UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549





FORM 10-Q





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


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2011





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


SECURITIES EXCHANGE ACT OF 1934





For the transition period from ______ to ______





Commission file number 333-148883





SPECTRUMDNA, INC.


(Exact name of Registrant as Specified in its Charter)





Delaware
20-4880377(State or other jurisdiction
(IRS Employer Identification No.)of incorporation or organization)1781 Sidewinder Drive, Suite 201P.O. Box 682798Park City, Utah
84068(Address of principal executive offices)
(Zip Code)





(435) 658-1349


(Registrant’s Telephone Number, Including Area Code)





Not applicable


(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)







Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes o          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 o          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   o        No   o





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


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





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


Yes   o                      No   x





State the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date: $0.001 par value per share: 69,896,237 outstanding as of May 13, 2011.









SPECTRUMDNA, INC.





TABLE OF CONTENTS





PagePART I - FINANCIAL INFORMATIONItem 1.
Financial Statements.
3Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
20Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
27Item 4.
Controls and Procedures.
27PART II - OTHER INFORMATIONItem 1.
Legal Proceedings.
29Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
29Item 3.
Default upon Senior Securities.
29Item 4.
[Removed and Reserved.]
29Item 5.
Other Information.
29Item 6.
Exhibits.
29SIGNATURES
30




2


PART I - FINANCIAL INFORMATION





Item 1.  Financial Statements.





SPECTRUMDNA, INC.





Index to Condensed Consolidated Financial Statements


For The Three Month Period Ended March 31, 2011





PageCondensed Consolidated Balance Sheets
4Condensed Consolidated Statements of Operations
5Condensed Consolidated Statements of Stockholders’ Equity
6Condensed Consolidated Statements of Cash Flows
7Notes to Condensed Consolidated Financial Statements
9




3




SpectrumDNA, Inc.
 Condensed Consolidated Balance Sheets
 
 ASSETS


March 31,


December 31,2011


2010(Unaudited)CURRENT ASSETSCash

$
63,863


$
195,876Accounts receivable, net


66,606



2,200Prepaid consulting services


186,667



189,780Prepaid expenses and other assets


15,880



24,021Total Current Assets


333,016



411,877PROPERTY AND EQUIPMENT, NET


6,647



6,445OTHER ASSETSIntangible assets, net


671



1,040Prepaid consulting services, long term


62,222



108,889Security deposit


1,000



6,000Total Other Assets


63,893



115,929TOTAL ASSETS

$
403,556


$
534,251LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
105,494


$
73,851Accounts payable - related parties


1,480



261Accrued expenses


49,200



49,200Deferred revenue


12,100



11,750Notes payable


9,090



15,828Total Current Liabilities


177,364



150,890Total Liabilities


177,364



150,890STOCKHOLDERS' EQUITYPreferred 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,


69,058



69,05869,058,237 and 69,058,237 shares issued and outstanding, respectivelyAdditional paid-in capital


9,444,580



9,359,475Accumulated deficit


(9,287,446
)


(9,045,172
)Total Stockholders' Equity


226,192



383,361TOTAL LIABILITIES ANDSTOCKHOLDERS' EQUITY

$
403,556


$
534,251




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




4


SpectrumDNA, Inc.
 Condensed Consolidated Statements of Operations
 (Unaudited)
  For the Three


For the ThreeMonths Ended


Months EndedMarch 31,


March 31,2011


2010(Restated)REVENUES, net

$
117,599


$
26,000COST OF SALES


370



1,402GROSS PROFIT


117,229



24,598OPERATING EXPENSESGeneral and administrative


129,444



209,707Salaries and wages


219,476



389,547Product development expenses


9,278



11,498Depreciation expense


998



1,412Total Operating Expenses


359,196



612,164OPERATING LOSS


(241,967
)


(587,566
)OTHER INCOME (EXPENSES)Interest income


104



360Interest expense


(136
)


(2,839
)Interest expense - beneficial conversion feature


-



(47,232
)Other income / (expense)


(275
)


5,100Total Other Income / (Expenses)


(307
)


(44,611
)NET LOSS BEFORE INCOME TAXES


(242,274
)


(632,177
)INCOME TAX EXPENSE


-



-NET LOSS

$
(242,274
)

$
(632,177
)BASIC AND FULLY DILUTED LOSS PER SHARE

$
(0.00
)

$
(0.01
)WEIGHTED AVERAGE NUMBEROF SHARES OUTSTANDING


69,058,237



63,963,670




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




5


SpectrumDNA, Inc.
 Condensed Consolidated Statements of Stockholders' Equity
 For the period January 1, 2010 through March 31, 2011


Preferred Stock


Common Stock


Additional

Paid-In


Accumulated


Total

Stockholders'Shares


Amount


Shares


Amount


Capital


Deficit


EquityBalance, December 31, 2009


-


$
-



52,747,237


$
52,747


$
7,145,683


$
(7,078,273
)

$
120,157Common shares issued for cash at $0.10 per share


-



-



15,150,000



15,150



1,365,700



-



1,380,850Common shares issued for conversion of convertible promissory notes at $0.10 per share


