting for the adjustment features of the conversion price and the warrant exercise price is described separately below under, “Warrant Liability” and “Derivative Liability”. The Company received cash proceeds of $1,851,098, net of $117,526 in original issue discount and $379,402 in transaction costs upon issuance of the Debentures. On March 31, 2012, if converted, the value of the Debentures would exceed their fair value by approximately $1,752,000.

Warrant Liability

The Company issued convertible Debentures with Holders Warrants and Agent Warrants that include a possible exercise adjustment feature in the event that we issue securities for consideration less than that offered with the warrants (referred to as “Derivative Warrants”). Effective January 1, 2009, the accounting guidance regarding derivative warrants changed and required that certain of the Company’s warrants be recorded as a liability and measured at fair value recorded in earnings. The Company records the fair value of these warrants in its statement of operations in the line “Change in fair value of derivative and warrant liabilities”. The Company measures these warrants using a modified Black-Scholes option valuation model using similar assumptions to those described herein under, “Stock Based Compensation.” For the three-month period ended March 31, 2012 the Company recorded non-cash expense and an adjustment to warrant liability related to these warrants of approximately $875,000. At March 31, 2012, there were exercisable warrants to purchase 26,663,911 shares of common stock subject to this price adjustment feature. The time period over which the Company will be required to evaluate the fair value of these warrants is approximately six months. Upon inception of the Debentures, the Company recorded a Warrant Liability of $1,508,081 and an initial fair value non-cash expense of $380,334. For the three-month period ending March 31, 2012, the Company recorded non-cash expense of $317,148 which represents the change in the fair value of the Warrant Liability from inception to March 31, 2012, resulting in a Warrant Liability amount of $2,205,563.

The Company computes the fair value of the warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the warrant liability is the Company’s stock price, which is subject to significant fluctuation and is not under the Company’s control. The resulting effect on the Company’s net loss is therefore subject to significant fluctuation and will continue to be so until the Company’s Convertible Debentures, which the warrants are associated with, matures (approximately six months). Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its stock price increases and non-cash income when its stock price decreases.

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, the Company’s fair value estimates could be materially different in the future.

Derivative Liability

During the three-month period ended March 31, 2012, the Company issued convertible Debentures with a conversion price that includes a possible exercise adjustment feature in the event that it issues securities for consideration less than that offered with the convertible Debentures (referred to as “Derivative Liabilities”). The Company records the fair value of the conversion feature in its income statement of operations in the line “Change in fair value of derivative and warrant liabilities.” The Company measures the conversion feature using a modified Black-Scholes option valuation model using similar assumptions to those described herein entitled, “Stock Based Compensation.” For the three-month period ended March 31, 2012 the Company recorded non-cash expense and liability related to this conversion feature of approximately $2,026,000. At March 31, 2012, there were convertible shares to purchase 41,021,402 shares of common stock subject to this price adjustment feature. The time period over which the Company will be required to evaluate the fair value of this conversion feature is approximately six months. Upon inception of the Debentures, the Company recorded a Derivative Liability of $1,140,635 and an initial fair value non-cash expense of $432,685. For the three-month period ending March 31, 2012, the Company recorded non-cash expense of $452,239 which represents the change in the fair value of the Derivative Liability from inception to March 31, 2012, resulting in a Derivative Liability amount of $2,025,559 at March 31, 2012.

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

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, the Company’s fair value estimates could be materially different in the future.

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Revenue recognition

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

Consolidation

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

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, assumptions used to value stock options and warrants, assumptions used to value the common stock issued and the assets acquired in the LUMA acquisition and the realization of intangible assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

Highly liquid investments with original maturities of three months or less when purchased are considered to be cash equivalents. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalent accounts

Inventory Valuation

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

Valuation of Long-lived Assets

The Company’s long-lived assets consist of 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.

Warrants/Embedded Derivatives

The Company has outstanding Warrants in conjunction with its convertible debt.  Due to certain features of these instruments, the related liability warrants are recorded at fair value at issuance, using the Black-Scholes option valuation model, and will continue to be recorded at fair value each subsequent balance sheet date. Any change in value between reporting periods will be recorded on the statement of operations at each reporting date. The liability warrants will remain until such time as they are exercised or the related convertible debt matures when they will be adjusted to fair value and reclassified from liabilities to equity.

The Company has convertible features (embedded derivatives) in its convertible debt. Due to certain features of these instruments, the embedded derivatives are recorded at fair value and classified as liabilities on the balance sheet. The embedded derivatives will continue to be recorded at fair value each subsequent balance sheet date. Any change in value between reporting periods will be recorded on the statement of operations at each reporting date. These embedded derivatives will remain until such time as they are exercised or the convertible debt matures at which time they will be adjusted to fair value and reclassified from liabilities to equity.

