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EX-31.2 - SpectrumDNA, Inc.v180645_ex31-2.htm
EX-31.1 - SpectrumDNA, Inc.v180645_ex31-1.htm
EX-32.1 - SpectrumDNA, Inc.v180645_ex32-1.htm
UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to __________________
 
Commission File No. 333-148833 
 
Spectrum DNA, Inc.
(Exact Name of registrant as specified in its charter)

Delaware
20-4880377
(State or other jurisdiction
(IRS Employer Identification Number)
of incorporation or organization)
 
   
1700 Park Avenue, Suite 2020
P.O. Box 682798
 
Park City, Utah
84068
(Address of principal executive offices)
(Zip code)
 
(435) 658-1349
(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨         No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ¨         No  x

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 registrant was required to submit and post such files).
Yes ¨      No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨         No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $6,390,000.  The number of shares outstanding of the Common Stock ($.001 par value) of the registrant as of the close of business on March 18, 2010 was 68,818,237.
 
Documents Incorporated by Reference:  None
 
 
 

 

TABLE OF CONTENTS
 
Item
Description
Page
     
Part I
   
     
Item 1.
Business
3
     
Item 1A.
Risk Factors
8
     
Item 1B.
Unresolved Staff Comments
12
     
Item 2.
Properties
12
     
Item 3.
Legal Proceedings
12
     
Item 4.
Reserved
12
     
Part II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
 
 
 Issuer Purchases of Equity Securities
13
     
Item 6.
Selected Financial Data
14
     
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
14
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
20
     
Item 8.
Financial Statements and Supplementary Data
21
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
44
     
Item9A(T) .
Controls and Procedures
44
     
Item 9B.
Other Information
45
     
Part III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
46
     
Item 11.
Executive Compensation
49
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
52
     
Item 13.
Certain Relationships and Related Transactions and Director Independence
54
     
Item 14.
Principal Accountant Fees and Services
54
     
Part IV
   
     
Item 15.
Exhibits and Financial Statement Schedules
55
     
 
Signatures
57
 
 
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NOTICE ABOUT FORWARD LOOKING STATEMENTS
 
When used in this report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “intend,” “plans”, and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends which may affect our future plans of operations, business strategy, operating results and financial position. Forward looking statements in this report include without limitation statements relating to trends affecting our financial condition or results of operations, our business and growth strategies and our financing plans.  Such statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
 
PART I
 
ITEM 1.  Business.
 
(a)  Organizational History
 
SpectrumDNA, Inc. was incorporated under the laws of the State of Delaware on January 16, 2008 under the name SpectrumDNA Holdings, Inc. to enable its now wholly-owned subsidiary, formerly known as SpectrumDNA, Inc. (now known as SpectrumDNA Studios, Inc.) to implement a holding company organizational structure.  Effective as of January 22, 2008, we reorganized into a holding company structure whereby SpectrumDNA, Inc. became a wholly-owned subsidiary of SpectrumDNA Holdings, Inc. pursuant to an Agreement and Plan of Merger dated as of January 18, 2008 whereby SpectrumDNA, Inc. changed its name to SpectrumDNA Studios, Inc. and SpectrumDNA Holdings, Inc. changed its name to SpectrumDNA, Inc.
 
SpectrumDNA Studios, Inc. (formerly SpectrumDNA, Inc.) is a Delaware corporation.  It was originally incorporated in the State of Utah in May 2006, and on September 11, 2006 was reorganized as a Delaware corporation as a result of a merger into a newly formed Delaware corporation incorporated on September 7, 2006 which took the Utah corporation’s name and became the surviving entity of the merger. The “DNA” in the corporate name stands for “digital networked applications.”
 
Cooshoo, Inc. is a Delaware corporation (formerly a Utah corporation) which is a wholly-owned subsidiary of SpectrumDNA Studios, Inc. and owns and operates the Cooshoo engine which was rebranded and renamed PlanetTagger in mid-2008.
 
References in this document to "us," "we," “Spectrum,” “SpectrumDNA,” “SPXA” or "the Company" refer to SpectrumDNA, Inc., and its direct and indirect wholly-owned subsidiaries.
 
Our corporate address is 1700 Park Avenue, Suite 2020, P.O. Box 682798, Park City, Utah 84068.  Our telephone number is (435) 658-1349.  The Company’s website is http://www.spectrumdna.com.
 
Organization
 
Our Company is presently comprised of SpectrumDNA, Inc., a Delaware corporation, with two wholly-owned subsidiaries, Cooshoo, Inc. and SpectrumDNA Studios, Inc., also Delaware corporations (collectively, the Company or Spectrum).  We use the trade names “SpectrumDNA, Inc.” or “SpectrumDNA Studios, Inc.” in our commercial operations.
 
(b)  Business Overview
 
General
 
SpectrumDNA, Inc. is a social media studio that creates digital networked applications that are engines of engagement (or “enginets”) for institutions—primarily media outlets and brand advertisers—seeking to cost-effectively capture specific audiences (“social nicheworks”) and audience behaviors, and develop advertiser-safe user-generated and user-marketed content.  Enginets are branded web and wireless-based network experiences—web apps and mobile apps— that empower users to take active roles in their community.
 
Our product development methodology is based on our Chief Executive Officer James A. Banister’s book “Word of Mouse: The New Age of Networked Media” (Agate, 2004) which we believe predicted what The Gartner Group has now measured in its study measuring demographics of the social media audience and culture.  Banister distilled his research into a methodology called “enginetworking,” a process for creating and evolving software applications for the web and mobile wireless that address all levels of engagement.
 
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Strong evidence exists that the history of success in online and mobile web is a history of “capturing behavior” or “providing utility”—searching, dating, self-expression, shopping, social networking, job-seeking, travel, with many more behaviors left to capture-and-nurture.  Further, the nature of social media is such that software applications seeking to capture user behavior must be evolutionary by-design.  Our team is trained in leading-edge agile-adaptive techniques that enable us to quickly adapt our engines’ functionality, form and content to actual user-behavior, partner requests and advertiser/sponsor imperatives.
 
Current Products
 
Enginets can create new ways to capture-and-nurture audiences and help existing organizations and online networks improve key audience metrics - drive more unique users, more frequency of usage by each user, and a deeper, longer engagement in each user visit.  Our product development strategy is to develop, incubate and produce enginets based on observed emergent audience behavior.
 
Currently, our active enginets are as follows:
 
The Addictionary
 
The Addictionary is a social wordplay engine.  The original strategy for The Addictionary was to build the product into a singular web destination for creating, contributing, contesting and sharing lingo/language.  Market feedback indicated there was a larger opportunity in evolving the engine into a software-as-a-service (“SaaS”) application that enabled us to instance the social wordplay engine for multiple existing online communities, as each affinity group has its own idiosyncratic lingo and social morays (e.g. golfers vs. pet owners).  We undertook and completed that conversion in the first quarter of 2008, effectively turning one product into dozens of products by licensing the Addictionary to companies desiring social media applications to increase their brands’ awareness and increase engagement of their existing user base.
 
This move pre-dated, and we believe predicted a now rapidly emerging trend in social media—social  nicheworking—which are software applications for web and mobile wireless that target specific affinity groups, either direct-to-consumer or in partnership with traditional media entities or brand advertisers targeting those affinity groups.
 
PlanetTagger
 
PlanetTagger is a location-enabled integrated social marketing platform offering online communities a powerful tool which centralizes their social media marketing and editorial programming and provides the community users with utility to extend the reach of the community.  The pre-cursor to PlanetTagger, our now-discontinued cooshoo.com property, was originally intended as a direct-to-consumer software application—a singular destination aimed at capturing “missed connections” behavior that was naturally emerging on sites like craigslist.org.  Similar to our repositioning of The Addictionary, we re-engineered the cooshoo.com application into a location-enabled services application and re-branded it PlanetTagger—another example of a SaaS application that can be offered to any niche community looking to capture and nurture the behavior of its users around People, Events, Media, or Locations.  Like The Addictionary, emergence of PlanetTagger as a software-as-a-service effectively turned one product into dozens of products
 
New Products
 
We maintain a product development pipeline that is continually re-prioritized based on commercial opportunity, market feedback and market conditions.  Our development pipeline is based on our proprietary enginetworking process as well as other opportunities as they arise.
 
Sales, Marketing and Performance
 
Currently, mainstream advertising is based primarily on the “impression” model, such as thirty-second television commercials, print ads and radio spots; but the emergence of social media enables a new methodology for engaging audiences.  Advertisers spend billions of dollars every year to create a “spark” with a target constituency.  Typically these expenditures take the form of limited-run ad campaigns (e.g. 13-week television ad run), or fixed-length events (e.g. the Superbowl).  However, when these events end, the exposure to and engagement with the sponsor’s audience concludes.  Such campaigns can be characterized as “planting dead trees.”
 
With very little change in existing, and long-standing, advertising industry methodologies, advertisers can augment their limited-run campaigns that they are already doing with an engine of engagement—an enginet.  This way, the dollars they are already investing in reaching their desired audience—the “spark”—can be used to prime an engine that has the potential to create a long-term return on investment by offering the audience a more engaging social media experience with potential to grow into a self-perpetuating messaging engine.
 
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Conversely, traditional media outlets (print, broadcast, online) are in the business of building assets, and often the foundation of their business models rest on support from brand advertisers.  But traditional media outlets aren’t proficient at creating social media experiences, as they are rooted in linear media— push media instead of conversational media or “pull” media.
 
In our sales and marketing strategy, SpectrumDNA has pioneered the business of social nicheworking—providing white-label social media experiences that media entities or brand advertisers (or both) can offer to their target affinity groups.  Instead of launching “yet another web2.0 destination,” SpectrumDNA partners with institutions already spending the time, money and effort to engage their target affinity group, providing them with the social media expertise they lack.
 
Our first Addictionary transaction of this type was signed in June 2008 with Comedy Central.  During the remainder of 2008 and throughout 2009, the Company licensed the Addictionary to a number of other media companies and brands including:
 
 
·
NBC Universal’s television show The Office
 
 
·
E!Online, the online presence of E! Entertainment, a Comcast Networks Property
 
 
·
Warner Bros. distributed syndicated talk show The Ellen DeGeneres Show
 
 
·
Dictionary.com, an IAC operating unit
 
 
·
The New York Post, News Corp’s daily newspaper
 
 
·
FearNet Channel, another Comcast Networks Property
 
 
·
Comedy Central’s television show Secret Girlfriend
 
 
·
G4TV.com, the third Comcast Networks Property
 
The Addictionary has proved itself very capable of moving the needle on our partners’ core audience metrics.  For example, the Political Addictionary doubled average time-on-site for Comedy Central’s Indecision2008 efforts leading up to the election, and approximately 40% of visitors to E! Online spend twice as much time-on-site because of the Celebrity Addictionary feature.
 
The Addictionary platform continued to evolve based on successes to-date.  We continued sales efforts targeting IP-based communities (like The Office, Harry Potter or Star Trek) and subject-matter communities like golf, gardening, celebrity, local geography (e.g. New York) or pet ownership.  Sales discussions during the third and into the fourth quarter have focused on a number of verticals in including parenting, sports, news, financial news, and food as well as brand marketers and traditional media outlets looking to engage online audiences around their brands or properties.
 
Our secondary sales focus is on licensing PlanetTagger.  During the second quarter of 2009, preliminary meetings held prior to the launch of the deployable PlanetTagger product resulted in our first license sold to UCLA Anderson School of Management’s Entertainment and Media Management Institute (dba Managing Enterprises in Entertainment, Media, and Sports).  Launch of the site occurred in November 2009.
 
During the third and fourth quarter 2009, PlanetTagger sales efforts remain low-level due to limited sales and marketing resources.  Despite this, the Company continued to have sales meetings regarding potential PlanetTagger installations with a number of companies and institutions within the sports, music, and pharmaceutical industries as well as various governmental entities.
 
In general, as we increase our sales and marketing efforts we anticipate that we will continue to incur net losses for the foreseeable future.  The extent of these losses will depend, in part, on the amount of growth in our revenues from organization adoption, consumer acceptance and use of our products and the number of relationships we are able to form with advertisers and marketers to use our enginets.
 
Recent Events
 
During the first quarter of 2010, the Company sold its second PlanetTagger installation to the State of Utah’s Utah Science Technology and Research initiative (USTAR).  USTAR’s PlanetTagger installation, DigitalUproar, launched in March of 2010 to coincide with USTAR’s PushButton Digital Media Summit hosted by the State of Utah.
 
Late in the fourth quarter of 2009, the Company began to re-focus its efforts on differentiation, circumventing resource limitations and leveraging its assets.  That strategy resulted in two additions to strategic direction and two strategic relationships formed early in 2010:
 
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OptEngage, a product development and services offering strategy rooted in the currently exploding “browser apps” marketplace (happening in parallel to the smartphone apps explosion, albeit much less publicized) and the contextual/semantic web movement, was introduced.  OptEngage enables clients to deliver content and utility to their constituency and/or audience anywhere they go on the web, contextual to what they’re doing, when they’re doing and where they’re doing it.  For example, we are OptEngaging the PlanetTagger product, so we can offer it to clients and their users in a “to go” form—via a mobile app, and via an optengaged browser app (or series of browser apps).
 
In January 2010, SpectrumDNA entered into an exclusive license agreement with Optini, LLC, a Utah based company, to market and sell Optini’s products under the OptEngage brand to the Company’s existing and future clients.  Optini offers a suite of services that allows an online community owner to control their end users’ experience on the web and to collect metrics data related to the behavior of those users.  The community owner uses the product suite to personalize and customize its content around the community member wherever he or she travels on the web, contextually to where they are, when they are and what they’re doing.
 
Also, in January 2010, the Company partnered with mediaForge, a Salt Lake City based ecommerce retargeting and personalization provider that allows its clients to deliver advanced, fully interactive ads geared for personalization and optimized for engagement.  These personalized ads and widgets listen for shoppers who have shopped but not bought, and delivers            personalized ads and widgets.    Viewers of such ads are provided with a more personalized and engaging user experience.  The Company has taken steps to integrate mediaForge’s products into its own Addictionary widgets to take advantage of the high engagement we already see and turn it into revenue, thereby assisting our Addictionary licensees with an incremental method of monetization and a revenue stream into which they are not currently tapping.
 
Customers and Competition
 
The internet industry is highly competitive, rapidly evolving and subject to constant technological change.  As the markets for internet based products and services and online advertising continue to grow, we expect that competition will intensify.  Barriers to entry are minimal, and competitors can offer products and services at a relatively low cost.  We compete for the time, attention and usage of a broad spectrum of consumers and internet users, as well as the marketing, advertising and purchasing budgets of a broad range of businesses.  Many companies offer properties that compete with our properties for user attention and partner, advertiser and subscriber budgets, including large companies such as Yahoo, Google, Microsoft, and Facebook, as well as start-ups such as Hootsuite, Foursquare, Loopt, and Brightkite as well as others about which we may not yet know.  These companies may be or may become directly competitive with our business. We also expect that additional companies will offer competing products in the future. Furthermore, competitors of our properties may develop products or services that are superior to, or have greater market acceptance than, the enginets we develop.
 
Competitors against our properties may have greater brand recognition and greater financial, marketing and other resources than we do. This may place our properties at a disadvantage in responding to their competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. Many competitors have (i) greater financial, technical, engineering, personnel and marketing resources; (ii) longer operating histories; (iii) greater name recognition; and (iv) larger consumer bases.  These advantages afford competitors the ability to (a) offer greater pricing flexibility, (b) offer more attractive incentive packages to encourage prospective partners to do business with competitive properties, (c) negotiate more favorable contracts with affiliates, partners and service providers and (d) negotiate more favorable contracts with other suppliers.  We believe that additional competitors may be attracted to the market, including media companies, marketing and advertising firms, internet companies, startups and others. We also believe that existing competitors are likely to continue to expand their service offerings to appeal to advertisers and consumers.
 