-



-



661,000



661



65,439



-



66,100Common shares issued for pre-paid services at an average of $0.14 per share


-



-



500,000



500



68,500



-



69,000Stock based compensation


-



-



-



-



714,153



-



714,153Net loss for the year ended December 31, 2010


-



-



-



-



-



(1,966,899
)


(1,966,899
)Balance, December 31, 2010


-



-



69,058,237



69,058



9,359,475



(9,045,172
)


383,361Stock based compensation (unaudited)


-



-



-



-



85,105



-



85,105Net loss for the three months ended March 31, 2011 (unaudited)


-



-



-



-



-



(242,274
)


(242,274
)Balance, March 31, 2011 (unaudited)


-


$
-



69,058,237


$
69,058


$
9,444,580


$
(9,287,446
)

$
226,192




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




6


SpectrumDNA, Inc.
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)




For the Three


For the ThreeMonths Ended


Months EndedMarch 31,


March 31,2011


2010(Restated)CASHFLOWS FROM OPERATING ACTIVITIESNet loss

$
(242,274
)

$
(632,177
)Adjustments to reconcile net loss to netused by operating activities:Depreciation and amortization


1,368



2,810Stock options and warrants granted for services rendered


85,105



231,944Prepaid consulting services


49,780



56,506Accretion of remaining discount on convertible promissory notes


-



47,232Changes in operating assets and liabilities(Increase) / decrease in accounts receivable


(64,406
)


5,750(Increase) / decrease in prepaid expenses and other


8,141



(11,327
)(Increase) / decrease in security deposit


5,000



-Increase / (decrease) in accounts payable and accrued expenses


32,862



(179,211
)Increase / (decrease) in unearned revenue


350



-Net Cash Used in Operating Activities


(124,074
)


(478,473
)CASHFLOWS FROM INVESTING ACTIVITIESCash paid for fixed assets


(1,200
)


(4,426
)Net Cash Used in Investing Activities


(1,200
)


(4,426
)CASHFLOWS FROM FINANCING ACTIVITIESCash received from issuance of common stock, net of stock offering costs


-



1,380,850Payments made on notes payable


(6,739
)


(7,115
)Cash paid for repayment of convertible promissory notes


-



(44,859
)Net Cash (Used) / Provided by Financing Activities


(6,739
)


1,328,876NET INCREASE / (DECREASE) IN CASH


(132,013
)


845,977CASH AT BEGINNING OF PERIOD


195,876



10,302CASH AT END OF PERIOD

$
63,863


$
856,279




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




7




SpectrumDNA, Inc.
 Condensed Consolidated Statements of Cash Flows (Continued)
 (Unaudited)
 
 For the Three

Months Ended

March 31,

2011


For the Three

Months Ended

March 31,

2010(Restated)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:CASH PAID FOR:Interest

$
136


$
5,455Income Taxes

$
-


$
-NON-CASH INVESTING AND FINANCING ACTIVITIES:Common stock issued for prepaid consulting services

$
-


$
69,000Common stock issued for payment of

convertible promissory notes and interest

$
-


$
61,000




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




8


SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





NOTE 1 -
BASIS OF PRESENTATION AND USE OF ESTIMATES




The interim financial statements of SpectrumDNA, Inc. (“we,” “us,” “our,” “Spectrum” or the “Company”) are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in part, but not limited to, the timing of acquisitions, product demand, market competition, and our ability to obtain additional capital.  In the opinion of management, all adjustments which are necessary for a fair presentation of the results for the interim period have been included.  You should read these condensed consolidated unaudited interim financial statements in conjunction with the audited consolidated financial statements and notes thereto included in Spectrum’s Annual Report on Form 10-K for the year ended December 31, 2010.




NOTE 2 -
GOING CONCERN





The Company prepares its financial statements 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 March 31, 2011, the Company’s current assets exceeded it current liabilities.  However, it has incurred substantial losses in this quarter and prior fiscal years resulting in an accumulated deficit of $9,287,446 at March 31, 2011. The Company has recorded negative cash flows from operations in this quarter and prior fiscal years.   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 and again in October of 2010 to improve earnings potential.  Given the stabilization of its cost structure, the Company is currently focused on the execution of its business operation strategy to continue to increase its revenues from the sales of its products and services.




NOTE 3 -
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. 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 March 31, 2011 and 2010, the number of shares underlying these instruments is as follows:




2011


2010Shares of common stock underlying stock options


14,293,008



15,264,551Shares of common stock underlying warrants


18,208,586



18,208,586Total shares


32,501,594



33,473,137




9





SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




NOTE 3 -
NET LOSS PER SHARE OF COMMON STOCK (CONTINUED)




For the three months ended March 31, 2011 and 2010, potential common shares of 32,501,594 and 33,473,137 resulting from the aforementioned instruments, respectively, were considered but not included in the calculation of diluted loss per share as their effect would be anti-dilutive.