Fair Value Measurement

In general, fair value measurements are based upon quoted market prices, where available. If quoted market prices are not available, fair value measurements are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and require some degree of judgment regarding interest rates, credit risk, prepayments and other factors. The use of different assumptions or estimation techniques may have a significant effect on the fair value amounts reported.

Recent Accounting Pronouncements

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards.  This guidance includes amendments that clarify the application of existing fair value measurement requirements, in addition to other amendments that change principles or requirements for measuring fair value and for disclosing information about fair value measurements.  This guidance is effective for interim and annual periods beginning after December 15, 2011.  The adoption of this guidance primarily impacted the Company’s disclosures, but otherwise did not have a material impact on the Company’s consolidated financial statements.

Stock-Based Compensation

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

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

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

As of March 31, 2012, 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 5,000,000 shares of common stock.  At March 31, 2012, the Company had outstanding 16,320,000 options under the EIP and the Company’s prior Amended 2001 Stock Plan representing approximately 15% of the Company’s outstanding shares (6,990,103 of which were exercisable), with 1,175,000 available for future issuance under the 2011 EIP. Awards under the Company’s EIP generally vest over four years.

The fair value of options granted were estimated at the date of grant using a Black-Scholes Model which includes several variables including expected life, risk free interest rate, expected stock price volatility, stock option exercise patterns and expected dividend yield. The Company also must estimate forfeitures for employee stock options. These models and assumptions are emerging and may change future expenses by increasing or decreasing stock-based compensation expense. Management used the following weighted average assumptions to value stock options granted during the three months ended March 31, 2012 and 2011:

	2012		2011
Expected life	5 Years		5 Years
Risk-free interest rate		..85%		2.19%
Expected volatility		113%		115%
Expected dividend yield		0%		0%

In addition to the above, management estimated the forfeitures on employee options under the EIP would have negligible effects because such forfeitures would be a very small percentage. Management believes that options granted have been to a group of individuals that have a high desire to see the Company succeed and have aligned themselves to that end.

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

The risk-free interest rates are the five-year U.S. Treasury rates as published at the time of making the calculations.

Volatility is a calculation based on the Company’s stock price since the beginning of the successor company. Management computed and tested this volatility calculation for reasonableness and found it to be acceptable based on a number of factors including the Company’s current market capitalization, comparison to other similar companies in its area of interest, the current early revenue stage of the Company and management’s estimate of the net present value of forward looking profits that has been compiled (for which there is no assurance).

Information with respect to stock option activity is as follows:

				Outstanding Options
	Options Available For Grant			Plan Options Outstanding		Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
December 31, 2011		1,700,000			15,795,000	$	0.20		8.20		-
Options granted		(525,000	)		525,000	$	0.09		9.90		-
Outstanding at March 31, 2012		1,175,000			16,320,000	$	0.20		8.01		-
Exercisable at March 31, 2012					6,990,103	$	0.28		6.91		-

There were no options exercised during the three months ended March 31, 2012 and 2011. At March 31, 2012, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is approximately $798,000, which we expect to be recognized over the next three years.

Inventories

Inventories consisted of the following at March 31, 2012 and December 31, 2011:

	March 31, 2012		December 31, 2011
Raw materials	$	57,782	$	225,729
Finished goods		386,988		142,109
Totals	$	444,770	$	367,838

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period of computation. Diluted earnings (loss) per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and only if the additional common shares would be dilutive. Basic and diluted loss per share are the same for the three month periods ended March 31, 2012 and 2011, since any additional common stock equivalents would be antidilutive. Potentially dilutive shares of common stock that have been excluded from the calculation of the weighted average number of dilutive common shares for the three months ended March 31, 2012 include stock options to purchase 16,320,000 shares of common stock, stock options reserved for issuance of 1,175,000, warrants to purchase 53,397,411 shares of common stock, convertible debt convertible into 41,021,402 shares of common stock and preferred stock convertible into 3,585,000 shares of common stock. If converted under the treasury method, these instruments would have resulted in 31,257,478 additional equivalent common shares outstanding.