Our ability to compete effectively in the internet industry will depend upon our ability to (i) provide high quality properties and services with usage and advertising prices competitive with, or lower than, those charged by our competitors; (ii) develop new and innovative products and services; and (iii) exhibit a high degree of agility and adaptability in our properties, our operations and our business strategies.  There can be no assurance that competition from existing or new competitors or changes in internet user trends, habits or expectations affected by such competitors will not have a material adverse effect on our business, financial condition and results of operations, or that we will be able to compete successfully in the future.
 
Employees
 
As of the date hereof, the Company has eight (8) full-time employees located in Park City, UT, Spanish Fork, UT, Billings, MT, Denver, CO, and Fairfield, CA.  This includes one of the founders, James A. Banister, serving as Chief Executive Officer.  The remaining employees manage operations, finance, engineering and product management, market and sell our products and build software and implement effective quality assurance standards.  It is expected that in the next 12 months we will seek to employ one or two additional employees to augment the product development, marketing, business development and sales efforts.
 
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Proprietary Information and Technology
 
Our operations do not currently depend upon any patents, copyrights, or trade secrets (collectively, “intellectual property”).  However, over time we do anticipate that certain of our individual properties and subsidiaries, and the Company itself, may come to depend upon certain intellectual property developed or acquired by us in the pursuit of development of such properties.  In such cases, we anticipate relying on a combination of patent, trademark, copyright and trade secret laws in the U.S. and other jurisdictions as well as confidentiality procedures and contractual provisions to protect any proprietary technologies and brands.  We plan to enter into confidentiality and invention assignment agreements with employees and consultants and confidentiality agreements with third parties where necessary.
 
We also plan to rigorously control access to any proprietary technologies, and as the Company matures, we also plan to assess at regular intervals our intellectual property status, including identifying and articulating particular pieces of intellectual property, and for intellectual property believed to be of significant novelty and value, engaging patent counsel to assist in the assessment of whether such intellectual property should be protected by patents, trade secret doctrine, copyrights, or other mechanisms. Our management has had significant experience in the development and administration of such processes, and includes individuals who have been awarded multiple patents in connection with prior ventures.
 
We have been granted an exclusive worldwide license to use the name “Spectrum” by James A. Banister, one of the Company’s founders and its Chairman of the Board, who is the owner of the U.S. Federal Trademark Registration for the mark “Spectrum”.  Pursuant to the Trademark License Agreement, Mr. Banister reserved any and all rights to authorize or license use of such mark or names containing Spectrum or Spectrum Mediaworks (a company in which Mr. Banister owns an interest) for use in connection with its business, which Mr. Banister has indicated is not competitive with the business of the Company.
 
Government Regulation
 
The availability and wide use of the internet and Web are relatively recent developments. Although the development, deployment and operation of enginets using the internet and Web are currently permitted by United States law and largely unregulated within the United States, some foreign governments have adopted laws and/or regulations restricting certain kinds of applications and content. Overall, industry experts generally characterize the current regulatory environment for most internet companies as favorable.  However, more aggressive domestic or international regulation of the internet in general may materially and adversely affect our business, financial condition, operating results and future prospects.
 
In the United States, Congress has begun to adopt legislation that regulates certain aspects of the internet, including online content, user privacy, taxation, liability for third party activities and jurisdiction. Such legislation includes the following:
 
Communications Decency Act. The Communications Decency Act, or CDA, regulates content of material on the internet, and provides immunity to internet service providers and providers of interactive computer services. The CDA and the case law interpreting it provide that domain name registrars and website hosting providers cannot be liable for defamatory or obscene content posted by customers on websites unless they participate in the conduct.
 
Digital Millennium Copyright Act. The Digital Millennium Copyright Act of 1998, or DMCA, provides recourse for owners of copyrighted material who believe that their rights under U.S. copyright law have been infringed on the internet. The DMCA provides domain name registrars and website hosting providers a safe harbor from liability for third-party copyright infringement. However, to qualify for the safe harbor, registrars and website hosting providers must satisfy a number of requirements, including adoption of a user policy that provides for termination of service access of users who are repeat infringers, informing users of this policy, and implementing the policy in a reasonable manner. In addition, a registrar or a website hosting provider must remove or disable access to content upon receiving a proper notice from a copyright owner alleging infringement of its protected works by domain names or content on hosted web pages. A registrar or website hosting provider that fails to comply with these safe harbor requirements may be found contributorily or vicariously liable for third-party infringement.
 
Lanham Act. The Lanham Act governs trademarks and servicemarks, and case law interpreting the Lanham Act has limited liability for search engine providers and domain name registrars in a manner similar to the DMCA. No court decision to date known to us has found a domain name registrar liable for trademark infringement or trademark dilution as a result of accepting registrations of domain names that are identical or similar to trademarks or service marks held by third parties, or by holding auctions for such domain names.
 
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Anticybersquatting Consumer Protection Act. The Anticybersquatting Consumer Protection Act, or ACPA, was enacted to address piracy on the internet by curtailing a practice known as “cybersquatting,” or registering a domain name that is identical or similar to another party’s trademark, or to the name of another living person, in order to profit from that domain name. The ACPA provides that registrars may not be held liable for registration or maintenance of a domain name for another person absent a showing of the registrar’s bad faith intent to profit from the use of the domain name. Registrars may be held liable, however, for failure to comply with procedural steps set forth in the ACPA.
 
Privacy and Data Protection. In the area of data protection, the U.S. Federal Trade Commission and certain state agencies have investigated various internet companies’ use of their customers’ personal information, and the federal government has enacted legislation protecting the privacy of consumers’ non-public personal information. Other federal and state statutes regulate specific aspects of privacy and data collection practices. Although we believe that our information collection and disclosure policies will comply with existing laws, if challenged, we may not be able to demonstrate adequate compliance with existing or future laws or regulations. In addition, in the European Union member states and certain other countries outside the U.S., data protection is more highly regulated and rigidly enforced. To the extent that we expand our business into these countries, we expect that compliance with these regulatory schemes will be more burdensome and costly for us.
 
Federal, state, local and foreign governments also are considering other legislative and regulatory proposals that would regulate the internet in more and different ways than exist today. It is impossible to predict whether new taxes will be imposed on our services, and depending upon the type of such taxes, whether and how we would be affected. Increased regulation of the internet both in the United States and abroad may decrease its growth and hinder technological development, which may negatively impact the cost of doing business via the internet or otherwise materially adversely affect our business, financial condition or operational results.
 
Research and Development Update
 
We have spent approximately $81,000 and $209,000 in research and development activities during the years ended December 31, 2009 and 2008.  
 
Environmental Compliance
 
At the present time, SpectrumDNA is not subject to any material costs for compliance with any environmental laws. With respect to our current focus of operations, we do not know if environmental compliance will have a material impact on us in the future.
 
ITEM 1A.  Risk Factors. 
 
In addition to other information and financial data set forth elsewhere in this report, the following risk factors should be considered carefully in evaluating the Company.
 
THE ONGOING ECONOMIC SLOWDOWN MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS AND FINANCIAL CONDITION THAT WE CURRENTLY CANNOT PREDICT.  The ongoing global economic slowdown has caused turmoil and upheaval characterized by extreme volatility and declines in prices of securities, diminished liquidity and credit availability, inability to access capital markets, the bankruptcy, failure, collapse or sale of financial institutions and an unprecedented level of intervention from the United States federal government and other governments. Unemployment has risen while businesses and consumer confidence have declined and there are fears of a prolonged recession.  While the ultimate outcome of these events cannot be predicted, they could materially adversely affect our business and financial condition, including our ability to raise any equity or debt financing in the future.
 
WE HAVE HAD A LIMITED OPERATING HISTORY AND LIMITED REVENUES SO FAR.  Our business originally began in July 2006.  Since then, we have had limited revenues.  For the years ended December 31, 2009 and 2008, we had revenues of $149,800 and $67,747, respectively.  Our likelihood of success must be considered in light of all of the risks, expenses and delays inherent in establishing a new business, including, but not limited to, unforeseen expenses, complications and delays, established competitors and other factors.  Irrespective of the quality of our enginet properties and skills of management, we may still never achieve profitable operations. Any investment in the Company is therefore highly speculative and could result in the loss of the entire investment.
 
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OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.  Our independent public accounting firm has issued an opinion on our financial statements that states that the financial statements have been prepared assuming the Company will continue as a going concern and further states that our recurring losses from operations, use of significant cash flows in operating activities and our lack of significant revenues raise substantial doubt about our ability to continue as a going concern.   If these factors continue, there is a risk of total loss of any monies invested in the Company and we may have to cease operations.
 
WE HAVE SUFFERED OPERATING LOSSES SINCE INCEPTION ANY MAY NEVER BECOME PROFITABLE.  For the years ended December 31, 2009 and 2008, we suffered net losses of $2,433,472 and $2,558,631, respectively.  We cannot predict whether our current or prospective business activities will ever generate enough revenue to be profitable.  If we do not generate enough revenue to be profitable, our business might have to be discontinued, in which case, investors would lose all or most of their investment in the Company.
 
WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL TO SUCCESSFULLY OPERATE OR EXPAND OUR BUSINESS. As of December 31, 2009, we had $10,303 in cash and total liabilities of $457,992.  Subsequent to the end of the fiscal year, however, we did raise gross proceeds of $1,515,000 pursuant to a private placement offering of shares of common stock and warrants.  While management believes our current finances will enable us to implement our plans and satisfy our estimated financial needs for at least the next 12 months, such belief cannot give rise to an assumption that cost estimates are accurate or that we will in fact have sufficient working capital for the foreseeable future.  Our continued operations after such period will depend upon the availability of cash flow from operations and/or our ability to raise additional funds through various financing methods.  If sales or revenues do not meet expectations, or cost estimates for development and expansion of business prove to be inaccurate, we will require additional funding.  There can be no assurance that additional financing will be available on satisfactory terms, if at all.
 
OUR ENGINET PROPERTIES ARE IN VARIOUS STAGES OF DEVELOPMENT; NO ASSURANCE THAT EACH WILL LAUNCH.  We currently have various enginet properties in various stages of development and we cannot guarantee that each will ultimately launch.  We expect and intend that, from time to time, market analysis, user feedback, operational performance and other considerations will prompt us to terminate further development or operation of some enginets.  There is no assurance that we will be able to successfully manage this process and deliver compelling content to users.
 
IF WE ARE UNABLE TO ATTRACT A SIGNIFICANT NUMBER OF USERS OF OUR ENGINETS, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUES.  In order to operate our enginets profitably, we must attract sufficient users, including users who regularly visit and use our enginets.  Our ability to attract advertisements and other sources of revenues for our enginets will be dependent upon various metrics, including the number of unique visitors, the number of unique page views, and the number of repeat visitors.  For example, these metrics help advertisers determine whether or not to advertise on our website and the price which we will receive from them. If we unable to attract sufficient users, we will not generate sufficient revenues and your investment may be jeopardized.
 
INTENSE COMPETITION IN THE INTERNET INDUSTRY COULD HAVE A NEGATIVE IMPACT ON OUR ABILITY TO SECURE A MARKET SHARE SUFFICIENT TO SUSTAIN OPERATIONS.  The internet industry is highly competitive, rapidly evolving and subject to constant technological change. As the markets for internet based products and services and online advertising continue to grow, we expect that competition will intensify.  Barriers to entry are minimal and competitors can offer products and services at a relatively low cost.  We compete for the time, attention and usage of a broad spectrum of consumers and internet users, and also compete for marketing, advertising and purchasing budgets of a broad range of businesses.  Many companies offer properties that compete with our properties for user attention and partner, advertiser and subscriber budgets, including large companies such as Yahoo, Google, Microsoft, News Corporation and YouTube, as well as start-ups such as Hootsuite, Foursquare, Loopt, and Brightkite, and others about which we may not yet know.  These companies may be or may become directly competitive with our business. We also expect that additional companies will offer competing products in the future. Furthermore, competitors of our enginet properties may develop products or services that are superior to, or have greater market acceptance than, the enginets we develop.
 
Competitors against our properties may have greater brand recognition and greater financial, marketing and other resources than we do. This may place our properties at a disadvantage in responding to their competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. Many competitors have (i) greater financial, technical, engineering, personnel and marketing resources; (ii) longer operating histories; (iii) greater name recognition; and (iv) larger consumer bases than us.  These advantages afford competitors the ability to (a) offer greater pricing flexibility, (b) offer more attractive incentive packages to encourage prospective partners to do business with competitive properties, (c) negotiate more favorable contracts with affiliates, partners and service providers and (d) negotiate more favorable contracts with other suppliers.  We believe that additional competitors may be attracted to the market, including media companies, marketing and advertising firms, internet companies, startups and others. We also believe that existing competitors are likely to continue to expand their service offerings to appeal to advertisers and consumers.
 
Our ability to compete effectively in the internet industry will depend upon our ability to (i) provide high quality properties and services with usage and advertising prices competitive with, or lower than, those charged by our competitors; (ii) develop new and innovative products and services; and (iii) exhibit a high degree of agility and adaptability in our properties, our operations and our business strategies.  There can be no assurance that competition from existing or new competitors or changes in internet user trends, habits or expectations affected by such competitors will not have a material adverse effect on our business, financial condition and results of operations, or that we will be able to compete successfully in the future.
 
9

 
WE MAY NOT BE ABLE TO ADAPT TO RAPID TECHNOLOGICAL AND OTHER CHANGES AS QUICKLY AS OUR COMPETITORS.  The internet industry is characterized, in part, by rapid growth, evolving industry standards, significant technological changes and frequent product enhancements. These characteristics could render our existing systems and strategies obsolete, and require us to continue to develop and implement new products and services, anticipate changing consumer demands and respond to emerging industry standards and technological changes. We intend to evaluate these developments and others that may allow us to improve service to our customers. However, no assurance can be given that we will be able to keep pace with rapidly changing consumer demands, technological trends and evolving industry standards. The failure to keep up with such changes is likely to have a material adverse effect on our business, long term growth prospects and results of operations.
 
GOVERNMENT REGULATION.  The availability and wide use of the internet and Web are relatively recent developments. Although the development, deployment and operation of enginets using the internet and Web are currently permitted by United States law and largely unregulated within the United States, some foreign governments have adopted laws and/or regulations restricting certain kinds of applications and content. Overall, industry experts generally characterize the current regulatory environment for most internet companies as favorable.  However, more aggressive domestic or international regulation of the internet in general may materially and adversely affect our business, financial condition, operating results and future prospects.  In the United States, Congress has begun to adopt legislation that regulates certain aspects of the internet, including online content, user privacy, taxation, liability for third party activities and jurisdiction.   Federal, state, local and foreign governments also are considering other legislative and regulatory proposals that would regulate the internet in more and different ways than exist today. It is impossible to predict whether new taxes will be imposed on our services, and depending upon the type of such taxes, whether and how we would be affected. Increased regulation of the internet both in the United States and abroad may decrease its growth and hinder technological development, which may negatively impact the cost of doing business via the internet or otherwise materially adversely affect our business, financial condition or operational results.
 
SERVICE INTERRUPTIONS OR IMPEDIMENTS COULD HARM OUR BUSINESS. Our operations are vulnerable to damaging software programs, such as computer viruses and worms. Certain of these programs have disabled the ability of computers to access the internet, requiring users to obtain technical support. Other programs have had the potential to damage or delete computer programs. The development and widespread dissemination of harmful programs has the potential to seriously disrupt internet usage. If internet usage is significantly disrupted for an extended period of time, or if the prevalence of these programs results in decreased residential internet usage, our business could be materially and adversely impacted.  In addition, our operations and services depend on the extent to which our computer equipment and the computer equipment of our third-party network providers are protected against damage from fire, flood, earthquakes, power loss, telecommunications failures, break-ins, acts of war or terrorism and similar events.  Despite precautions taken by us and our third-party network providers, over which we have no control, a natural disaster or other unanticipated problem that impacts this location or our third-party providers’ networks could cause interruptions in the services that we provide. Such interruptions in our services could have a material adverse effect on our ability to provide internet services to our subscribers and, in turn, on our business, financial condition and results of operations.
 
FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH POTENTIAL WOULD BE DETRIMENTAL TO HOLDERS OF OUR SECURITIES.  Since we have limited operating history, any significant growth will place considerable strain on our financial resources and increase demands on our management and on our operational and administrative systems, controls and other resources. There can be no assurance that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employees and maintain close coordination among our technical, accounting, finance, marketing, sales and editorial staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems. We may fail to adequately manage our anticipated future growth. We will also need to continue to attract, retain and integrate personnel in all aspects of our operations. Failure to manage our growth effectively could hurt our business.
 
ABSENCE OF DIVIDENDS.  We have never declared or paid any cash dividends on our Common Stock and do not currently intend to pay cash dividends on our Common Stock in the foreseeable future.
 
THE COMPANY IS SUBJECT TO CONTROL BY ONE OF OUR PRINCIPAL OFFICERS.  As of December 31, 2009, one of our principal officers, James A. Banister, beneficially owns approximately 63% of the voting shares of the Company.  As a result, such person will possess meaningful influence and control over the Company and will be able to control and direct the Company’s affairs, including the election of directors and approval of significant corporate transactions.
 
DEPENDENCE ON FOUNDERS AND PERSONS TO BE HIRED; NO EMPLOYMENT AGREEMENTS. Our success will be dependent to a significant degree, upon the continuing contributions of our key executive officers. We do not have an employment agreement with any of our officers.  Therefore, we cannot guarantee that we can retain these individuals.  In addition, we have not obtained “key man” life insurance on the lives of any of the members of our management team.  Investors should note that it may be difficult for us to find adequate replacements for these key individuals.  In addition, we will need to attract and retain additional talented individuals in order to carry out our business objectives.  The competition for such persons is intense and there are no assurances that these individuals will be available to us.
 
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DIRECTOR AND OFFICER LIABILITY IS LIMITED. As permitted by Delaware law, the Company’s certificate of incorporation limits the personal liability of directors to the fullest extent permitted by the provisions of the Delaware General Corporation Law.  As a result of the Company’s charter provision and Delaware law, stockholders may have limited rights to recover against directors for breach of fiduciary duty.
 
RECENT ISSUANCES AND POSSIBLE ADDITIONAL ISSUANCES OF EQUITY SECURITIES IN THE FUTURE HAS A DILUTIVE EFFECT ON EXISITNG SHAREHOLDERS WHICH COULD SUBSTANTIALLY DIMINISH THE VALUE OF THEIR STOCK. We recently issued 15,150,000 shares of Common Stock and 15,150,000 common stock purchase warrants  in connection with a private placement which resulted in dilution to the interests of our then existing shareholders.  We may in the future issue additional shares of Common Stock for various reasons and may grant additional stock options to employees, officers, directors and third parties which will cause further dilution.  Such dilution can be expected to cause the market price of the Common Stock to decline.  One of the factors which generally affects the market price of publicly traded equity securities is the number of shares outstanding in relationship to assets, net worth, earnings or anticipated earnings.  Furthermore, the public perception of future dilution can have the same effect even if actual dilution does not occur.
 
THE EXISTENCE OF OUTSTANDING OPTIONS MAY HARM OUR ABILITY TO OBTAIN ADDITIONAL FINANCING AND THEIR EXERCISE WILL RESULT IN DILUTION TO INTERESTS OF EXISTING SHAREHOLDERS.  As of December 31, 2009, we have outstanding options to purchase an aggregate of 14,262,075 shares of our common stock.  While these options are outstanding, our ability to obtain future financing may be harmed since such options  represent an outstanding obligation to sell shares of common stock at a price which may be significantly below then-current market prices.  Upon exercise of these options, dilution to the ownership interests of existing shareholders will occur as the number of shares of Common Stock outstanding increases.
 
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF THE COMPANY’S SECURITIES.   Our Common Stock is classified as a penny stock, which is traded on the OTCBB.  The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  As a result, the Company’s Common Stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established clients and “accredited investors”.  For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell shares of the Company’s Common Stock and may affect the ability of investors to sell such shares of Common Stock in the secondary market and the price at which such investors can sell any of such shares.
 
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:
 
 
·
control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
 
 
·
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
 
·
“boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
 
·
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
 
 
·
the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
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The Company’s management is aware of the abuses that have occurred historically in the penny stock market.
 
ITEM 1B. Unresolved Staff Comments.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
ITEM 2.  Properties. 
 
The Company leases approximately 2,326 square feet of space in Park City, Utah.  Such lease, which commenced on September 1, 2007, has a term of three years, subject to an option to extend for an additional three years.  Pursuant to the terms thereof, base rent is $4,264 per month for the first year and $4,563 per month for the second and third years of the lease.  In November 2009, the parties entered into an amendment to the lease agreement, pursuant to which the parties agreed that the option shall be terminated and the third and final year of the lease shall be paid for by a cash payment of $45,000 plus the Company creating  a website and providing ongoing maintenance, training, and hosting services associated with said website.  Through December 31, 2009, the Company performed services in association with the website development of $9,000, which reduced the Company’s lease liability and increased other income on the statements of operations.   Management believes that the current facility is adequate for the foreseeable future.  In the event the lease is not renewed at the end of the term, management believes other suitable space will be available in the Park City, Utah area on terms acceptable to the Company.
 
ITEM 3.  Legal Proceedings.  
 
There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities.  None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
ITEM 4.  Reserved.
 
 
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PART II
 
ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 
 
(a)  Principal Market or Markets 
 
Our common stock is quoted on the OTC Bulletin Board under the symbol “SPXA”.  It has been listed on the OTC Bulletin Board since August 4, 2008.  The following table sets forth the range of high and low closing prices per share of the common stock for each of the calendar quarters identified below.
 
Fiscal Year 2009
 
High
   
Low
 
             
Quarter Ended:
           
             
First Quarter 2009
  $ 0.24     $ 0.095  
                 
Second Quarter  2009
  $ 0.44     $ 0.10  
                 
Third Quarter  2009
  $ 0.29     $ 0.13  
                 
Fourth Quarter 2009
  $ 0.20     $ 0.10  
        
    Fiscal Year 2008
 
High
   
Low
 
             
Quarter Ended:
           
             
First Quarter  2008
    N/A       N/A  
                 
Second Quarter  2008
    N/A       N/A  
                 
Third Quarter  2008
  $ 0.60     $ 0.30  
                 
Fourth Quarter 2008
  $ 0.30     $ 0.15  
 
(b)  Approximate Number of Holders of Common Stock
 
As of March 18, 2010, there were 103 shareholders of record of our common stock.  Such number does not include any shareholders holding shares in nominee or “street name”.
 
(c)  Dividends
 
Holders of our common stock are entitled to receive such dividends as may be declared by our Board of Directors.  Spectrum paid no dividends on the common stock during the periods reported herein nor do we anticipate paying such dividends in the foreseeable future.
 
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(d)  Equity Compensation Plan Information
 
Information regarding equity compensations plans, as of December 31, 2009, is set forth in the table below:
 
 
 
Plan category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a)
   
 
Weighted-average
Exercise price of
Outstanding options,
Warrants and rights (b)
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities reflected
in column (a)) (c)
 
Equity compensation plans approved by security holders
    -0-       -0-       -0-  
Equity compensation plans not approved by security holders
    14,262,075     $ 0.30       3,030,008  
Total
    14,262,075     $ 0.30       3,030,008  
 
The foregoing equity compensation plan information relates to the stock options granted under and outside of the 2008 Equity Incentive Plan.  On June 30, 2008, the Board of Directors of the Company approved and adopted the 2008 Equity Incentive Plan, under which 10,000,000 stock options were available in 2008.  Pursuant to the Plan, an additional 2,436,983 were made available on January 1, 2009, and an additional 2,637,362 were made available on January 1, 2010.  Of the 14,262,075 options outstanding, 9,406,975 were issued under the Plan.
 
(e)  Recent Sales of Unregistered Securities
 
The information set forth below describes our issuance of securities without registration under the Securities Act of 1933, as amended, during the year ended December 31, 2009, that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K:
 
 
ITEM 6.   Selected Financial Data.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiary for the fiscal years ended December 31, 2009 and 2008.  The discussion and analysis that follows should be read together with the consolidated financial statements of SpectrumDNA, Inc. and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K.  Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control.
 
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Application of Critical Accounting Policies and Estimates
 
Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.  These estimates and assumptions are affected by management’s application of accounting policies.
 
Critical accounting policies for us include our accounting for intangible assets, convertible debt, share based payment arrangements, and revenue recognition.
 
Intangible Assets
 
Intangible assets for us are patents, trademarks and other rights.  Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, requires that goodwill and other intangible assets be tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of an operating unit.  Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of intangibles to reporting units, and determination of the fair value of each reporting unit.  The fair value of each reporting unit is estimated using a discounted cash flow methodology.  This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital.  Changes in these estimates and assumptions could materially affect the determination of fair value and/or intangible impairment.
 
Convertible Debt
 
In accordance with FASB ASC 470-20-30, the Company used the effective conversion price based on the proceeds received to compute the intrinsic value of the embedded conversion option.  The Company allocated the proceeds received from the Bridge Financing (See Note 11 to the consolidated financial statements included under Part II, Item 8) to the convertible instrument and the detachable warrants included in the exchange on a relative fair value basis.  The Company then calculated an effective conversion price and used that price to measure the intrinsic value of the embedded conversion option.  The convertible notes may be converted into shares of the Company’s common stock or cash at any time at the option of the holder.  The conversion price of the convertible notes is equal to $0.10 per share of the company’s common stock.  The number of shares issuable upon conversion of the notes shall be determined by dividing the outstanding principal amount, together with accrued but unpaid interest, to be converted by the conversion price in effect on the conversion date.
 
Share Based Payment
 
FASB ASC 718, Share Based Payment, requires companies to estimate the fair value of share based payments on the date of grant.  For stock grants, the Company uses the closing price on the date of grant.  For warrants, we use the Black Scholes option pricing model. In order to estimate the fair value of the warrants, certain assumptions are made regarding future events. Such assumptions include the estimated future volatility of the Company’s stock price, the expected lives of the awards and the expected forfeiture rate. Changes in these estimates would change the estimated fair value of the awards and the corresponding accounting for the rewards.
 
Revenue Recognition
 
The Company intends to derive revenues from the sale and licensing of web based software applications.  In addition, the Company may at times earn revenues from the performance of certain hosting, marketing, and contract labor services.  Revenue will be recognized when earned and collection is reasonably assured. The Company’s revenue recognition policies are in compliance with FASB ASC 985-605, “Software Revenue Recognition” and FASB ASC 605-10 . Revenues will be recognized ratably over the license period, only if no significant company obligations remain, the fee is fixed or determinable, and collection is received or the resulting receivable is deemed probable. Revenue will be recognized, net of any discounts and allowances. Provisions will be recorded for returns, concessions, and bad debts. Revenues which include technical support, will be based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence (VSOE) when significant. The Company VSOE will be determined by the price charged when each element is sold separately. Revenue from non-recurring programming, consulting service, support arrangements and training programs will be recognized as the services are provided.
 
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Recent Accounting Pronouncements
 
In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.

In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.

In December 2009, the FASB issued Accounting Standards Update 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 167. (See FAS 167 effective date below.)

In December 2009, the FASB issued Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 166. (See FAS 166 effective date below.)

In October 2009, the FASB issued Accounting Standards Update 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This Accounting Standards Update amends the FASB Accounting Standard Codification for EITF 09-1. (See EITF 09-1 effective date below.)

In October 2009, the FASB issued Accounting Standards Update 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This update changed the accounting model for revenue arrangements that include both tangible products and software elements. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15,2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-14 to have a material effect on the financial position, results of operations or cash flows of the Company.

In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP.  This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15,2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. The Company does not expect the provisions of ASU 2009-12 to have a material effect on the financial position, results of operations or cash flows of the Company.

In July 2009, the FASB ratified the consensus reached by EITF (Emerging Issues Task Force) issued EITF No. 09-1, (ASC Topic 470) "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance" ("EITF 09-1"). The provisions of EITF 09-1, clarifies the accounting treatment and disclosure of share-lending arrangements that are classified as equity in the financial statements of the share lender. An example of a share-lending arrangement is an agreement between the Company (share lender) and an investment bank (share borrower) which allows the investment bank to use the loaned shares to enter into equity derivative contracts with investors. EITF 09-1 is effective for fiscal years that beginning on or after December 15,2009 and requires retrospective application for all arrangements outstanding as of the beginning of fiscal years beginning on or after December 15,2009. Share-lending arrangements that have been terminated as a result of counterparty default prior to December 15, 2009, but for which the entity has not reached a final settlement as of December 15, 2009 are within the scope. Effective for share-lending arrangements entered into on or after the beginning of the first reporting period that begins on or after June 15,2009. The Company does not expect the provisions of EITF 09-1 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
16

 
In June 2009, FASB issued ASC 105-10 (Prior authoritative literature:  SFAS No. 168, "The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10 establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. FASB ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2009.  Adoption of FASB ASC 105-10 did not have a material effect on the Company’s financial statements.
 
In June 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature:  SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) which amends the consolidation guidance applicable to a variable interest entity (“VIE”). This standard also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. Previously, the standard required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. This standard is effective for fiscal years beginning after November 15, 2009, and for interim periods within those fiscal years. Early adoption is prohibited.  Adoption of FASB ASC 810-10-65 did not have a material impact on the Company’s financial statements.
 
In June 2009, the FASB ASC 860-10 (Prior authoritative literature: issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”), which eliminates the concept of a qualifying special-purpose entity (“QSPE”), clarifies and amends the de-recognition criteria for a transfer to be accounted for as a sale, amends and clarifies the unit of account eligible for sale accounting and requires that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. This standard is effective for fiscal years beginning after November 15, 2009. Adoption of FASB ASC 860-10 did not have a material impact on the Company’s financial statements.
 
In May 2009, FASB issued FASB ASC 855-10 (Prior authoritative literature:  SFAS No. 165, "Subsequent Events"). FASB ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. FASB ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009.
 
In April 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 164, “Not-for-Profit Entities: Mergers and Acquisitions”) which governs the information that a not-for-profit entity should provide in its financial reports about a combination with one or more other not-for-profit entities, businesses or nonprofit activities and sets out the principles and requirements for how a not-for-profit entity should determine whether a combination is in fact a merger or an acquisition. This standard is effective for mergers occurring on or after Dec. 15, 2009 and for acquisitions where the acquisition date is on or after the beginning of the first annual reporting period, beginning on or after Dec. 15, 2009. This standard does not apply to the Company since the Company is considered a for-profit entity
 
In May 2008, the FASB issued FASB ASC 944 (Prior authoritative literature: SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60"). FASB ASC 944 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement.  This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years.   As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009.  The Company does not believe this standard will have any impact on the financial statements.
 
In March 2008, the FASB issued FASB ASC 815-10 (Prior authoritative literature: SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”), which is effective January 1, 2009. FASB ASC 815-10 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, this standard requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. This standard is not currently applicable to the Company since we do not have derivative instruments or engage in hedging activity.
 
In December, 2007, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, an amendment of ARB No. 51). FASB ASC 810-10-65 will change the accounting and reporting for minority interests which will be characterized as noncontrolling interests and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest shareholders. This standard is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008.  The Company adopted this standard beginning January 1, 2009 and does not believe it has a material impact in its financial statements.
 
17

 
In December, 2007, the FASB issued FASB ASC 805 (Prior authoritative literature: SFAS No. 141(R), “Business Combinations”), which established the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. FASB ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. FASB ASC 805 is effective the first annual reporting period beginning on or after December 15, 2008.  The Company adopted this standard beginning January 1, 2009 and does not believe it has a material impact in its financial statements.
 