2011


2010(Restated)Basic and Fully Diluted earnings per share:Loss (numerator)

$
(242,274
)

$
(632,177
)Weighted average number of shares outstanding – basic (denominator)


69,058,237



63,963,670Per share amount

$
(0.00
)

$
(0.01
)


NOTE 4 -
SHARE BASED PAYMENT




The Company follows the provisions of 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.




During the three months ended March 31, 2011 and 2009, the Company recorded $85,105 and $231,944, 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 has been included in general and administrative expense for non-employees and in salaries and wages for employees.  During the three months ended March 31, 2011and 2010, the Company recorded $60,359 and $136,027, 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




During the first quarter of 2011, there were no material changes to common stock options from those disclosed in the audited annual consolidated financial statements for the year ended December 31, 2010, other than the cancellation of 250,000 common stock options as the employee to whom the options had been granted left the Company.




10





SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





NOTE 4 -
SHARE BASED PAYMENT (CONTINUED)




Common Stock Options (Continued)




Changes in stock options issued to employees, advisors, and board members for the periods ended March 31, 2011 and December 31, 2010 are as follows:




Number

Of

Options


Weighted

Average

Exercise

PriceOutstanding, December 31, 2009


13,762,075


$
0.31Granted


7,520,000



0.12Exercised


-



-Cancelled


(6,739,067
)


0.23Outstanding, December 31, 2010


14,543,008


$
0.26Exercisable, December 31, 2010


10,020,716


$
0.30Outstanding, December 31, 2010


14,543,008


$
0.26Granted


-



-Exercised


-



-Cancelled


(250,000
)


0.04Outstanding, March 31, 2011


14,293,008


$
0.26Exercisable, March 31, 2011


10,619,987


$
0.30




11


SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)


NOTE 4 -
SHARE BASED PAYMENT (CONTINUED)





Common Stock Options (Continued)




The following table summarizes information about stock options granted to employees, advisors, and board members at March 31, 2011:




Options Outstanding


Options ExercisableRange of Exercise Prices


Number of Options


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



5.59



1,620,000


$
0.04



5.590.50



1,819,643



0.50



6.36



1,819,643



0.50



6.360.55



1,620,000



0.55



7.23



1,620,000



0.55



7.230.56



1,020,000



0.56



7.34



686,667



0.56



7.340.46



400,000



0.46



7.51



400,000



0.46



7.510.21



420,000



0.21



9.15



420,000



0.21



9.150.11



1,823,365



0.11



7.93



1,344,198



0.11



7.930.17



1,000,000



0.17



8.04



489,583



0.17



8.040.34



250,000



0.34



8.19



229,167



0.34



8.190.33



200,000



0.33



8.24



200,000



0.33



8.240.19



250,000



0.19



8.54



91,146



0.19



8.540.20



500,000



0.20



8.80



500,000



0.20



8.800.14



500,000



0.14



8.97



130,208



0.14



8.970.13



500,000



0.13



9.02



125,000



0.13



9.020.09



1,020,000



0.09



9.18



224,583



0.09



9.180.07



350,000



0.07



9.25



65,625



0.07



9.250.22



200,000



0.22



9.26



200,000



0.22



9.260.08



200,000



0.08



9.26



154,167



0.08



9.260.05



600,000



0.05



9.51



300,000



0.05



9.5114,293,008


$
0.26



7.72



10,619,987


$
0.30



7.40





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, another 2,637,362 were made available on January 1, 2010, and another 3,452,912 were made available on January 1, 2011.  Of the 14,293,008 options outstanding, 10,853,365 were issued under the Plan.




As of March 31, 2011, the aggregate intrinsic value of the options outstanding and exercisable was $0 and $0, respectively.  As of March 31, 2010, the aggregate intrinsic value of the options outstanding and exercisable was $102,060 and 102,060, respectively.  The total fair value of shares vested during the three months ended March 31, 2011 and 2010 was $12,428 and $91,058, respectively.




12





SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)


NOTE 4 -
SHARE BASED PAYMENT (CONTINUED)




Warrants




In connection with the Bridge Financing and Private Offering discussed in Note 6 below, the Company granted warrants to purchase the Company’s common stock to the investors in each offering during the quarters ended December 31, 2009 and March 31, 2010.  These warrants have exercise prices of $0.10 and $0.25, vested upon grant, and are exercisable for a period of five years.  No warrants have been issued since the quarter ended March 31, 2010.




Changes in warrants issued to investors for the periods ended March 31, 2011 and December 31, 2010 are as follows:




Number

Of

Warrants


Weighted

Average

Exercise

PriceOutstanding, December 31, 2009


1,048,586


$
0.25Granted


17,160,000



0.24Exercised


-



-Cancelled


-



-Outstanding, December 31, 2010


18,208,586


$
0.24Exercisable, December 31, 2010


18,208,586


$
0.24Outstanding, December 31, 2010


18,208,586


$
0.24Granted


-



-Exercised


-



-Cancelled


-



-Outstanding, March 31, 2011


18,208,586


$
0.24Exercisable, March 31, 2011


18,208,586


$
0.24


13





SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




NOTE 4 -
SHARE BASED PAYMENT (CONTINUED)