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CONSOLIDATED BALANCE SHEETS (USD $)	Mar. 31, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 1,004,933	$ 250,723
Accounts receivable, net	26,735	26,735
Inventories	444,770	367,838
Deferred debt issuance costs	690,487
Prepaid expenses and other current assets	26,543	24,493
Total current assets	2,193,468	669,789
Fixed assets, net	214,034	244,275
Patents, net	2,378,237	2,432,732
TOTAL ASSETS	4,785,739	3,346,796
Current liabilities:
Accounts payable	595,976	695,809
Convertible debt	2,350,526
Discount	(1,960,161)
Convertible debt, net	390,365
Derivative liability	2,025,559
Accrued expenses	115,068	145,356
Total current liabilities	3,126,968	841,165
Warrant liability	2,205,563
TOTAL LIABILITIES	5,332,531	841,165
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: Authorized - 175,000,000 shares; Issued and outstanding-108,041,084 shares at March 31, 2012 and December 31, 2011	1,080,411	1,080,411
Additional paid-in capital	31,022,508	30,922,930
Accumulated deficit	(32,685,561)	(29,533,560)
TOTAL SHAREHOLDERS' EQUITY	(546,792)	2,505,631
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	4,785,739	3,346,796
Series B Convertible Preferred Stock
SHAREHOLDERS' EQUITY
Convertible Preferred Stock, value	25,850	25,850
Series C Convertible Preferred Stock
SHAREHOLDERS' EQUITY
Convertible Preferred Stock, value	$ 10,000	$ 10,000

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
OPERATING ACTIVITIES:
Net loss	$ (3,152,001)	$ (854,845)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	88,906	79,968
Amortization of derivative and warrant liabilities discount	351,425
Amortization of deferred debt issuance costs and original issue discount	143,571
Change in the fair value of derivative and warrant liabilities	1,582,406
Impairment of LUMA Equipment		12,364
Fair market value of common stock and warrants issued for services		8,000
Changes in operating assets and liabilities:
Inventory	(76,932)	5,251
Prepaid expenses and other assets	(2,050)	36,616
Accounts payable	(99,833)	42,961
Accrued expenses	(30,288)	(78,286)
Net cash (used in) operating activities	(1,095,218)	(576,146)
INVESTING ACTIVITIES:
Redemption of certificates of deposit		1,998,974
Purchases of fixed assets	(4,170)
Net cash provided by (used in) investing activities	(4,170)	1,998,974
FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt	2,233,000
Payment of debt issuance costs	(379,402)
Net cash provided by financing activities	1,853,598
Net increase in cash and cash equivalents	754,210	1,422,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	250,723	1,764,803
CASH AND CASH EQUIVALENTS AT END OF PERIOD	1,004,933	3,187,631
Employee
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation	92,457	165,774
Consultants
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation	$ 7,121	$ 6,051

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Nature of Business and Basis of Presentation

3 Months Ended

Mar. 31, 2012

Nature of Business and Basis of Presentation

1. Nature of Business and Basis of Presentation

Description of Business

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

The Company has developed and received 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 WavSTAT4 Optical Biopsy System operates by using cool, safe UV laser light to optically illuminate and analyze tissue, enabling the physician to make an instant diagnosis during endoscopy when screening for cancer, and if warranted, to begin immediate treatment during the same procedure. Beginning in December 2011, the WavSTAT 4 began to be sold in the European Union for colon cancer detection.

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

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

Basis of Presentation

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q as they are prescribed for smaller reporting companies. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

Liquidity and Capital Resources

As of March 31, 2012, the Company had negative working capital of approximately $934,000 and cash and cash equivalents of approximately $1.0 million. In December 2011, the Company entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd. (“Laidlaw”). Under the Engagement Agreement, Laidlaw will assist the Company in raising up to $20.0 million in capital over the next two years. During the three-month period ended March 31, 2012, the Company raised approximately $1.85 million under this agreement. The Company anticipates that its convertible debt will be converted into shares of common stock and that, at the time of this conversion, any remaining derivative and warrant liabilities will be reclassified as equity. As a result, the Company expects that these liabilities will have no effect on our cash position. However, if the Company does not receive additional funds in a timely manner, the Company may not be able to continue as a going concern. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement Agreement occur as expected, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations. Historically, the Company’s sources of cash have come from the issuance and sales of equity securities and interest income. The Company’s historical cash outflows have been primarily used for operating activities including research, development, administrative and sales activities. Fluctuations in the Company’s working capital due to timing differences of its cash receipts and cash disbursements also impact our cash flow. The Company expects to incur significant additional operating losses through at least the remainder of 2012, as it completes proof-of-concept trials, begin outcome-based clinical studies and increase sales and marketing efforts to commercialize the WavSTAT4 Systems in Europe. 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.

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.