In March 2007, FASB ASC 715-60 (Prior authoritative literature:  EITF Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements”). FASB ASC 715-60 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. FASB ASC 715-60 is effective for fiscal years beginning after December 15, 2007. The adoption of FASB ASC 715-60 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
In February 2007, FASB ASC 825-10 (Prior authoritative literature:  Statement of Financial Accounting Standards No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115  ,”) was issued. This standard allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard were effective as of the beginning of fiscal year 2008, with early adoption permitted. The adoption of FASB ASC 825-10 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
In September 2006, the FASB issued FASB ASC 820-10 (Prior authoritative literature:  FASB Statement 157, “Fair Value Measurements”). FASB ASC 820-10 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. FASB ASC 820-10 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, FASB ASC 820-10 does not require any new fair value measurements. However, for some entities, the application of FASB ASC 820-10 will change current practice. The changes to current practice resulting from the application of FASB ASC 820-10 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. The provisions of FASB ASC 820-10 are effective as of January 1, 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. However, delayed application of this statement is permitted for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of FASB ASC 820-10 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
In June 2006, FASB issued FASB ASC 740-10 (Prior authoritative literature:   FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”).  This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes.  FASB ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FASB ASC 740-10 is effective for fiscal years beginning after December 15, 2006. The adoption of FASB ASC 740-10 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
Results of Operations
 
This section entitled Management Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report.  
 
For the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
 
Revenues for the year ended December 31, 2009 were $149,800, compared to $67,747 for the year ended December 31, 2008.  This revenue in the current period resulted from sales relating to the Addictionary enginet and various service functions.  Cost of sales was $68,926 for the year ended December 31, 2009, compared to $97,669 for the comparable period of 2008.  Cost of sales primarily consisted of the amortization of product development expenses.  As of December 31, 2009, these expenses have been almost fully amortized hence the significant decrease from the amount recorded for the year ended December 31, 2008.
 
Total operating expenses for the 2009 fiscal year were $2,458,457, compared to $2,565,691 for the comparable period of 2008, a decrease of 4%.  The decreased operating expenses in 2009 resulted primarily from related decreases in salaries and wages ($1,480,029 in 2009 compared to $1,553,505 in 2008), and product development expenses ($80,578 in 2009 compared to $209,496 in 2008).  The decrease in salaries and wages was offset by an increase in stock-based compensation.  The Company recognized $1,301,834 in 2009 compared to $1,240,614 in expenses pertaining to common stock and stock options granted for services rendered.
 
18

 
We recognized a net loss of $2,433,472 for the year ended December 31, 2009 compared to a loss of $2,558,631 for the year ended December 31, 2008, a decrease of 5%.  This decreased net loss was primarily the result of increased revenues and decreased operating expenses offset by an increase in interest expense. Our basic and diluted net loss per share was $0.05 for the year ended December 31, 2009, compared to $0.05 for the comparable period of 2008.  Excluding the non cash stock-based compensation described above our loss would have been $1,131,638 and $1,318,017 for 2009 and 2008, respectively.
 
Liquidity and Capital Resources
 
As of December 31, 2009, we had $10,303 in cash and total liabilities of $457,992. Additionally, our current liabilities exceeded our current assets, we have incurred substantial losses in this and prior fiscal years, and we have recorded negative cash flows from operations in this and prior fiscal years.  As a result, as of December 31, 2009, management could not be assured that the Company’s current finances would enable us to implement our plans and satisfy our estimated financial needs over the next 12 months.  We implemented significant cost cutting measures in November of 2008 to improve earnings potential as well as continuing to focus on increasing revenues from the sales of our products.  In addition, we were actively seeking additional sources of financing to fund our operations for the foreseeable future.

On July 31, 2009, the Company entered into a Consulting Agreement (the “Agreement”) with HFP Capital Markets LLC (“HFP”) pursuant to which HFP will provide certain consulting services to the Company including but not limited to assistance in securing future investment in the Company, assistance with certain corporate finance and investment banking activities, assistance with new business development, sales and marketing opportunities, and such other services as set forth therein.  The term of the Agreement is three years, although the Company may terminate upon thirty days written notice for any reason or no reason at all, but no sooner than six months from the full execution of the Agreement.  As compensation for these consulting services, the Company issued to HFP or its designees 4,000,000 shares of the Company’s restricted common stock which vested and became issuable to HFP or its designees 120 days from the full execution of the Agreement, or November 28, 2009.  As such, the shares issued were recorded as prepaid consulting services since it is a three year agreement.  The shares were valued at $0.14 per share for a total prepayment for these fees of $560,000.  At December 31, 2009, $15,556 had been amortized to consulting expense, with the remaining as prepaid consulting services, to be amortized over the remaining life of the agreement.

During September 2009, the Company commenced a private offering (“Private Offering”) of equity securities consisting of shares of common stock and common stock purchase warrants on a best efforts $1,500,000 minimum and $2,000,000 maximum basis.  The securities were offered to accredited investors only. The securities have not been registered under the Securities Act of 1933, as amended (the “Act”) and were offered in reliance upon the exemption from registration set forth in Section 4(2) and Regulation D, promulgated under the Act.  Such securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.  On December 8, 2009, the minimum for the offering was reduced to $1,000,000 and the offering period was extended to January 13, 2010.  Subsequent to the end of the fiscal year, the offering period was extended from January 13, 2010 to February 28, 2010 and again until March 15, 2010.

On November 2, 2009, November 12, 2009, and December 14, 2009, and in connection with a private debt offering (“Bridge Financing”), the Company raised $62,859 from four investors, including the Company’s Chief Executive Officer and Chief Operating Officer, from the sale of Convertible Promissory Notes in the principal amount of $62,859 due three months from issuance bearing interest at a 90-day rate of 10%.  In connection with such investments, 628,586 common stock purchase warrants were also issued to such investors.  Similarly, on November 12, 2009, and in connection with the Bridge Financing, the Company issued Convertible Promissory Notes to its Chief Executive Officer and another stockholder in the principal amount of $42,000 due three months from issuance bearing interest at a 90-day rate of 10%, resulting from the funds advanced by such two stockholders during the third quarter of 2009.  In connection with such issuance, 420,000 common stock purchase warrants were also issued to the two stockholders.

Subsequent to the end of the fiscal year, the Company completed three closings of the Private Offering with a total of 65 accredited investors (the “Purchasers”) for the issuance and sale of securities of the Company consisting of shares of Common Stock and common stock purchase warrants (the “Purchase Warrants”).  Pursuant to the Private Offering, the Company issued 15,150,000 shares of Common Stock and 15,150,000 Purchase Warrants.  Gross offering proceeds totaled $1,515,000.  Each of the Purchase Warrants entitles the holder thereof to purchase, at any time beginning from the final closing through five years thereafter, one share of Common Stock at a price of $0.25 per share.

In association with the Private Offering, the Company paid the placement agent commissions of $100,500 and a non-accountable expense allowance of $30,150.  In addition, the placement agent and its designees were issued an aggregate of 1,005,000 placement agent warrants (the “Placement Agent Warrants”) to purchase up to 1,005,000 warrant units (the “Warrant Units”) exercisable for five years at an exercise price of $0.10 per Warrant Unit with each Warrant Unit consisting of one share of Common Stock and one Purchase Warrant.

 
19

 
During the first quarter of 2010, two of the investors in the Bridge Financing converted all of the principal and interest due on their Convertible Promissory Notes into a total of 661,000 shares of Common Stock.  On January 22, 2010 and February 10, 2010, the balance of the principal and interest due on the Convertible Promissory Notes issued in connection with the Bridge Financing, was repaid to the other three of the investors, including the Chief Executive Officer and Chief Operating Officer, in the principal amount of $44,859 plus accrued interest of $4,981.

For the fiscal year ended December 31, 2009, the Company’s Net Cash Used in Operating Activities was $633,495 compared to $1,262,357 for the comparable period in 2008.  The decrease in Net Cash Used in Operating Activities between the two periods resulted from decreases in cash-based salaries and wages, increases in accounts payable and accrued expenses, and decreases in prepaid expenses.

For the fiscal year ended December 31, 2009, the Company’s Net Cash Used in Investing Activities was $4,860 compared to $22,696 for the comparable period in 2008.  The decrease in Net Cash Used in Investing Activities between the two periods resulted from decreases in fixed asset purchases and new product development.  .

For the fiscal year ended December 31, 2009, Net Cash Provided by Financing Activities was $100,159 for the year ended December 31, 2009 due to the receipt of proceeds from convertible promissory notes.
 
Capital Commitments
 
The Company currently has no material commitments for capital expenditures.
 
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
 
The Company has various contractual obligations, which are recorded as liabilities in the consolidated financial statements. Other items, such as certain lease agreements are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, the Company is contractually committed to make certain minimum lease payments to rent its current corporate location.
 
Any seasonal aspects
 
We have not experienced seasonal sales spikes in our sales as a result of our very limited retail distribution.
 
Off-Balance Sheet Arrangements
 
None
 
ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
 
20

 
 
ITEM 8.    Financial Statements and Supplementary Data.
 

 
SPECTRUMDNA, INC.
 
Consolidated Financial Statements
 
Years Ended December 31, 2009 and 2008
 

 
 
21

 

 
22


SpectrumDNA, Inc.
Consolidated Balance Sheets

   
December 31,
   
December 31,
 
   
2009
   
2008
 
              
ASSETS
           
             
CURRENT ASSETS
           
             
Cash
  $ 10,303     $ 548,499  
Accounts receivable, net
    6,750       14,000  
Prepaid expenses
    18,272       59,204  
                 
Total Current Assets
    35,325       621,703  
                 
PROPERTY AND EQUIPMENT, NET
    6,643       11,629  
                 
OTHER ASSETS
               
                 
Domain names, net
    2,542       3,428  
Product development, net
    2,583       69,273  
Security deposit
    5,000       5,000  
                 
Total Other Assets
    10,125       77,701  
                 
TOTAL ASSETS
  $ 52,093     $ 711,033  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
CURRENT LIABILITIES
               
                 
Accounts payable
  $ 152,019     $ 34,386  
Accounts payable - Related Parties
    10,112       -  
Accrued expenses
    166,526       11,933  
Interest payable
    8,723       -  
Debt conversion payable
    43,834       -  
Convertible promissory notes
    49,611       -  
Convertible promissory notes - Related Parties
    8,017       -  
Notes payable
    19,150       -  
                 
Total Current Liabilities
    457,992       46,319  
Total Liabilities
    457,992       46,319  
                 
COMMITMENTS
    -       -  
STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
-0- shares issued and outstanding
    -       -  
Common stock, $0.001 par value, 250,000,000 shares authorized, 52,747,237 and 48,739,658 shares issued and outstanding, respectively
    52,748       48,740  
Additional paid-in capital
    7,212,527       5,309,232  
Prepaid consulting services
    (544,444 )     -  
Accumulated deficit
    (7,126,730 )     (4,693,258 )
                 
Total Stockholders' Equity (Deficit)
    (405,899 )     664,714  
TOTAL LIABILITIES AND
               
STOCKHOLDERS' EQUITY (DEFICIT)
  $ 52,093     $ 711,033  

The accompanying notes are an integral part of these consolidated financial statements.

 
23

 

SpectrumDNA, Inc.
Consolidated Statements of Operations

   
For the
   
For the
 
   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
             
REVENUES, net
  $ 149,800     $ 67,747  
                 
COST OF SALES, net
    68,926       97,669  
                 
GROSS PROFIT (LOSS)
    80,874       (29,922 )
                 
OPERATING EXPENSES
               
                 
General and administrative
    889,354       795,211  
Salaries and wages
    1,480,029       1,553,505  
Product development expenses
    80,578       209,496  
Bad debt expense
    -       90  
Depreciation expense
    8,496       7,389  
                 
Total Operating Expenses
    2,458,457       2,565,691  
                 
OPERATING LOSS
    (2,377,583 )     (2,595,613 )
                 
OTHER INCOME (EXPENSES)
               
Interest income
    1,984       36,982  
Interest expense
    (66,873 )     -  
Other income
    9,000       -  
                 
Total Other Income (Expenses)
    (55,889 )     36,982  
                 
NET LOSS BEFORE INCOME TAXES
    (2,433,472 )     (2,558,631 )
INCOME TAX EXPENSE
    -       -  
                 
NET LOSS
  $ (2,433,472 )   $ (2,558,631 )
                 
BASIC AND FULLY DILUTED LOSS PER SHARE
  $ (0.05 )   $ (0.05 )
                 
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
    49,108,860       48,658,823  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
24

 

SpectrumDNA, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
For the period January 1, 2008 through December 31, 2009

                                             
Total
 
                           
Additional
         
Prepaid
   
Stockholders'
 
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Accumulated
   
Equity
   
Equity
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Expenses
   
(Deficit)
 
                                                 
Balance, January 1, 2008
    -     $ -       48,626,667     $ 48,627     $ 4,068,731     $ (2,134,627 )   $ -     $ 1,982,731  
                                                                 
Common shares issued for services at an average of $0.37 per share
    -       -       112,991       113       42,095       -       -       42,208  
Compensation expense associated with stock options and warrants
    -       -       -       -       1,198,406       -       -       1,198,406  
Net loss for the year ended December 31, 2008
    -       -       -       -       -       (2,558,631 )     -       (2,558,631 )
                                                                 
Balance, December 31, 2008
    -       -       48,739,658       48,740       5,309,232       (4,693,258 )     -       664,714  
                                                                 
Common shares issued for services at an average of $0.55 per share
    -       -       7,579       8       4,159       -       -       4,167  
Common shares issued for pre-paid services at an average of $0.14 per share
    -       -       4,000,000       4,000       556,000       -       (560,000 )     -  
Compensation expense associated with stock options and warrants
    -       -       -       -       1,282,111       -       -       1,282,111  
Amortization of prepaid consulting services
                                                    15,556       15,556  
Value attributable to benefical conversion features and related warrant valuation
    -       -       -       -       61,025       -       -       61,025  
Net loss for the year ended December 31, 2009
    -       -       -       -       -       (2,433,472 )             (2,433,472 )
                                                                 
Balance, December 31, 2009
  $ -     $ -       52,747,237     $ 52,748     $ 7,212,527     $ (7,126,730 )   $ (544,444 )   $ (405,899 )

The accompanying notes are an integral part of these consolidated financial statements.

 
25

 

SpectrumDNA, Inc.
Consolidated Statements of Cash Flows

   
For the
   
For the
 
   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
             
Net loss
  $ (2,433,472 )   $ (2,558,631 )
Adjustments to reconcile net loss to net used by operating activities:
               
Depreciation and amortization
    77,423       99,613  
Stock options and warrants granted for services rendered
    1,282,111       1,198,406  
Common stock issued for services rendered
    4,167       42,208  
Prepaid consulting services
    15,556       -  
Accretion of discount on convertible promissory notes
    57,628       -  
Changes in operating assets and liabilities
               
(Increase) decrease in accounts receivable
    7,250       (14,000 )
(Increase) decrease in employee advances
    -       1,790  
(Increase) decrease in prepaid expenses
    64,782       (10,050 )
Increase (decrease) in accounts payable and accrued expenses
    291,060       (21,693 )
                 
Net Cash Used in Operating Activities
    (633,495 )     (1,262,357 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
                 
Cash paid for fixed assets
    (3,510 )     (11,491 )
Cash paid for product development
    -       (8,110 )
Cash paid for intangible assets
    (1,350 )     (3,095 )
                 
Net Cash Used in Investing Activities
    (4,860 )     (22,696 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
                 
Payments made on notes payable
    (4,700 )     -  
Proceeds from convertible promissory notes
    104,859       -  
                 
Net Cash Provided by Financing Activities
    100,159       -  
                 
NET DECREASE IN CASH
    (538,196 )     (1,285,053 )
                 
CASH AT BEGINNING OF YEAR
    548,499       1,833,552  
                 
CASH AT END OF YEAR
  $ 10,303     $ 548,499  

The accompanying notes are an integral part of these consolidated financial statements.

 
26

 

SpectrumDNA, Inc.
Consolidated Statements of Cash Flows (Continued)

   
For the
   
For the
 
   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
             
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
           
             
CASH PAID FOR:
           
             
Interest
  $ -     $ -  
Income Taxes
  $ -     $ -  
                 
NON-CASH FINANCING ACTIVITIES:
               
                 
Common stock issued for services
  $ 4,167     $ 42,208  
Stock options and warrants granted for services rendered
  $ 1,282,111     $ 1,198,406  
Insurance financing through note payable
  $ 23,850     $ -  
Common stock issued for prepaid consulting services
  $ 560,000     $ -  

The accompanying notes are an integral part of these consolidated financial statements.