Warrants (Continued)




The following table summarizes information about stock warrants granted to employees, investors, and board members as of March 31, 2011:




Warrants Outstanding


Warrants ExercisableRange of Exercise Prices


Number of Warrants


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



17,203,586


$
0.25



3.82



17,203,586


$
0.25



3.820.10



1,005,000



0.10



3.80



1,005,000



0.10



3.8018,208,586


$
0.24



3.82



18,208,586


$
0.24



3.82







As of March 31, 2011, the aggregate intrinsic value of the warrants outstanding and exercisable was $0 and $0, respectively.  As of March 31, 2010, 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 period ended March 31, 2010 was $0.17.  No warrants were granted during the period ended March 31, 2011.  The total fair value of shares vested during the three months ended March 31, 2010 was $1,716,000.  No warranted vested during the three months ended March 31, 2011.





NOTE 5 -
CONSULTING AGREEMENTS





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 and 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 a prepaid consulting services asset.  The shares were valued at $0.14 per share for a total prepayment for these fees of $560,000.  At March 31, 2011, $311,111 had been amortized as consulting expense, with the remaining asset to be amortized over the remaining life of the agreement.




On January 15, 2010, the Company entered into a one-year consulting agreement for services.  In full consideration for this agreement, the Company paid $50,000 to the consultant and issued a total of 500,000 shares of Common Stock and options to acquire an additional 500,000 shares at $0.20 per share.  The shares were valued at an average of $0.14 per share for a total prepayment for these fees of $69,000.  From the beginning of the term through March 31, 2011, $69,000 had been amortized to consulting expense, representing the total value of the contract.


14





SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




NOTE 6 -
PRIVATE FINANCING TRANSACTIONS




During September 2009, the Company commenced a private offering (the “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 had 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.  During the first quarter of 2010, the offering period was extended two additional times.




During the first quarter of 2010, 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, with a total of $134,150 of stock offering costs.  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 placement agent commissions of $100,500 and a non-accountable expense allowance of $30,150 to the placement agent as well as fees of $3,500 to the escrow agent.  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 to acquire an additional share of Common Stock.  The aggregate warrants considered outstanding and exercisable from the warrant units granted are 2,010,000.




On May 28, 2010, the Company filed a Form S-1 Registration Statement (the “Statement”) with the Securities and Exchange Commission relating to the aforementioned equity securities and certain other securities of the Company.  On June 15, 2010, the Securities and Exchange Commission deemed the Statement effective.




On November 2, 2009, November 12, 2009, and December 14, 2009, and in connection with a private debt offering (the “Bridge Financing”), the Company raised $104,859 from five investors, including the Company’s Chief Executive Officer and Chief Operating Officer (Note 7), from the issuance of six Convertible Promissory Notes (the “Notes”) in the principal amount of $104,859 due three months from issuance bearing interest at a 90-day rate of 10%.  In connection with such investments, 1,048,586 common stock purchase warrants were also granted to such investors.




In accordance with FASB ASC 470-20, the Company accounts for the proceeds from the sale of a debt instrument with detachable stock purchase warrants by allocating the proceeds based on the relative fair values of the debt instrument without the warrants and of the warrants at the time of issuance.  The portion of the proceeds allocated to the detachable warrants is accounted for as additional paid-in-capital, and the remaining proceeds are allocated to the debt instrument as a debt discount.  Further, an embedded beneficial conversion feature present in the debt instrument is recognized at issuance by allocating that portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.  The Company utilizes the Black-Scholes option pricing model to determine the relative fair values.  Any such debt discount is accreted over the term of the instrument and expensed on the statement of operations in accordance with ASC 835.




At the time of issuance, the six notes resulted in an allocation of proceeds based on the detachable warrants of $61,025 and the beneficial conversion feature of $43,834, both of which were recorded to additional paid-in capital, and a debt discount of $104,859 to be accreted over the life of the respective Notes or 90 days.  Accretion of the debt discount at December 31, 2009 was $57,628, which was charged to the Statements of Operations.




15


SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




NOTE 6 -
PRIVATE FINANCING TRANSACTIONS (CONTINUED)





On January 11, 2010, two investors converted two Notes into 661,000 shares of the Company’s common stock resulting from the outstanding principal amount of $60,000 and accrued interest of $6,100.  On January 22, 2010, two additional investors, including the Company’s Chief Executive Officer and Chief Operating Officer, were repaid the interest and principal due on three Notes for a total of $22,172 in cash resulting from the outstanding principal amount of $19,859 and accrued interest of $2,314.  Finally on February 10, 2010, one investor was repaid the interest and principal due on one Note for a total of $27,667 in cash resulting from the principal amount of $25,000 and accrued interest of $2,667.  Upon conversion of the Notes, the remaining debt discount was accreted and $47,232 in interest expense was charged to the statement of operations.




NOTE 7 -
RELATED PARTY TRANSACTIONS




During the fourth quarter of 2009, the Chief Executive Officer and the former Chief Operating Officer invested a total of $19,859 in connection with the Bridge Financing as referenced in Note 6 above.  On January 22, 2010, these individuals converted their three Notes for a total of $22,172 in cash resulting from the outstanding principal amount of $19,859 and accrued interest of $2,314.