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Common stock, par value	$ 0.01	$ 0.01
Common stock, Authorized	175,000,000	175,000,000
Common stock, issued	108,041,084	108,041,084
Common stock, outstanding	108,041,084	108,041,084
Series B Convertible Preferred Stock
Convertible Preferred Stock, par value	$ 0.01	$ 0.01
Convertible Preferred Stock, Authorized	2,585,000	2,585,000
Convertible Preferred Stock, shares issued	2,585,000	2,585,000
Convertible Preferred Stock, shares outstanding	2,585,000	2,585,000
Convertible Preferred Stock, liquidation value	$ 517,000	$ 517,000
Convertible Preferred Stock, accumulated and unpaid dividends	106,931	106,931
Series C Convertible Preferred Stock
Convertible Preferred Stock, par value	$ 0.01	$ 0.01
Convertible Preferred Stock, Authorized	1,000,000	1,000,000
Convertible Preferred Stock, shares issued	1,000,000	1,000,000
Convertible Preferred Stock, shares outstanding	1,000,000	1,000,000
Convertible Preferred Stock, liquidation value	$ 200,000	$ 200,000

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 10, 2012
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Trading Symbol	SCIE
Entity Registrant Name	SPECTRASCIENCE INC
Entity Central Index Key	0000727672
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		108,041,084

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development	380,286	211,679
General and administrative	547,645	547,110
Sales and marketing	108,696	95,899
Total operating expenses	1,036,627	854,688
Loss from operations	(1,036,627)	(854,688)
Other expense (income)
Interest expense	38,028
Change in fair value of derivative and warrant liabilities	1,582,406
Amortization of derivative and warrant liability discount	351,425
Amortization of deferred debt issuance costs and original issue discount	143,571
Other expense, net	(56)	(157)
Nonoperating Income (Expense), Total	(2,115,374)	(157)
Net (Loss)	$ (3,152,001)	$ (854,845)
Basic and diluted net (loss) per share	$ (0.03)	$ (0.01)
Weighted average common shares outstanding	108,041,084	108,019,251

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Contingencies

3 Months Ended

Mar. 31, 2012

Contingencies

6. Contingencies

None

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Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements

5. Fair Value Measurements

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

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

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

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

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

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

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

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
As of March 31, 2012
Derivative liability	$	-	$	-	$	2,025,559	$	2,025,559
Warrant liability		-		-		2,205,563		2,205,563
Total	$	-	$	-	$	4,231,122	$	4,231,122

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the quarter ended March 31, 2012:

	Liabilities
Beginning balance, December 31, 2011	$	-
Issuance of convertible debt and warrants resulting in derivative and warrant liabilities		2,648,716
Change in the estimated fair value		1,582,406
Ending balance, March 31, 2012	$	4,231,122

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Subsequent Events

3 Months Ended

Mar. 31, 2012

Subsequent Events

7. Subsequent Events

None

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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (USD $)	Total	Consultants	Employee	Preferred Stock	Common Stock	Additional Paid-In Capital	Additional Paid-In Capital Consultants	Additional Paid-In Capital Employee	Accumulated Deficit
Beginning Balance at Dec. 31, 2011	$ 2,505,631			$ 35,850	$ 1,080,411	$ 30,922,930			$ (29,533,560)
Beginning Balance (in shares) at Dec. 31, 2011				3,585,000	108,041,084
Stock based compensation		7,121	92,457				7,121	92,457
Net loss	(3,152,001)								(3,152,001)
Ending Balance at Mar. 31, 2012	$ (546,792)			$ 35,850	$ 1,080,411	$ 31,022,508			$ (32,685,561)
Ending Balance (in shares) at Mar. 31, 2012				3,585,000	108,041,084

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Shareholders' Equity

3 Months Ended

Mar. 31, 2012

Shareholders' Equity

4. Shareholders’ Equity

Stock Options

In February 2012, the Company granted a stock option to purchase 500,000 shares of common stock at an exercise price of $0.09 per share to its European Director of Business Development. The option vests 25% at grant and 1/36 of the remaining grant amount monthly for three years. The grant was deemed to be exempt from registration under either Section 4(2) of the Securities Act of 1933 or Rule 506 under Regulation D as an issuance not involving a public offering.

In March 2012, the Company granted a stock option to purchase 25,000 shares of common stock at an exercise price of $0.10 per share to a contractor. The option vests 25% at March 31, 2013 and 1/36 of the remaining amount monthly for three years. The grant was deemed to be exempt from registration under either Section 4(2) of the Securities Act of 1933 or Rule 506 under Regulation D as an issuance not involving a public offering.