 
27

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

NOTE 1 - 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization
 
SpectrumDNA, Inc. was incorporated under the laws of the State of Delaware on January 16, 2008 under the name SpectrumDNA Holdings, Inc. to enable its now wholly-owned subsidiary, formerly known as SpectrumDNA, Inc. (now known as SpectrumDNA Studios, Inc.) to implement a holding company organizational structure.  Effective as of January 22, 2008, we reorganized into a holding company structure whereby SpectrumDNA, Inc. became a wholly-owned subsidiary of SpectrumDNA Holdings, Inc. pursuant to an Agreement and Plan of Merger dated as of January 18, 2008 whereby SpectrumDNA, Inc. changed its name to SpectrumDNA Studios, Inc. and SpectrumDNA Holdings, Inc. changed its name to SpectrumDNA, Inc.
 
SpectrumDNA Studios, Inc. (formerly SpectrumDNA, Inc.) is a Delaware corporation.  It was originally incorporated in the State of Utah in May 2006, and on September 11, 2006 was reorganized as a Delaware corporation as a result of a merger into a newly formed Delaware corporation incorporated on September 7, 2006 which took the Utah corporation’s name and became the surviving entity of the merger.  In management's opinion, the accompanying consolidated financial statements presented include all adjustments necessary for a fair presentation.  The consolidated financial statements include the accounts of SpectrumDNA, Inc. and its wholly-owned subsidiary, Cooshoo, Inc. which was created and capitalized by the Company (collectively, the Company).
 
SpectrumDNA, Inc. is a social media studio that creates digital networked applications that are engines of engagement (or “enginets”) for institutions—primarily media outlets and brand advertisers—seeking to cost-effectively capture specific audiences (“social nicheworks”) and audience behaviors, and develop advertiser-safe user-generated and user-marketed content.  Enginets are branded web and wireless-based network experiences—web apps and mobile apps— that empower users to take active roles in their community.
 
Financial Statement Reclassification
 
Certain account balances from prior periods have been reclassified in these consolidated financial statements so as to conform with current year classifications.
 
Development Stage Activities
 
Prior to the realization of significant revenues during 2009, the Company was classified as a development stage enterprise.
 
Cash and Cash Equivalents
 
Cash equivalents are highly liquid investments with maturities of three months or less when purchased.
 
Concentrations of Credit Risk
 
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of temporary cash investments.
 
The Company maintains its cash balances at one financial institution.  At times, such investments may exceed the FDIC limit of $250,000 per depositor per insured institution.  The Company has not experienced any losses in such accounts, but it is exposed to limited credit risk on cash since its investments are deposited in only one financial institution.
 
Concentration of Revenue with Individual Customers
 
The Company is exposed to financial risk due to the concentration of revenue generated from certain individual customers.  During 2009, the Company had ten customers.  The top three customers represented 67% of total revenue, with the top customer representing 40% of revenue, the next customer representing 17% of the revenue and the third representing 10% of the revenue.
 
 
28

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 1 - 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Accounts Receivable
 
Accounts receivable are stated at the amount management expects to collect from outstanding balances.  The Company provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts.  Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. A provision for bad debt of $1,668 and $-0-existed at December 31, 2009 and 2008, respectively.
 
Property and Equipment
 
Property and equipment are recorded at cost, less accumulated depreciation.  Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, generally three years.
 
Costs of renewals and improvements which substantially extend the useful life of the assets are capitalized.  Upon retirement, sale or other disposition, the cost and accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in operations.  Maintenance and repairs are expensed as incurred.
 
Intangible Assets
 
The Company’s intangible assets are amortized using the straight-line method over their estimated period of benefit of three years. The Company evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All intangible assets are subject to amortization. No material impairments of intangible assets have been identified during the period presented.  Capitalized product development costs are amortized to Cost of Sales.
 
Product Development
 
Product development expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with product development. The Company charges costs incurred internally in creating software products to product development until technological feasibility has been established.  Product development expense for the periods ended December 31, 2009 and 2008 were $80,578 and $209,496, respectively.  Thereafter, all product development costs are capitalized until the product is launched into the market.  Once the product is launched, all associated capitalized costs are amortized via the straight-line method over the estimated remaining economic life of the products.  The amortization of these costs will be included in cost of revenue over the estimated life of the products.  Amortization expense for the periods ended December 31, 2009 and 2008 were $68,926 and $88,650, respectively.
 
Fair Value of Financial Instruments
 
On January 1, 2008, the Company adopted FASB ASC 820-10-50, “Fair Value Measurements. This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
 
 
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
·
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
The carrying amounts reported in the balance sheets for the cash and cash equivalents, receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of convertible promissory notes approximates fair value because negotiated terms and conditions are consistent with current market rates as of December 31, 2009.  No convertible promissory notes were outstanding as of December 31, 2008.

 
29

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 1 - 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Recently Issued Accounting Pronouncements
 
In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In December 2009, the FASB issued Accounting Standards Update 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 167. (See FAS 167 effective date below.)
 
In December 2009, the FASB issued Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 166. (See FAS 166 effective date below)
 
In October 2009, the FASB issued Accounting Standards Update 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This Accounting Standards Update amends the FASB Accounting Standard Codification for EITF 09-1. (See EITF 09-1 effective date below.)
 
In October 2009, the FASB issued Accounting Standards Update 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This update changed the accounting model for revenue arrangements that include both tangible products and software elements. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15,2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-14 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15,2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. The Company does not expect the provisions of ASU 2009-12 to have a material effect on the financial position, results of operations or cash flows of the Company.

 
30

 
 
SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 1 - 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Recently Issued Accounting Pronouncements (Continued)
 
In July 2009, the FASB ratified the consensus reached by EITF (Emerging Issues Task Force) issued EITF No. 09-1, (ASC Topic 470) "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance" ("EITF 09-1"). The provisions of EITF 09-1, clarifies the accounting treatment and disclosure of share-lending arrangements that are classified as equity in the financial statements of the share lender. An example of a share-lending arrangement is an agreement between the Company (share lender) and an investment bank (share borrower) which allows the investment bank to use the loaned shares to enter into equity derivative contracts with investors. EITF 09-1 is effective for fiscal years that beginning on or after December 15,2009 and requires retrospective application for all arrangements outstanding as of the beginning of fiscal years beginning on or after December 15,2009. Share-lending arrangements that have been terminated as a result of counterparty default prior to December 15, 2009, but for which the entity has not reached a final settlement as of December 15, 2009 are within the scope. Effective for share-lending arrangements entered into on or after the beginning of the first reporting period that begins on or after June 15, 2009. The Company does not expect the provisions of EITF 09-1 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In June 2009, FASB issued ASC 105-10 (Prior authoritative literature:  SFAS No. 168, "The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10 establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. FASB ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2009.  Adoption of FASB ASC 105-10 did not have a material effect on the Company’s financial statements.
 
In June 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature:  SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) which amends the consolidation guidance applicable to a variable interest entity (“VIE”). This standard also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. Previously, the standard required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. This standard is effective for fiscal years beginning after November 15, 2009, and for interim periods within those fiscal years. Early adoption is prohibited.  Adoption of FASB ASC 810-10-65 did not have a material impact on the Company’s financial statements.
 
In June 2009, the FASB ASC 860-10 (Prior authoritative literature: issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”), which eliminates the concept of a qualifying special-purpose entity (“QSPE”), clarifies and amends the de-recognition criteria for a transfer to be accounted for as a sale, amends and clarifies the unit of account eligible for sale accounting and requires that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. This standard is effective for fiscal years beginning after November 15, 2009. Adoption of FASB ASC 860-10 did not have a material impact on the Company’s financial statements.
 
In May 2009, FASB issued FASB ASC 855-10 (Prior authoritative literature:  SFAS No. 165, "Subsequent Events"). FASB ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. FASB ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009.
 
In April 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 164, “Not-for-Profit Entities: Mergers and Acquisitions”) which governs the information that a not-for-profit entity should provide in its financial reports about a combination with one or more other not-for-profit entities, businesses or nonprofit activities and sets out the principles and requirements for how a not-for-profit entity should determine whether a combination is in fact a merger or an acquisition. This standard is effective for mergers occurring on or after Dec. 15, 2009 and for acquisitions where the acquisition date is on or after the beginning of the first annual reporting period, beginning on or after Dec. 15, 2009. This standard does not apply to the Company since the Company is considered a for-profit entity

 
31

 
 
SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 1 - 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Recently Issued Accounting Pronouncements (Continued)
 
In May 2008, the FASB issued FASB ASC 944 (Prior authoritative literature: SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60"). FASB ASC 944 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement.  This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years.   As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009.  The Company does not believe this standard will have any impact on the financial statements.
 
In March 2008, the FASB issued FASB ASC 815-10 (Prior authoritative literature: SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”), which is effective January 1, 2009. FASB ASC 815-10 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, this standard requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. This standard is not currently applicable to the Company since we do not have derivative instruments or engage in hedging activity.
 
In December, 2007, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, an amendment of ARB No. 51). FASB ASC 810-10-65 will change the accounting and reporting for minority interests which will be characterized as noncontrolling interests and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest shareholders. This standard is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008.  The Company adopted this standard beginning January 1, 2009 and does not believe it has a material impact in its financial statements.
 
In December, 2007, the FASB issued FASB ASC 805 (Prior authoritative literature: SFAS No. 141(R), “Business Combinations”), which established the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. FASB ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. FASB ASC 805 is effective the first annual reporting period beginning on or after December 15, 2008.  The Company adopted this standard beginning January 1, 2009 and does not believe it has a material impact in its financial statements.
 
In March 2007, FASB ASC 715-60 (Prior authoritative literature:  EITF Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements”). FASB ASC 715-60 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. FASB ASC 715-60 is effective for fiscal years beginning after December 15, 2007. The adoption of FASB ASC 715-60 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
In February 2007, FASB ASC 825-10 (Prior authoritative literature:  Statement of Financial Accounting Standards No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115  ,”) was issued. This standard allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard were effective as of the beginning of fiscal year 2008, with early adoption permitted. The adoption of FASB ASC 825-10 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 
32

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

NOTE 1 - 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Recently Issued Accounting Pronouncements (Continued)
 
In September 2006, the FASB issued FASB ASC 820-10 (Prior authoritative literature:  FASB Statement 157, “Fair Value Measurements”). FASB ASC 820-10 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. FASB ASC 820-10 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, FASB ASC 820-10 does not require any new fair value measurements. However, for some entities, the application of FASB ASC 820-10 will change current practice. The changes to current practice resulting from the application of FASB ASC 820-10 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. The provisions of FASB ASC 820-10 are effective as of January 1, 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. However, delayed application of this statement is permitted for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of FASB ASC 820-10 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
In June 2006, FASB issued FASB ASC 740-10 (Prior authoritative literature:   FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”).  This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes.  FASB ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FASB ASC 740-10 is effective for fiscal years beginning after December 15, 2006. The adoption of FASB ASC 740-10 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
Revenue Recognition
 
The Company intends to derive revenues from the sale and licensing of web based software applications.  In addition, the Company may at times earn revenues from the performance of certain hosting, marketing, and contract labor services.  Revenue will be recognized when earned and collection is reasonably assured. The Company’s revenue recognition policies are in compliance with FASB ASC 985-605, “Software Revenue Recognition” and FASB ASC 605-10 . Revenues will be recognized ratably over the license period, only if no significant company obligations remain, the fee is fixed or determinable, and collection is received or the resulting receivable is deemed probable. Revenue will be recognized, net of any discounts and allowances. Provisions will be recorded for returns, concessions, and bad debts. Revenues which include technical support, will be based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence (VSOE) when significant. The Company VSOE will be determined by the price charged when each element is sold separately. Revenue from non-recurring programming, consulting service, support arrangements and training programs will be recognized as the services are provided.
 
Advertising
 
Advertising costs are expensed as incurred.  The Company recorded $1,776 and $9,965  in advertising expense during the years ended December 31, 2009 and 2008, respectively.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year.  Actual results could differ from those estimates.

 
33

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

NOTE 1 - 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Share-Based Payment
 
The Company adopted ASC 718, Share-Based Payment, which requires the grant-date fair value of all share-based payment awards that are expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period.
 
Net Loss Per Share of Common Stock
 
The Company computes net loss per share of common stock in accordance with ASC 260, Earnings per Share (“ASC 260”). Under the provisions of ASC 260, basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of convertible promissory notes. The dilutive effect of these instruments is reflected in diluted earnings per share by application of the treasury stock method.  As of December 31, 2009 and 2008, the number of shares underlying these instruments are as follows:
 
   
2009
   
2008
 
Shares of common stock underlying stock options
    14,262,075       10,015,100  
Shares of common stock underlying warrants
    1,048,586       -0-  
Shares of common stock issuable upon conversion of convertible promissory notes
    1,135,815       -0-  
Total shares
    16,446,476       10,015,100  
 
For the fiscal years ended December 31, 2009 and 2008, potential common shares of 16,446,476 and 10,015,100 resulting from the aforementioned instruments, respectively, were considered but not included in the calculation of diluted income (loss) per share as their effect would be anti-dilutive.
 
   
2009
   
2008
 
Basic and Fully Diluted earnings per share:
           
Loss (numerator)
  $ (2,433,472 )   $ (2,558,631 )
                 
Weighted average number of shares outstanding – basic (denominator)
    49,108,860       48,658,823  
                 
Per share amount
  $ (0.05 )   $ (0.05 )
 
NOTE 2 -
PROPERTY AND EQUIPMENT
 
Property and equipment as of December 31, 2009 and 2008 are as follows:
 
Cost:
           
Computer equipment
  $ 18,284     $ 14,709  
Software
    7,744       7,808  
Office furniture
    650       650  
Less:  accumulated depreciation
    (20,035 )     (11,538 )
                 
Net book value
  $ 6,643     $ 11,629  

Depreciation expense for the years ended December 31, 2009 and 2008 was $8,496 and $7,389, respectively

 
34

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

NOTE 3 - 
INTANGIBLE ASSETS
 
Intangible assets as of December 31, 2009 and 2008 are as follows:
 
Cost:
           
Patents and trademarks
  $ 100     $ 100  
Domain names
    7,083       5,734  
Product development costs
    194,322       194,322  
Total Intangible Assets
    201,505       200,156  
                 
Less: accumulated amortization
    (196,380 )     (127,455 )
                 
Net book value
  $ 5,125     $ 72,701  
 
Amortization expense for the years ended December 31, 2009 and 2008 was $68,926 and $88,650, respectively, and have been included in cost of sales for the periods ended December 31, 2009 and 2008.
 
NOTE 4 - 
INCOME TAXES
 
The Financial Accounting Standards Board (FASB) has issued FASB ASC 740-10 (Prior authoritative literature: Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48)).  FASB ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with prior literature FASB Statement No. 109, Accounting for Income Taxes.  This standard requires a company to determine whether it is more likely than not that a tax position will be sustained will be sustained upon examination based upon the technical merits of the position.  If the more-likely-than- not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.  As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740-10.  

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
The components of current income tax expense as of December 31, 2009 and 2008 consist of the following:
 
   
2009
   
2008
 
             
Current federal tax expense
  $ -     $ -  
Current state tax expense
    -       -  
Change in NOL benefits
    (525,700 )     (508,700 )
Change in depreciation differences
    -       -  
Change in contribution benefits
    -       -  
Change in valuation allowance
    525,700       508,700  
                 
    $ -     $ -  

 
35

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

NOTE 4 - 
INCOME TAXES (CONTINUED)
 
The net deferred income taxes in the accompanying balance sheet include the following amounts of deferred income tax assets:
 
   
2009
   
2008
 
Net income tax assets:
           
Net operating loss carryforward
  $ 972,000     $ 953,800  
Contribution carryforward
    -       400  
                 
Less: Deferred income tax liabilities:
               
Depreciation differences
    -       9,600  
                 
Less: Valuation allowance
    (972,000 )     (963,800 )
                 
Net deferred income tax asset
  $ -     $ -  

The following is a reconciliation of the provision for income taxes at the United States of America federal income tax rate to the income taxes reflected in the statements of operations:
 
Tax expense (credit) at statutory rate – federal
    -35 %
State tax expense net of federal tax
    -6 %
Change in valuation allowance
    -41 %
Tax expense at actual rate
    0 %
 
As of December 31, 2009, the Company’s net deferred tax assets are offset by a valuation allowance of $1,442,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the year in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment.
 