Additionally, as of March 31, 2011, and December 31, 2010, the Company recorded accounts payable balances of $1,480 and $261, respectively.  From time to time, employees of the Company procure goods or services on behalf of the Company which require reimbursement.




In the first quarter of 2011, the Company entered into an agreement with Say.so LLC, a media measurement software technology company.  Say.so’s co-founder is Michael Dowling, who is a member of the Company’s Board of Directors.




Aside from the transactions disclosed above, there were no other related party transactions during the three months ended March 31, 2011.




16





SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




NOTE 8 -
RESTATEMENT




On February 9, 2011, the Company dismissed its previous independent accountant, Chisholm, Bierwolf, Nilson, and Morrill LLC and subsequently retained HJ & Associates, LLC (“HJ & Associates) to conduct the audit of its financial statements for the year ended December 31, 2010 and a re-audit of its financial statements for the year ended December 31, 2009, during which we made certain adjustments.  The tables set forth below highlight the material balance sheet and income statement items that were affected by these restatements:




As of

March 31, 2010

(Previous)


Cumulative

Effect of Adjustments through

December 31, 2009 (1)


As of

March 31, 2010

(Restated)


Cumulative

Effect of Adjustments through

March 31, 2010AssetsPrepaid consulting services

$
-


$
-


$
59,161


$
59,161Prepaid consulting services, long-term


-



-



435,555



435,555Total Assets


905,262



-



1,399,978



494,716Stockholders’ EquityPrepaid consulting services


(558,777
)


-



-



558,777Additional paid-in capital


11,820,914



(66,844
)


8,877,267



(2,943,647
)Accumulated deficit


(10,590,037
)


(48,456
)


(7,710,451
)


2,879,586Total Stockholders’ Equity


741,159



-



1,235,875



494,716Total Liabilities and Stockholders’ Equity

$
905,262


$
-


$
1,399,978


$
494,716




(1)
Please refer to our annual report on Form 10-K for the fiscal year ended December 31, 2010




17




SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




NOTE 8 -
RESTATEMENT (CONTINUED)




For the three months ended March 31, 2010

(Previous)


For the three months ended March 31, 2010

(Restated)


Changes Attributable

to RestatementGeneral and administrative

$
207,871


$
209,707


$
1,836Financing costs


2,876,803



-



(2,876,803
)Interest expense – beneficial conversion feature


28,397



47,232



18,835Gain on conversion


25,000



-



(25,000
)Net Loss


(3,463,307
)


(632,177
)


(2,831,130
)Basic and Fully Diluted Loss per Share

$
(0.05
)

$
(0.01
)

$
0.04





During the quarter ended March 31, 2010, these adjustments resulted in the variances highlighted in the tables immediately above and are related to the following accounts:




·
The adjustment of ($558,777) from a contra-equity account to a current asset account of $59,161 and an other asset account of $435,555 related to certain prepaid consulting contracts.  Associated with this prepaid consulting agreement, in order to properly recognize consulting expenses in the first quarter of 2010, general and administrative expenses increased by $1,836 resulting in an increase in the accumulated deficit (Note 5).




·
The reclassification $2,876,803 in financing costs associated with the value of the warrants granted as part of Private Offering resulting in a decrease in additional paid in capital and a decrease in accumulated deficit (Note 6).




·
The increase in interest expense related to the beneficial conversion feature of the convertible promissory notes of $18,835 and the elimination of the $25,000 gain on conversion of the convertible promissory notes resulting in an increase in the accumulated deficit of $43,835 (Note 6).




18





SPECTRUMDNA, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




NOTE 9 -
SUBSEQUENT EVENTS




On May 2, 2011, the Board of Directors approved the issuance of 838,000 shares of the Company’s common stock as consideration for services rendered by the Company’s legal counsel during 2010 and 2011.




The Company has evaluated subsequent events for the period from March 31, 2011 through the date the financial statements were issued pursuant to FASB ASC 855 and concluded that there were no events or transactions occurring during this period that required recognition or disclosure in its condensed consolidated financial statements other than that disclosed above.




19


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




The following information should be read in conjunction with the condensed consolidated financial statements of SpectrumDNA, Inc. and the notes thereto appearing elsewhere in this report. Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report that are not statements of historical or current fact constitute “forward looking statements”.




Our business and results of operations are affected by a wide variety of factors which could materially and adversely affect us and our actual results. As a result of these factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results and stock price.




Projections and 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.




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 1781 Sidewinder Drive, Suite 201, P.O. Box 682798, Park City, Utah 84068.  Our telephone number is (435) 658-1349.  The Company’s website is http://www.spectrumdna.com.




20





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 an innovation agency and digital studio focused on creating high-engagement web and mobile applications that allow marketers to empower their community members to take an active, measurable, and monetizable role in the extension of their brand.  SpectrumDNA specializes in gamification, and the design and development of gamified commerce and social loyalty programs; and SpectrumDNA’s white-label applications and API/web-services platforms can be easily configured to engage and enroll the marketers’ most influential users who propagate its messaging to the masses through SpectrumDNA’s intelligent integration with popular social media sites.