As of December 31, 2009 and 2008, the Company has approximately $3,517,000 and $2,432,000, respectively, of net operating loss carryforwards available to reduce future taxable income. These carryforwards will begin to expire in 2027.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
Beginning balance
  $ -     $ -  
Additions based on tax positions related to current year
    -       -  
Additions for tax positions of prior years
    -       -  
Reductions for tax positions of prior years
    -       -  
Reductions in benefit due to income tax expense
    -       -  
Ending balance
  $ -     $ -  

At December 31, 2009, the Company had no unrecognized tax benefits that, if recognized, would affect the effective tax rate.

The Company did not have any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

 
36

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

NOTE 4 - 
INCOME TAXES (CONTINUED)
 
The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income taxes.  As of December 31, 2009 and 2008, the Company had no accrued interest or penalties related to uncertain tax positions.

The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended December 31, 2009, 2008 and 2007.
 
NOTE 5 - 
CAPITAL STRUCTURE
 
 
The Company is authorized to issue 250,000,000 shares of Common Stock with a par value of $0.001.  As of December 31, 2009 and 2008, 52,747,237 and 48,739,658 shares of Common Stock are issued and outstanding, respectively.  The holders of our Common Stock are entitled to one vote for each share of record on all matters to be voted on by stockholders.  Stockholders are not entitled to cumulative voting, so the holders of Common Stock entitled to cast more than 50% of the votes cast at an election of directors can elect all of the directors.  Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefore, as well as any distributions to the shareholders and, in the event of liquidation, dissolution or winding up of SpectrumDNA, are entitled to share ratably in all assets of SpectrumDNA remaining after satisfaction of all liabilities.  Holders of the Common Stock have no conversion, redemption or preemptive rights or other rights to subscribe for additional shares.
 
On February 16, 2010, pursuant to a Certificate of Amendment to the Company’s Certificate of Incorporation filed with the State of Delaware, the Company increased the number of authorized shares of Common Stock, par value $0.001 per share, from 100,000,000 to 250,000,000.
 
NOTE 6 - 
STOCKHOLDERS EQUITY
 
During the year ended December 31, 2008, the Company issued 112,991 shares of its common stock at an average of $0.37 per share for services rendered in the amount of $42,208.
 
During the year ended December 31, 2009, the Company issued 7,579 shares of its common stock at an average of $0.55 per share for services rendered in the amount of $4,167.
 
On November 28, 2009, the Company executed a three year consulting agreement.  As payment of the services the Company issued 4,000,000 shares of common stock to be recognized as consulting fees over the three year term.  Accordingly, the Company recorded $560,000 as prepaid equity expenses.  At December 31, 2009, $15,556 had been amortized in the statement of operations with $544,444 remaining as prepaid consulting services.

 
37

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

NOTE 7- 
SHARE BASED PAYMENT
 
The Company follows the provisions of ASC 718, which requires the grant-date fair value of all share-based payment awards that are expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period.
 
During 2009 and 2008, the Company recorded $1,282,111 and $1,198,406, respectively, in compensation expense related to share-based payment awards. The Company recognizes compensation expense for share-based payment awards on the straight-line basis over the requisite service period of the entire award, unless the awards are subject to market conditions, in which case the Company recognizes compensation expense over the requisite service period of each separate vesting installment. Compensation expense related to share-based payment awards is recorded in general and administrative expense for non-employees and in salaries and wages for employees.  During 2009 and 2008, the Company recorded $852,970 and $842,392, respectively, in compensation expense related to shared-based payments awards for employees. The fair value of each option or warrant award is estimated on the date of the grant using the Black-Scholes pricing model that uses the assumptions noted in the following table. The expected term of the options or warrants granted represents the period of time that options or warrants granted are expected to be outstanding. Expected volatilities are based on historical volatility of the stock of similar companies and other factors. The risk-free interest rate for the period matching the expected term of the option or warrant is based on the U.S. Treasury yield curve in effect at the time of the grant.

Common Stock Options
 
The following table sets forth information about the weighted-average fair value of options granted during the years ended December 31, 2009 and 2008 and the assumptions used for such grants:
 
   
2009
 
2008
Dividend yields
 
0.0%
 
0.0%
Expected volatility
 
175.0% - 188.7%
 
68.5%
Risk-free interest rate
 
2.88% - 3.84%
 
3.57% - 4.06%
Option terms
 
1– 4 years
 
1– 4 years
 
Changes in stock options issued to employees, advisors, and board members for the period ended December 31, 2009 and 2008 are as follows:
 
         
Weighted
 
   
Number
   
Average
 
   
Of
   
Exercise
 
   
Options
   
Price
 
             
Outstanding, December 31, 2007
    8,410,180     $ 0.35  
Granted
    5,260,000       0.54  
Exercised
    -       -  
Cancelled
    (3,655,080 )     0.50  
Outstanding, December 31, 2008
    10,015,100     $ 0.45  
Exercisable, December 31, 2008
    4,094,614     $ 0.38  
                 
Outstanding, December 31, 2008
    10,015,100     $ 0.45  
Granted
    7,550,100       0.13  
Exercised
    -       -  
Cancelled
    (3,303,125 )     0.35  
Outstanding, December 31, 2009
    14,262,075     $ 0.30  
Exercisable, December 31, 2009
    8,066,743     $ 0.35  

 
38

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 7- 
SHARE BASED PAYMENT(CONTINUED)
 
Common Stock Options (Continued)
 
The following table summarizes information about stock options granted to employees, advisors, and board members at December 31, 2009:
 
Options Outstanding
   
Options Exercisable
 
Range of
Exercise
Prices
   
Number
Outstanding
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
(in years)
   
Number of
Options
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
(in years)
 
                                       
$ 0.04       1,620,000     $ 0.04       6.84       1,620,000     $ 0.04       6.84  
                                                     
  0.50       3,235,100       0.50       7.67       2,510,159       0.50       7.65  
                                                     
  0.55       1,870,000       0.55       8.49       1,624,167       0.55       8.50  
                                                     
  0.56       1,020,000       0.56       8.59       374,167       0.56       8.59  
                                                     
  0.46       400,000       0.46       8.76       400,000       0.46       8.76  
                                                     
  0.21       20,000       0.21       8.29       20,000       0.21       8.29  
                                                     
  0.11       4,396,975       0.11       9.17       1,151,063       0.11       9.17  
                                                     
  0.17       1,000,000       0.17       9.29       177,083       0.17       9.29  
                                                     
  0.34       250,000       0.34       9.43       72,917       0.34       9.43  
                                                     
  0.33       200,000       0.33       9.48       104,167       0.33       9.48  
                                                     
  0.19       250,000       0.19       9.79       13,021       0.19       9.79  
                                                     
          14,262,075     $ 0.30       8.45       8,066,743     $ 0.35       8.05  
 
On June 30, 2008, the Board of Directors of the Company approved and adopted the 2008 Equity Incentive Plan, under which 10,000,000 stock options were available in 2008.  Pursuant to the Plan, an additional 2,436,983 were made available on January 1, 2009.  Of the 14,262,075 options outstanding, 9,406,975 were issued under the Plan.  As of December 31, 2009, the aggregate intrinsic value of the options outstanding and exercisable was $358,939 and $229,103, respectively.  As of December 31, 2008, the aggregate intrinsic value of the options outstanding and exercisable was $183,060 and $132,210.  The weighted-average grant-date fair value of options granted for the periods ended December 31, 2009 and 2008 was $0.12 and $0.41, respectively.  The total fair value of shares vested during 2009 and 2008 was $636,538 and $432,825, respectively.

 
39

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 7- 
SHARE BASED PAYMENT(CONTINUED)
 
Warrants
 
In connection with the Bridge Financing convertible promissory notes discussed in Note 11 below, the holders of the notes were granted warrants to purchase the Company’s common stock.  The exercise price of the warrants is $0.25, vest upon grant and are exercisable for a period of five years.
 
The following table sets forth information about the weighted-average fair value of warrants issued during the year ended December 31, 2009 and the assumptions used for such grants.  No warrants were issued in 2008:
 
 
2009
Dividend yields
0.0%
Expected volatility
178.0% - 183.0%
Risk-free interest rate
2.28% - 2.33%
Warrant term
5 years
 
Changes in warrants issued to investors for the period ended December 31, 2009 are as follows:
 
         
Weighted
 
   
Number
   
Average
 
   
Of
   
Exercise
 
   
Warrants
   
Price
 
             
Outstanding, December 31, 2008
    -     $
 0.00
 
Granted
    1,048,586       0.25  
Exercised
    -       -  
Cancelled
    -       -  
Outstanding, December 31, 2009
    1,048,586     $ 0.25  
Exercisable, December 31, 2009
    1,048,586     $ 0.25  
 
The following table summarizes information about stock warrants granted to employees, advisors, and board members at December 31, 2009:
 
Warrants Outstanding
   
Warrants Exercisable
 
Range of
Exercise
Prices
   
Number
Outstanding
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
(in years)
   
Number of
Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
(in years)
 
                                       
$ 0.25       1,048,586     $ 0.25       4.87       1,048,586     $ 0.25       4.87  
                                                     
          1,048,586     $ 0.25       4.87       1,048,586     $ 0.25       4.87  
 
As of December 31, 2009, the aggregate intrinsic value of the warrants outstanding and exercisable was $0 and $0, respectively.  The weighted-average grant-date fair value of options granted for the periods ended December 31, 2009 was $0.14.  The total fair value of shares vested during 2009 was $157,288.

 
40

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 8- 
OPERATING LEASES
 
The Company leases approximately 2,326 square feet of space in Park City, Utah.  Such lease, which commenced on September 1, 2007, has a term of three years, subject to an option to extend for an additional three years.  Pursuant to the terms thereof, base rent is $4,264 per month for the first year and $4,563 per month for the second and third years of the lease.  In November 2009, the parties entered into an amendment to the lease agreement, pursuant to which the parties agreed that the option shall be terminated and the third and final year of the lease shall be paid for by a cash payment of $45,000 plus the Company creating  a website and providing ongoing maintenance, training, and hosting services associated with said website for its landlord.  Through December 31, 2009, the Company performed services in association with the website development of $9,000, which reduced the Company’s lease liability and increased other income on the statements of operations.  Subsequent to the end of the year, the Company made a cash payment of $45,000 in order to fulfill the lease amendment.
 
Rent expense for operating leases for the years end December 31, 2009 and 2008 was $49,876 and $52,366, respectively.
 
NOTE 9- 
GOING CONCERN
 
The Company’s financial statements have been prepared using accounting principles generally accepted in the United States of America generally applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  Accordingly, the consolidated financial statements do not include any adjustments related to the recoverability of assets or classification of liabilities that might be necessary should we be unable to continue as a going concern.  At December 31, 2009, the Company’s current liabilities exceeded it current assets.  Additionally, it has incurred substantial losses in this and prior fiscal years and has recorded negative cash flows from operations in this and prior fiscal years.  At December 31, 2009, the Company’s cash balance was $10,303.  The preceding circumstances combine to raise substantial doubt about the Company’s ability to continue as a going concern.
 
Management’s plan to continue as a going concern includes significant cost cutting measures implemented in November of 2008 to improve earnings potential as well as continuing to focus on increasing revenues from the sales of its products.  In addition, throughout the third and fourth quarters of 2009, the Company actively sought additional sources of financing to fund its operations for the foreseeable future.  Subsequent to the close of the year ended December 31, 2009, the Company closed a private offering of equity securities.  See Notes 11 and 12 below.
 
NOTE 10 –
CONSULTING AGREEMENT
 
On July 31, 2009, the Company entered into a Consulting Agreement (the “Agreement”) with HFP Capital Markets LLC (“HFP”) pursuant to which HFP will provide certain consulting services to the Company including but not limited to assistance in securing future investment in the Company, assistance with certain corporate finance and investment banking activities, assistance with new business development, sales and marketing opportunities, and such other services as set forth therein.  The term of the Agreement is three years, although the Company may terminate upon thirty days written notice for any reason or no reason at all, but no sooner than six months from the full execution of the Agreement.  As compensation for these consulting services, the Company  issued to HFP or its designees 4,000,000 shares of the Company’s restricted common stock which vested and became issuable to HFP or its designees 120 days from the full execution of the Agreement, or November 28, 2009.  As such, the shares issued were recorded as prepaid equity expenses since it is a three year agreement.  The shares were valued at $0.14 per share for a total prepayment for these fees of $560,000.  At December 31, 2009, $15,556 had been amortized to consulting expense, with the remaining as prepaid equity expense, to be amortized over the remaining life of the agreement.

 
41

 

SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 11 –
PRIVATE FINANCING TRANSACTIONS
 
During September 2009, the Company commenced a private offering (“Private Offering”) of equity securities consisting of shares of common stock and common stock purchase warrants on a best efforts $1,500,000 minimum and $2,000,000 maximum basis.  The securities were offered to accredited investors only. The securities have not been registered under the Securities Act of 1933, as amended (the “Act”) and were offered in reliance upon the exemption from registration set forth in Section 4(2) and Regulation D, promulgated under the Act.  Such securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.  On December 8, 2009, the minimum for the offering was reduced to $1,000,000 and the offering period was extended to January 13, 2010.  Subsequent to the end of the fiscal year, the offering period was extended from January 13, 2010 to February 28, 2010 and again until March 15, 2010.
 
On November 2, 2009, November 12, 2009, and December 14, 2009, and in connection with a private debt offering (“Bridge Financing”), the Company raised $62,859 from four investors, including the Company’s Chief Executive Officer and Chief Operating Officer, from the issuance of Convertible Promissory Notes in the principal amount of $62,859 due three months from issuance bearing interest at a 90-day rate of 10%.  In connection with such investments, 628,586 common stock purchase warrants were also granted to such investors (See Note 7).  Similarly, on November 12, 2009, and in connection with the Bridge Financing, the Company issued Convertible Promissory Notes to its Chief Executive Officer and another stockholder in the principal amount of $42,000 due three months from issuance bearing interest at a 90-day rate of 10%, resulting from the funds advanced by such two stockholders during the third quarter of 2009.  In connection with such issuance, 420,000 common stock purchase warrants were also granted to the two stockholders.
 
In accordance with FASB ASC 470-20-30, the Company used the effective conversion price based on the proceeds received to compute the intrinsic value of the embedded conversion option.  The Company allocated the proceeds received from the Bridge Financing to the convertible instrument and the detachable warrants included in the exchange on a relative fair value basis.  The Company then calculated an effective conversion price and used that price to measure the intrinsic value of the embedded conversion option.  The convertible notes may be converted into shares of the Company’s common stock or cash at any time at the option of the holder.  The conversion price of the convertible notes is equal to $0.10 per share of the company’s common stock.  The number of shares issuable upon conversion of the notes shall be determined by dividing the outstanding principal amount, together with accrued but unpaid interest, to be converted by the conversion price in effect on the conversion date.
 
Since the holder has the option to convert the note to cash, the Company recorded a liability for the portion of the note that contained the conversion option.  Therefore, the six notes resulted in a debt discount of $104,859, with $43,834 recorded as a debt conversion liability and $61,025 as the equity component associated with the value of the warrants.  The debt discount will be accreted over the life of the respective note or 90 days.  Accretion  of the debt discount at December 31, 2009 was $57,629, which was charged to the statements of operations.
 