Our product development and services 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 of the social media audience demographics 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, and methodology for engaging social media audiences.




Strong evidence exists that the history of success in online and mobile web is a history of “encouraging and 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, behavioral motivation and reward dynamics have become an increasing imperative to successful business ventures, and much of that is embodied in the movement SpectrumDNA has helped precipitate around “gamification.”




Strategic Focus




Late in the fourth quarter of 2009 and into the first half of 2010, the Company began to re-focus its efforts on differentiation, circumventing resource limitations and leveraging its assets.  As part of that strategy, in June 2010, the Company entered into a value-added reseller relationship with Big Door Media, a Seattle, Washington, based organization focused on developing a virtual economy platform to help developers and digital publishers add game mechanics to their site or app.  The gamification technology platforms are rapidly becoming commoditized, and SpectrumDNA has since expanded its support of competitive gamification platforms, and is now platform-independent and focused on the ultimate differentiator of gamification design technique. Foursquare and social games like Farmville and Mafia Wars have shown the power of badges and achievements to drive consumer activity.  Recognition and loyalty programs are shown to positively impact marketing campaigns and evoke deep customer loyalty.  Our relationship with BigDoor has allowed for the gamification of our existing products where users can receive value in the form of points, currency or badges for not only purchases but any online activity, like posting brand related content on Facebook, Twitter or the host site.




Throughout the third and fourth quarters of 2010, our business strategy became increasingly focused on providing gamification design and development services to large and small clients looking to increase customer loyalty and engagement through the use of game mechanics.  The Company specializes in designing and building Social Loyalty Programs (“SLPs”) that are a cross-pollination of classic loyalty program, apps that engage the dynamic social graph, and game mechanics–techniques that encourage and capture intrinsic human behavior and match them with extrinsic rewards.




21





Gamified Commerce and Social Loyalty




In November 2010, Interpret, a leading entertainment, media and technology market research firm, released a report co-authored by SpectrumDNA CEO Jim Banister containing primary research that found gamers, even using the broadest definition, are more likely to be online shoppers and opinion-leaders and are more likely to buy in gamified environments.




It was the culmination of an evolutionary shift made by SpectrumDNA earlier in 2010 to focus its products and services on the rapidly emerging market for gamified commerce (“gCommerce”) and social loyalty, or any “gamified” transactional behavior. This goes beyond engagement.  While gCommerce fundamentally engenders and relies on engagement, the approach is designed to get customers and users to transact as opposed to simply interact.  The gCommerce process has emerged to help transaction-oriented companies leverage the rapidly coalescing landscape of web, social media and mobile, and integrate disparate social and mobile marketing and transaction-oriented activities into next-generation gamified social loyalty programs.




Interpret’s report put the spotlight on the power of the gamification paradigm showing that a gamer is 20% more likely to be an online shopper than the average non-gamer and 50% more likely to be an influencer among his or her friends.  The report further found that “shopping-gamers” are 70% more likely than the general population to buy within a gamified transactional environment.




Whether Farmville on Facebook, World of Warcraft on the PC, Solitaire on the iPhone, earning frequent flyer miles through American Airlines, or shopping through social commerce services like Groupon or Gilt, customers’ and users’ online and offline experiences are already “gamified.”  SpectrumDNA rapidly established a beachhead in this growth industry and authored one of the now de facto frameworks for operating in the realm of “gamification” called the “social loyalty framework” (“SLF”).  The SLF comprises of three elements—API, Appify and Gamify.




API-Appify-Gamify




SpectrumDNA pioneered the concept of social loyalty, or gamified social loyalty, which is a way for individuals and institutions to use the web/mobile social graph and its myriad utilities, from Facebook to Twitter to YouTube, as a mode of “lead generation.”  That is, to flip the now occurring intermediation by upstart social utilities into a feeding mechanism to owned loyalty programs that use the same mechanisms, techniques and technologies used by those upstart intermediaries.  There are three elements to the social loyalty framework.




APIs, or Application Programming Interfaces, have become the foundation for the explosion of social and mobile applications.  Many are free, but almost all are increasingly economical.  APIs enable the creation of applications relatively independent of consumer platform--  from Facebook, to websites, to iPhone apps and beyond.  They make the creation of transmedia consumer experiences viable and economical.




Apps, or Applications, are software programs with focused and themed function, for utilitarian, informational or entertainment purposes.  While an app can reside at web address accessible via a web browser, an app is not a “website” or “online brochure.”  While classic computer software programs (like Microsoft Word or Photoshop) are the original app, the explosion of smartphones (like iPhone, Blackberry and Android), proprietary platforms (like Facebook and Conduit), and the way websites work has affected the evolution of consumer behavior from “site centric” to “app centric.”