The following table outlines the gross amounts owed under these arrangements:
 
   
Principal Balance as of
December 31, 2009
   
Interest Accrued as of
December 31, 2009
 
Convertible promissory note, interest at 10% per 90 days,
no monthly payments due, unsecured, matures January 2010
  $ 30,000     $ 2,300  
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures February 2010
    25,000       1,528  
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures February 2010
    30,000       3,067  
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures February 2010
    12,000       1,680  
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures March 2010
    2,859       54  
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures March 2010
    5,000       94  
Total
  $ 104,859     $ 8,723  
At December 31, 2009, the Company’s convertible instruments’ if-converted value exceeded its principal value in the amount of $52,430.
 
42

 
SPECTRUMDNA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
 
NOTE 12 –
RELATED PARTY TRANSACTIONS
 
The following table outlines the  convertible promissory notes held by officers and directors of the Company as referenced in Note 11 above:
 
   
Principal Balance as of
December 31, 2009
   
Interest Accrued as of
December 31, 2009
 
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures February 2010
  $ 12,000     $ 1,680  
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures March 2010
    2,859       54  
Convertible promissory note, interest at 10% per 90 days
no monthly payments due, unsecured, matures March 2010
    5,000       94  
Total
  $ 19,859     $ 1,828  
 
No payments had been made and no notes had been converted at December 31, 2009.
 
NOTE 13 –
SUBSEQUENT EVENTS
 
Subsequent to the end of the fiscal year, the Company completed three closings of the Private Offering with a total of 65 accredited investors (the “Purchasers”) for the issuance and sale of securities of the Company consisting of shares of Common Stock and common stock purchase warrants (the “Purchase Warrants”).  Pursuant to the Private Offering, the Company issued 15,150,000 shares of Common Stock and 15,150,000 Purchase Warrants.  Gross offering proceeds totaled $1,515,000.  Each of the Purchase Warrants entitles the holder thereof to purchase, at any time beginning from the final closing through five years thereafter, one share of Common Stock at a price of $0.25 per share.
 
In association with the Private Offering, the Company paid the placement agent commissions of $100,500 and a non-accountable expense allowance of $30,150.  In addition, the placement agent and its designees were issued an aggregate of 1,005,000 placement agent warrants (the “Placement Agent Warrants”) to purchase up to 1,005,000 warrant units (the “Warrant Units”) exercisable for five years at an exercise price of $0.10 per Warrant Unit with each Warrant Unit consisting of one share of Common Stock and one Purchase Warrant.
 
During the first quarter of 2010, two of the investors in the Bridge Financing converted all of the principal and interest due on their Convertible Promissory Notes into a total of 661,000 shares of Common Stock.  On January 22, 2010 and February 10, 2010, the balance of the principal and interest due on the Convertible Promissory Notes issued in connection with the Bridge Financing, was repaid to the other three of the investors, including the Chief Executive Officer and Chief Operating Officer,  in the principal amount of $44,859 plus accrued interest of $4,981.  See Note 11 and 12 above.
 
During the first quarter of 2010, the Company issued a total of 500,000 shares of Common Stock and options to acquire an additional 500,000 shares at $.20 per share and paid $50,000 to a consultant for services rendered and in full consideration for a one-year consulting agreement entered into on January 15, 2010.
 
The Company has evaluated subsequent events from the balance sheet date through the issuance of these financial statements and has determined that no events had a material impact on its financial statements other than those disclosed above.

 
43

 
ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
 
None
 
ITEM 9A(T).  Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2009, these disclosure controls and procedures were ineffective to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
There have been no material changes in internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, 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.
 
Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.
 
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting.  Based on our evaluation, management concluded that our internal control over financial reporting was ineffective as of December 31, 2009 due to two significant deficiencies.  A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.
 
Management’s assessment identified the following significant deficiencies in internal control over financial reporting:
 
 
·
Incomplete recording of beneficial conversion feature associated with the Convertible Promissory Notes issued during the fourth quarter of 2009 (See Note 11 to the consolidated financial statements included under Part II, Item 8) prior to the audit conducted by our principal independent accounting firm.
 
 
·
Incomplete recording of the prepaid consulting services associated with the Consulting Agreement fulfilled during the fourth quarter (See Note 10 to the consolidated financial statements included under Part II, Item 8) prior to the audit conducted by our principal independent  accounting firm.  While the issuance of the stock certificates occurred on January 11, 2010 subsequent to the end of the fiscal year, the substance of the agreement was completed prior to December 31, 2009.
 
In light of the significant deficiencies described above, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
 
Management intends to mitigate the risk of significant deficiencies going forward by utilizing external financial consulting services prior to the review by our principal independent accounting firm to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the Commission’s rule and forms.

 
44

 
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
 
Inherent Limitations Over Internal Controls
 
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls.  Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
 
ITEM 9B.  Other Information.
 
None.

 
45

 

PART III
 
ITEM 10.   Directors, Executive Officers and Corporate Governance.
 
Set forth below are the present directors and executive officers of the Company.  Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers.  There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer.  Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified.  Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.

       
Present Position
 
Has Served As
Name
 
Age
 
and Offices
 
Director Since
             
James A. Banister
 
51
 
President, Chief Executive
 
2006
       
Officer, Chairman of the Board,
   
       
Secretary, Treasurer
   
       
and Director
   
             
Kelly A. McCrystal
 
39
 
Chief Operating Officer
 
             
Rebecca D. Hershinger
 
36
 
Chief Financial Officer
 
             
Michael Dowling
 
42
 
Director
 
2008
             
James Moloshok
 
60
 
Director
 
2008
             
Jeffrey Nolan
 
43
 
Director
 
2009
             
Anthony Stonefield
  
47
  
Director
  
2008

None of the directors and officers is related to any other director or officer of the Company.
 
Set forth below are brief accounts of the business experience during the past five years of each director, executive officer and significant employees of the Company.
 
JAMES A. BANISTER has been the Chairman of the Board and a Director of SpectrumDNA, Inc. since its inception in May 2006 and President and Chief Executive Officer since October 2006.  Mr. Banister’s background includes more than 20 years of crossing content with technology and he has been an entrepreneur in computer animation and media.  From March 2004 to January 2006, Mr. Banister was Executive Creative Director of the Center for Applied Media, a non-profit center for digital media education and enterprise development and in addition, since 2004, Mr. Banister has been the Managing Director of Spectrum Mediaworks, Inc., a digital media company that he co-founded which focused on the crossover between television, games and network media.  From June 2002 to March 2004, Mr. Banister traveled, researched, and wrote a book on the past, present and future of digital networked media entitled “Word of Mouse: The New Age of Networked Media”, Agate Fine Print, published in August 2004.  Prior thereto, and from September 2001 to June 2002, he was a project director for the British Broadcasting Corporation in London, England, and led its Media Asset Exchange project, an internal revamping of the BBC’s digital media infrastructure.  From June 2000 to June 2001, he was Managing Director of Windsor Digital, LLC, and was responsible for finding and developing early stage investments/partnerships for companies in the web, games and wireless industries.  From May 1995 to March 2000, Mr. Banister worked for Warner Brothers Online initially as Vice President of Production and Technology and then as its Chief Development Officer.  At Warner Brothers Online, he led the digital media content, community and commerce programming and spearheaded its overall digital media strategy.  Mr. Banister was the Producer of award-winning one-hour dramatic television specials for the Walt Disney Company, and two short subject films, both of which premiered at the Cannes Film Festival.  Mr. Banister has a Bachelors of Science in Physics from San Diego State University and a Masters of Science in Electrical Engineering from University of Southern California.
 
KELLY A. McCRYSTAL has been Chief Operating Officer since July 2007 and previously served as Vice President of Operations and Finance of the Company since November 2006.  From 1997 to 2006, Ms. McCrystal managed the development of large-scale software projects for Interactive Corp., EDS, BMC Software and Virgin Atlantic Airways.  Specific projects have included the Ticketmaster/CitySearch hotel reservation system, Leading Hotels of the World online reservation system, and Virgin Atlantic’s first online reservation system.  From 2001 through 2006, Ms. McCrystal delivered on these projects as President of Crystech Consulting, and from 1997 through 2001 as Senior Project Manager/Senior Web and Database Developer at Panther Software.  She holds a Bachelor of Arts in Economics from the University of Notre Dame and a Masters of Business Administration in Finance from The Wharton School of the University of Pennsylvania.

 
46

 
 
REBECCA D. HERSHINGER has been Chief Financial Officer since April 2009 and previously served as Vice President of Finance and Corporate Development since July 2008.  From 2007 to 2008, she provided financial and strategy consulting services to Kurt Salmon Associates and SpectrumDNA, Inc.  Prior to that, from 1999 to 2005, Ms. Hershinger held various positions at Metro-Goldwyn-Mayer, Inc., serving most recently as Vice President of Finance and Corporate Development.  From 1995 to 1998, she worked at J.P. Morgan in the Investment Banking and Global Credit Risk Management divisions covering media/entertainment, hotels, gaming, and commercial real estate clients.  She holds a Bachelor of Science in Business Administration from Georgetown University and a Masters of Business Administration in Finance from The Wharton School, University of Pennsylvania.
 
MICHAEL DOWLING has been a Director of the Company since October 2008.  Since March, 2006, Mr. Dowling has been the Chief Executive Officer of Interpret, LLC, a consumer research company that helps companies to bridge the gap between traditional and new media.  Prior to founding Interpret, from January 2002 to March 2006, Mr. Dowling was SVP, Entertainment at the Nielsen Company, leading its growth into emerging industries, such as video games, wireless and broadband and overseeing strategic planning and the efforts to consolidate seven separate companies into one.  Prior to that, from March 1998 to December 2000, Mr. Dowling co-founded and served as President and COO of iFUSE, a youth-oriented media company that provided integrated marketing solutions to major advertisers.
 
JAMES MOLOSHOK has been a Director of the Company since September 2008.  Since December 2007, he has been the Executive Chairman of Betawave, formerly known as GoFish Corp.  Prior to joining Betawave, from 2005 to 2007, Mr. Moloshok was President of Digital Initiatives for HBO Network, where he was responsible for exploring new opportunities for the company, focusing on innovative content and fast-changing technology.  Prior to that, from 2001 to 2005, Mr. Moloshok served in various positions with Yahoo! Inc., serving most recently as Senior Vice President, Entertainment and Content Relationships, during which he helped build partnerships with movie studios, TV networks and producers.  Prior to that, Mr. Moloshok was a co-founder of Windsor Digital, an entertainment and investment company.  From 1999 to 2000, Mr. Moloshok served as president of Warner Bros. Online and president and CEO of Entertaindom.com, an original entertainment destination for Time Warner.  From 1989 to 1999, Mr. Moloshok served as Senior Vice President of Marketing at Warner Bros. and previously held the same position at Lorimar Telepictures, a television distribution company, which was formed when Lorimar merged with Telepictures in 1986 where he was also responsible for marketing to consumers, broadcasters and advertisers.
 
JEFFREY NOLAN has been has been a Director of the Company since June 2009.  From August 2007 until January 2009, Mr. Nolan was the VP Corporate Development at NewsGator Technologies where he oversaw the restructuring of NewsGator into enterprise software and media business units operating independently of each other.  He also worked to establish brand leadership for the company in the widget and content syndication market space.  Prior to that, and from September 2006 to May 2007, he was CEO of Teqlo, Inc. where he defined strategy, led fundraising, oversaw marketing and managed operations for the early stage company in the emerging mashup platform space.  From October 2005 through September 2006, Mr. Nolan was appointed Director of the Apollo Strategy Group for SAP Global Marketing, leading the Oracle Competitive Strategies Team which identified and implemented disruptive competitive strategies, including innovative social media tactics.  From 1998 through 2005, Mr. Nolan was a Venture Partner for SAP Ventures where he managed a portfolio of investments.
 
ANTHONY STONEFIELD has been has been a Director of the Company since October 2008.  Since January 2010, he has been a consulting executive and advisor to several innovative wireless and online ventures, including Yagatta, a Qualcomm venture that focuses on providing smart phone users with a next-generation in data augmented communication experience. and Zad Mobile, Inc., a provider of turn-key marketing and rich media applications to help wireless service providers boost brand engagement and content sales. From September 2006 through January 2010, Mr. Stonefield was the Co-founder, Chairman of the Board, and Chief Executive Officer of eMotive Communications, Inc., that pioneered  a Telco 2.0 solution that enables mobile subscribers to project programmable media files from phone to phone in real time.  In January 2010, Mr. Stonefield completed the merger of eMotive Communications’ assets and capabilities with Zad Mobile, Inc.  From October 1993 to January 2002, he founded and served as CEO of Moviso LLC until its sale to Vivendi Universal in 2002 and subsequently to InfoSpace in 2003, in both cases serving as Chief Strategy Officer of the business unit.  Since 1995, working in cooperation with companies such as AT&T/Bell Labs and Qualcomm Services Labs, he has conceived and productized applications for networked media distribution and marketing, including pioneering downloadable song distribution, developing and popularizing the worldwide ringtone market, and deploying the first commercial peer-to-peer media networking service for mobile phones.  He received a bachelor’s degree in Biology from the University of California, Santa Cruz.
 
To the knowledge of the Company, none of the officers or directors has been personally involved in any bankruptcy or insolvency proceedings. To the knowledge of the Company, none of the directors or officers have been convicted in any criminal proceedings (excluding traffic violations and other minor offenses) or are the subject of a criminal proceeding which is presently pending, nor have such persons been the subject of any order, judgment, or decree of any court of competent jurisdiction, permanently or temporarily enjoining them from acting as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or insurance company, or from engaging in or continuing in any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security, nor were any of such persons the subject of a federal or state authority barring or suspending, for more than 60 days, the right of such person to be engaged in any such activity, which order has not been reversed or suspended.

 
47

 
 
Audit Committee Financial Expert
 
We do not have an audit committee financial expert, as such term is defined in Item 407(d)(5) of Regulation S-K, serving on our audit committee because we have no audit committee and are not required to have an audit committee because we are not a listed security.
 
Director Nominations
 
Due to the early stage nature of our business, our Board of Directors has not established formal procedures by which security holders may recommend nominees to the Company’s Board of Directors.
 
Compliance with Section 16(a) of the Securities Exchange Act of 1934
 
Insofar that we do not have a class of securities registered pursuant to Section 12 of the Exchange Act, our directors and executive officers, and persons who own more than ten percent of the Company’s Common Stock, are not required to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of Common Stock of the Company.
 
Code of Ethics for Chief Executive Officer and Senior Financial Officers
 
The Board of Directors has adopted a Code of Ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, which is designed to promote honest and ethical conduct; full, fair, accurate, timely and understandable disclosure; and compliance with applicable laws, rules and regulations.  A copy of the Code of Ethics will be provided to any person without charge upon written request to the Company at its executive offices, 1700 Park Avenue, Suite 2020, P.O. Box 682798, Park City, Utah 84068.
 
Indemnification of Directors and Officers
 
The Company's Bylaws (the “Bylaws”) provide that the Company will indemnify its officers and directors to the fullest extent permitted by Delaware law.  The Bylaws also provide that the Company will indemnify and hold harmless its officers and directors for any liability including reasonable costs of defense arising out of any act or omission taken on behalf of the Company, to the fullest extent allowed by Delaware law, if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in, or not opposed to, the best interests of the corporation.  The Company has also entered into indemnification agreements with the officers and directors of the Company with indemnification obligation substantially similar to those in the Bylaws, provided that they provide for advancement of funds in certain circumstances where the indemnified officers and directors have presented claims for indemnification.
 
In so far as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 
48

 
 
ITEM 11.   Executive Compensation.
 
SUMMARY COMPENSATION TABLE
 
The following summary compensation table sets forth the aggregate compensation we paid or accrued during the fiscal years ended December 31, 2009 and December 31, 2008 to (i) our Chief Executive Officer (principal executive officer), (ii) our two most highly compensated executive officers other than the principal executive officer who were serving as executive officers on December 31, 2009 whose total compensation was in excess of $100,000, and (iii) up to two additional individuals who would have been within the two-other-most-highly compensated but were not serving as executive officers on December 31, 2009.
 