Gamification involves the use of game mechanics and game dynamics to motivate and reward human behavior.  Even though many of the core principles of gamification are derived from modern video games, casual games and social games, gamification does not mean the creation of a game.  In the context of social loyalty, it means to create “capture-and-nurture” programs that acquire and retain customers in the realm of the brand, retailer or publisher across multiple consumer touchpoints—from Facebook to smartphones to the general web.




22





Quick-Start APIs




SpectrumDNA’s software API and app platforms have been adapted to support the now predominant work in gamification and social loyalty.  We frequently employ them to jump-start the creation of apps, and when appropriate, we intermix them with the multitude of third-party APIs to quickly and cost-effectively create individual apps or broader social loyalty programs.




Currently, our active product lines are as follows:




The Addictionary




The Addictionary is a social wordplay engine.  We use it as the foundation for apps created to engage in word-related apps.




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.




OptEngage




OptEngage is a new class configurable and contextual browser application that talks to a cloud-based platform, which enables clients to deliver content and utility to their users anywhere they go on the web.  SpectrumDNA clients can now program the entire Internet for their users, across all sites and platforms; and they can integrate customer data, context, location and their users’ intent to enhance their experience, driving deeper engagement, conversion and affinity for their brand or target affinity group.




Hucklemonkey




The Hucklemonkey API integrates gamification into our clients existing services or new applications.  It focuses on integrating scalable, pervasive economies into already-existing services, and it’s designed for quick deployment and high engagement.  Hucklemonkey allows our clients to easily pull profile, virtual economy, and achievement data and assets into their existing user experiences.




New Products




We continue to prioritize product and services development such that maximize our opportunities for annuity-based revenue streams.




Sales, Marketing and Performance




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 web 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




23


A secondary sales focus is on licensing PlanetTagger.  During the second half of 2009 through the first half of 2010, the Company licensed PlanetTagger to two institutions including:




·
UCLA Anderson School of Management’s Entertainment and Media Management Institute


·
State of Utah’s Utah Science Technology and Research initiative (USTAR)





During the second quarter of 2010, marking its entry into gCommerce and gamified loyalty space, the Company partnered Chisel Industries, a Bozeman, Montana, based marketing firm, to become the exclusive provider of digital marketing services to Vann’s Inc, a Montana-based electronics retailer, for the promotion of its new interactive, themed retail experience.  In working to position the new store’s online identity, the Company and Chisel created three coordinated modes of audience engagement – a website destination, a contextual browser app called EverOn, and a mobile app for the iPhone based on PlanetTagger – the combination of which allow members of the retailer’s online social community to connect and share knowledge in a seamless user experience across platforms.  Overlaying these methods of engagement, the Company implemented a gamification platform that allows these users to collect rewards worth actual currency to be used toward the purchase of gear in the boutique.




During the third quarter of 2010, the Company entered into a relationship with Fandango, the nation's leading moviegoer destination, to launch Fandango2Go, the next generation browser application that provides movie goers precisely the movie information they want, based on what they are doing as they browse the internet.  Fandango2Go is an example of “contextual browsing,” in which when a user performs a search for a movie, the Fandango2Go app will launch directly into the site the user is on, delivering the most relevant content the user wants to see.  Fandango2Go enables moviegoers to find movies and showtimes, watch trailers, locate theaters, and more without the need to travel to Fandango.com because the application is “aware” of the user’s context.




During the third and fourth quarters of 2010, the Company entered into an additional agreement with Vann’s to develop a point-of-sale (“POS”) application for the iPod Touch for use in its forthcoming stores as well as a marketing services contract with Vann’s to provide social media marketing services to its forthcoming stores.




Our recent focus on gamification services has yielded several new clients and an increasing number of inbound inquires.  In the fourth quarter of 2010, the Company contracted with two new clients - providing gamification services to UGO.com, a division of Hearst Media, and UNWeb, a business and personal networking application and global social exchange board for the United Nations NGO’s, Micro financers, Governments, Private Sectors, Media, Academic, Associations, Institutions, and Foundations.




The Company’s momentum in the gamification space continued to build in the first quarter of 2011, and the Company entered into agreements with UGO.com (second follow-on contract); ICE.com, the online jewelry retailer; Park City Week, a local online visitor resource; Accuscore, an online source for pregame sports statistics and information; WAI Consulting, LLC, marketers of photo-sharing apps ; Audree’s World, a tween MMOG focused on social games for social good; and Say.so LLC, a media measurement software technology company.




Recent Events




Subsequent to the end of the first quarter of 2011, the Company entered into follow-on contracts with WAI Consulting, LLC and Accuscore.  Further, the Company entered into a social media marketing agreement with the Egyptian Theatre, a community theatre based in Park City, UT.




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.




24




Employees




As of the date hereof, the Company has seven (7) full-time employees located in Utah, Michigan, and Italy.  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.




Results of Operations




For the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010




Revenues for the three months ended March 31, 2011 were $117,599, compared to $26,000 for the three months ended March 31, 2010.  The revenue in the current period related to predominantly to service revenue in the gamification space.  The increased revenue in the current period compared to the prior period resulted from the addition of more customers and larger fees for the services rendered.  Cost of sales was $370 for the quarter ended March 31, 2011, compared to $1,402 for the comparable period of 2010.  Cost of sales primarily consisted of the amortization of product development expenses.  As of March 31, 2011, these expenses have been almost fully amortized.