Summary Compensation Table
 
Name and
Principal Position
 
Year
 
Salary
   
Bonus
   
Stock
Awards
(1)
   
Option
Awards
(1)
   
Non-Equity
Incentive Plan
Compensation
   
Nonqualified
Deferred
Compensation
Earnings
   
All Other
Compensation
   
Total
 
                                                     
James Banister,
 
2009
  $ 88,129     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 88,129  
                                                                     
Chief Executive Officer
 
2008
  $ 117,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 117,000  
                                                                     
Kelly McCrystal,
 
2009
  $ 88,129     $ 0     $ 0     $ 497,243     $ 0     $ 0     $ 0     $ 585,372  
                                                                     
Chief Operating Officer
 
2008
  $ 117,000     $ 0     $ 0     $ 497,108     $ 0     $ 0     $ 0     $ 614,108  
                                                                     
Rebecca Hershinger,
 
2009
  $ 74,651     $ 0     $ 0     $ 152,396     $ 0     $ 0     $ 0     $ 227,047  
                                                                     
Chief Financial Officer
 
2008
  $ 34,965     $ 0     $ 0     $ 43,750     $ 0     $ 0     $ 0     $ 78,715  
 
(1)
Represents the dollar amount recognized for financial reporting purposes of stock awards and stock options awarded in 2008 and 2009 computed in accordance with FASB ASC 718.  Ms. McCrystal had 5,780,160 outstanding stock options at December 31, 2009; and Ms. Hershinger had 3,000,000 outstanding stock options at December 31, 2009.  The options are valued at $0.10 to $0.48, with exercise prices ranging from $0.037 to $0.56.  The options vest over periods from 36-48 months.

 
49

 
 
Equity Awards
 
The following table provides certain information concerning equity awards held by the individuals named in the Summary Compensation Table as of December 31, 2009.
 
Outstanding Equity Awards at December 31, 2009
 
OPTION AWARDS
STOCK AWARDS
 
Name
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   
Option
Exercise
Price ($)
 
Option
Expiration
Date
 
Number of
Shares or
Units of Stock
That Have Not
Vested (#)
   
Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
Or Other
Rights That
Have Not
Vested(#)
 
                                 
Kelly McCrystal
    1,620,000       -0-     $ 0.037  
11/1/2016
    -0-       -0-  
      915,000       165,000     $ 0.50  
6/19/2017
    -0-       -0-  
      552,128       447,952     $ 0.50  
10/15/2017
    -0-       -0-  
      433,350       1,646,730     $ 0.11  
3/2/2019
    -0-       -0-  
                                           
Rebecca Hershinger
    354,167       645,833     $ 0.56  
7/31/2018
    -0-       -0-  
      208,333       791,667     $ 0.11  
3/2/2019
    -0-       -0-  
      -0-       1,000,000     $ 0.17  
4/13/2019
    -0-       -0-  
 
Benefit Plans
 
On June 30, 2008, our Board of Directors approved and adopted the 2008 Equity Incentive Plan (the “2008 Plan”).  Under the 2008 Plan, we will have the right to issue incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and performance shares.  The purposes of the 2008 Plan are: (i) to attract and retain the best available personnel for positions of substantial responsibility, (ii) to provide additional incentive to employees, directors and consultants, and (iii) to promote the success of the Company’s business.  The maximum aggregate number of shares of common stock that may be optioned and sold under the 2008 Plan is 10,000,000, plus an annual increase to be added on the first day of the Company’s fiscal year beginning with the Company’s 2009 fiscal year, equal to the lesser of (a) 5,000,000 shares, or (b) 5% of the outstanding shares on the last day of the immediately preceding Company fiscal year.  There are 15,074,345 shares currently available under the plan.
 
Compensation of Directors
 
The following table provides certain summary information concerning the compensation paid to directors, other than James A. Banister (our Chief Executive Officer), during the year ended December 31, 2009.  No cash compensation was paid to directors, other than James A. Banister in 2009.  All compensation paid to Mr. Banister is set forth in the Summary Compensation Table.  All directors are also entitled to be reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to the Company.

 
50

 
 
Director Compensation
 
Name
 
Fees Earned or
Paid in Cash ($)
   
Stock
Awards ($)
   
Option
Awards ($) (1)
   
All Other
Compensation ($)
   
Total ($)
 
                               
Jamed Ackerly (2)
  $ 0       -0-     $ 78,000       -0-     $ 78,000  
                                         
Michael Dowling
  $ 0       -0-     $ 42,000       -0-     $ 42,000  
                                         
James Moloshok
  $ 0       -0-     $ 430,000       -0-     $ 430,000  
                                         
Jeffrey Nolan (3)
  $ 1,000       -0-     $ 138,500       -0-     $ 139,500  
                                         
Anthony Stonefield
  $ 0       -0-     $ 42,000       -0-     $ 42,000  
 
(1)
Represents the dollar amount recognized for financial reporting purposes of stock options awarded in 2009 computed in accordance with FASB ASC 718.
 
(2)
Mr. Ackerly resigned from the Board of Directors on June 22, 2009
 
(3)
Mr. Nolan was appointed to the Board of Directors on June 23, 2009.  Prior to his appointment, Mr. Nolan was paid $1,000 in consulting fees for advisory services.
 
Employment Agreements
 
We do not have any employment agreements with any of our executive officers.

 
51

 
 
ITEM 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
The following table sets forth, as of March 18, 2010, certain information with regard to the record and beneficial ownership of the Company’s Common Stock by (i) each person known to the Company to be the record or beneficial owner of 5% or more of the Company’s Common Stock, (ii) each director of the Company, (iii) the Company’s Chief Executive Officer and other individuals named in the Summary Compensation Table, and (iv) all executive officers and directors of the Company as a group:
 
   
Amount and Nature
   
Percent
 
Name of Beneficial Owner(1)
 
of Beneficial Ownership(2)
   
of Class(2)
 
             
James A. Banister(3)
    30,764,786 (4)     44.6 %
Robin Rankin(3)
    6,010,200       8.7 %
Michael Dowling(3)
    400,000 (5)     *  
James Moloshok(3)
    986,458 (6)     1.4 %
Jeffrey Nolan(3)
    503,125 (7)     *  
Anthony Stonefield(3)
    224,000 (8)     *  
Kelly A. McCrystal
    4,013,791 (9)     5.5 %
Rebecca Hershinger
    1,020,833 (10)     1.5 %
                 
All Officers and Directors as a Group
               
(consisting of 7 persons)
    37,926,535       50.0 %
 

 
*
Less than 1%.

(1)
Except as otherwise indicated, the address of each beneficial owner is c/o SpectrumDNA, Inc., 1700 Park Avenue, Suite 2020, P.O. Box 682798, Park City, Utah 84068.

(2)
Applicable percentage ownership is based on 68,818,237 shares of common stock outstanding as of March 18, 2010, together with securities exercisable or convertible into shares of common stock within 60 days of March 18, 2010.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that a person has the right to acquire beneficial ownership of upon the exercise or conversion of options, convertible stock, warrants or other securities that are currently exercisable or convertible or that will become exercisable or convertible within 60 days of March 18, 2010 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the number of shares beneficially owned and percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

(3)
Each is a founder and/or director of the Company.

(4)
Consists of (a) 30,616,200 share of common stock and (b) 148,586 shares of common stock issuable upon exercise of warrants that have vested or will vest within the next 60 days.

(5)
Consists of (a) 100,000 shares of common stock, (b) 200,000 shares of common stock issuable upon exercise of options that have vested or will vest within the next 60 days, and (c) 100,000 shares of common stock issuable upon the exercise of warrants that have vested or will vest within the next 60 days.

 
52

 

(6)
Consists of 986,458 shares of common stock issuable upon the exercise of options that have vested or will vest within the next 60 days.  Does not include 13,542 shares of common stock underlying options that are not exercisable within the next 60 days.

(7)
Consists of (a) 100,000 shares of common stock, (b) 303,125 shares of common stock issuable upon the exercise of options that have vested or will vest within the next 60 days, and (c) 100,000 shares of common stock issuable upon the exercise of warrants that have vested or will vest within the next 60 days.  Does not include 146,875 shares of common stock underlying options that are not exercisable within the next 60 days.

(8)
Consists of (a) 24,000 shares of common stock and (b) 200,000 shares of common stock issuable upon the exercise of options that have vested or will vest within the next 60 days.

(9)
Consists of: (a) 19,548 shares of common stock, (b) 3,944,243 shares of common stock issuable upon the exercise of options that have vested or will vest within the next 60 days, and (c) 50,000 shares of common stock issuable upon the exercise of warrants that have vested or will vest within the next 60 days.  Does not include 1,835,917 shares of common stock underlying options that are not exercisable within the next 60 days.

(10)
Consists of 1,020,833 shares of common stock issuable upon the exercise of options that either vested or will vest within the next 60 days.  Does not include 1,979,167 shares of common stock underlying options that are not exercisable within the next 60 days.

 
53

 

ITEM 13.    Certain Relationships and Related Transactions, and Director Independence. 
 
See “Liquidity and Capital Resources” under Part II, Item 7, for information on the  Bridge Financing effected by the Company during November and December 2009 which raised gross proceeds of $104,859 from the sale of Convertible Promissory Notes due three months from issuance bearing interest at a 90-day rate of 10%.  Of such amount, $14,859 was raised from James A. Banister, the Company’s Chief Executive Officer, and $5,000 was raised from Kelly A. McCrystal, the Company’s Chief Operating Officer.  In connection therewith, Mr. Banister was issued Convertible Promissory Notes in the aggregate principal amount of $14,859 and Ms. McCrystal was issued a Convertible Promissory Note in the principal amount of $5,000.  In addition, Mr. Banister and Ms. McCrystal received 148,586 and 50,000 common stock purchase warrants, respectively.

Other than the foregoing, since January 1, 2009, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party: (i) in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last three completed fiscal years; and (ii) in which any director, executive officer, shareholder who beneficially owns 5% or more of our common stock or any member of their immediate family had or will have a direct or indirect material interest.
 
Director Independence
 
Our board of directors currently consists of five members.  They are James A. Banister, Michael Dowling, James Moloshok, Jeffrey Nolan, and Anthony Stonefield.  Mr. Banister is the Company’s Chief Executive Officer and President.  Messrs. Dowling, Moloshok, Nolan, and Stonefield are independent directors.  We have determined their independence using the general independence criteria set forth in the Nasdaq Marketplace Rules.
 
ITEM 14.    Principal Accountant Fees And Services.
 
Effective November 7, 2007, Chisholm, Bierwolf, Nilson, and Morrill LLC (CBNM) became our principal independent accounting firm.  All audit work was performed by the full time employees of CBNM.  Our Board of Directors does not have an audit committee.  The functions customarily delegated to an audit committee are performed by our full Board of Directors.  Our Board of Directors approves in advance, all services performed by CBNM.  Our Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence, and has approved such services.  
 
The following table sets forth fees billed by our auditors during the last two fiscal years for services rendered for the audit of our annual consolidated financial statements and the review of our quarterly financial statements, services by our auditors that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported as audit fees, services rendered in connection with tax compliance, tax advice and tax planning, and all other fees for services rendered.
 
   
December 31, 2009
   
December 31, 2008
 
             
Audit fees
  $ 24,486     $ 30,190  
                 
Audit related fees
    -0-       -0-  
                 
Tax fees
    -0-       -0-  
                 
All other fees
    -0-       -0-  

 
54

 

PART IV
 
ITEM 15.   Exhibits and Financial Statement Schedules.
 
The following documents are filed as part of this report:

(1)
Financial Statements

Financial Statements are included in Part II, Item 8 of this report.

(2)
Financial Statement Schedules

No financial statement schedules are included because such schedules are not applicable, are not required, or because required information is included in the consolidated financial statements or notes thereto.

(3)
Exhibits

       
Incorporated by
Exhibit Number
 
Name of Exhibit
 
Reference to
         
2.1
 
Agreement and Plan of Merger dated January 18, 2008 among SpectrumDNA, Inc., SpectrumDNA Holdings, Inc. and SpectrumDNA Merger Sub, Inc.
 
Exhibit 2.1 (1)
         
3.1
 
Certificate of Incorporation of SpectrumDNA Holdings, Inc. filed January 16, 2008 (Delaware)
 
Exhibit 3.1 (1)
         
3.2
 
Certificate of Amendment of Certificate of Incorporation of SpectrumDNA Holdings, Inc.  filed January 23, 2008 (Delaware)
 
Exhibit 3.2 (1)
         
3.3
 
Certificate of Amendment of Certificate of Incorporation filed February 16, 2010 (Delaware)
 
Exhibit 3.1 (4)
         
3.4
 
Bylaws
 
Exhibit 3.3 (1)
         
10.1
 
Assignment of Property dated June 1, 2006  between James Banister and SpectrumDNA, Inc.
 
Exhibit 10.1 (1)
         
10.2
 
Assignment of Property dated June 1, 2006  between Robin Rankin and SpectrumDNA, Inc.
 
Exhibit 10.2 (1)
         
10.3
 
Assignment of Property dated August 30, 2006 between James Banister and Cooshoo, Inc.
 
Exhibit 10.3 (1)
         
10.4
 
Trademark License Agreement dated September 6, 2006 between James Banister and SpectrumDNA, Inc.
 
Exhibit 10.4 (1)
         
10.5
 
Lease Agreement dated July 17, 2007 between SpectrumDNA, Inc. and East West Center, LLC
 
Exhibit 10.5 (1)
         
10.6
 
2008 Equity Incentive Plan
 
Exhibit 10.1 (2)
         
10.7
 
Form of Private Offering Subscription Agreement
 
Exhibit 10.1 (3)
         
10.8
 
Form of Common stock Purchase Warrant
 
Exhibit 10.2 (3)
         
10.9
 
Form of Placement Agent Warrant
 
Exhibit 10.3 (3)
         
10.10
  
Registration Rights Agreement
  
Exhibit 10.4 (3)

 
55

 

21.1
 
Subsidiaries of the Registrant
 
Exhibit 21.1 (1)
         
31.1
 
Certification of Chief Executive Officer pursuant to Section 302
   
   
of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and
   
   
15d-14 of the Exchange Act)
 
*
         
31.2
 
Certification of Chief Financial Officer pursuant to Section 302
   
   
of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and
   
   
15d-14 of the Exchange Act)
 
*
         
32.1
 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
   
 
  
of 2002 (18 U.S.C. 1350)
  
*

(1)
Filed as an exhibit to the Company’s Registration Statement on Form SB-2 filed on January 28, 2008, File No. 333-148883, and incorporated by reference herein.

(2)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 filed on August 14, 2008, and incorporated by reference herein.

(3)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 19, 2010, and incorporated by reference herein.

(4)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 22, 2010, and incorporated by reference herein.

*
Filed herewith.

 
56

 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
SPECTRUMDNA, INC.
 
 
(Registrant)
 
       
 
By:
/s/ James A. Banister
 
   
James A. Banister,
 
   
President and Chief Executive Officer
 
       
 
Dated:
April 12, 2010
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, and in the capacities and on the dates indicated:

Signature
 
Title
 
Date
         
/s/ James A. Banister
 
President, Chief Executive
   
James A. Banister
 
Officer, Chairman of the
 
April 12, 2010
   
Board and Director
   
   
(Principal Executive Officer)
   
         
/s/ Rebecca D. Hershinger
 
Chief Financial Officer
 
April 12, 2010
Rebecca D. Hershinger
 
(Principal Financial Officer and
   
   
Principal Accounting Officer)
   
         
/s/ Michael Dowling
 
Director
 
April 12, 2010
Michael Dowling
       
         
/s/ James Moloshok
 
Director
 
April 12, 2010
James Moloshok
       
         
/s/ Jeffrey Nolan
 
Director
 
April 12, 2010
Jeffrey Nolan
       
         
/s/ Anthony Stonefield
 
Director
 
April 12, 2010
Anthony Stonefield
  
 
  
 

 
57

 

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
 
No annual report covering the last fiscal year or proxy materials with respect to any annual or other meeting of security holders has been sent to our stockholders.  An annual report and proxy materials may be sent to our stockholders subsequent to the filing of this Form 10-K.  In such event, we shall furnish to the Securities and Exchange Commission copies of any annual report or proxy materials that is sent to our stockholders.

 
58