Total operating expenses for the quarter ended March 31, 2011 were $359,196 compared to $612,164 for the comparable period of 2010, a decrease of 41%.  The decreased operating expenses in 2011 resulted primarily from decreases in salaries and wages ($219,476 in 2011 compared to $389,547 in 2010) and decreases in general and administrative expenses.  The Company recognized $85,105 and $231,944 in expenses pertaining to stock options granted for services rendered in 2011 and 2010, respectively.




We recognized a net loss of $242,274 for the three months ended March 31, 2011 compared to a loss of $632,177 for the comparable period in 2010, a decrease of 62%.  This decreased net loss was primarily the result of increased revenue as well as decreased operating expenses and interest expense.  Our basic and diluted net loss per share was $0.00 for the quarter ended March 31, 2011, compared to $0.01 for the comparable period of 2010.  Excluding the non cash stock-based compensation described above as well as non-cash consulting expenses and interest expense related to the Bridge Financing, our loss would have been $107,389 and $296,495 for 2011 and 2010, respectively.




Liquidity and Capital Resources




As of March 31, 2011, we had $63,863 in cash and total liabilities of $177,364. We have incurred substantial losses in this quarter and prior fiscal years, and we have recorded negative cash flows from operations in this quarter and prior fiscal years.  As a result, as of March 31, 2011, 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.




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.  During the first quarter of 2010, the offering period was extended two additional times.




During the first quarter of 2010, 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, with a total of $134,150 of stock offering costs.  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.




25


In association with the Private Offering, the Company paid placement agent commissions of $100,500 and a non-accountable expense allowance of $30,150 to the placement agent as well as fees of $3,500 to the escrow agent.  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.




On November 2, 2009, November 12, 2009, and December 14, 2009, and in connection with a private debt offering (the “Bridge Financing”), the Company raised $104,859 from five investors, including the Company’s Chief Executive Officer and Chief Operating Officer, from the issuance of six Convertible Promissory Notes (the “Notes”) in the principal amount of $104,859 due three months from issuance bearing interest at a 90-day rate of 10%.  In connection with such investments, 1,048,586 common stock purchase warrants were also granted to such investors.




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.




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




For the quarter ended March 31, 2011, the Company’s Net Cash Used in Operating Activities was $124,074 compared to $478,473 for the comparable period in 2010.  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 cash based consulting fees offset by increases in accounts receivable.




For the quarter ended March 31, 2011, the Company’s Net Cash Used in Investing Activities was $1,200 compared to $4,426 for the comparable period in 2010.  The decrease in Net Cash Used in Investing Activities between the two periods resulted from decreases in fixed asset purchases.




For the quarter ended March 31, 2011, Net Cash Used by Financing Activities was $6,739 compared to Net Cash Provided by Financing Activities of $1,328,876 for the comparable period in 2010.  The change was due to the receipt of proceeds from issuance of common stock offset by repayment of certain convertible promissory notes in the quarter ended March 31, 2010 without comparable activity in the quarter ended March 31, 2011.




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Off-Balance Sheet Arrangements




We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.




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.  Our critical accounting policies are discussed in our annual report on Form 10-K for the fiscal year ended December 31, 2010.  Certain prior period amounts have been reclassified in the condensed consolidated financial statements to conform to the current period presentation.




Recently Issued Accounting Pronouncements




The Company has evaluated recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants (“AICPA”) and the SEC, and we have not identified any that would have a material impact on the Company’s financial position, or statements.




Impact of Inflation




We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.




Item 3.  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.




Item 4T.  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 2010, and March 31, 2011, 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.




Management’s 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.




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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, 2010, our most recently completed fiscal year.




Material Weakness in Internal Control over Financial Reporting




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.




At December 31, 2010, management’s assessment identified the following material weaknesses in internal control over financial reporting:




1.
Inadequate segregation of duties within certain aspects of the financial reporting process.




2.
The non-cash aspects of certain debt and equity issuances were not properly and accurately accounted for.




Related mitigating procedures did not operate effectively to alleviate these deficiencies.




In light of the material weaknesses 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.




The internal control weakness identified above with regard to the inadequate segregation of duties with certain aspects of the financial reporting process will only be completely corrected if the Company expands and has the capacity to adequately segregate the duties to mitigate the risk in financial reporting.  This expansion will depend mostly on the ability of management to fully execute its business operating strategy as outlined in Item 2(b) above and generate enough income to warrant growth in personnel.  With regard to the internal control deficiency identified above related to the lack of preventative measures to properly and accurately account for the recording of the non-cash aspects of certain debt and equity issuances, management has already taken steps to mitigate such risk 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.




Changes in Internal Control over Financial Reporting




While the Company did not issue any debt or equity instruments during the quarter ended March, 31, 2011, it has taken steps to mitigate the risk associated with the lack of preventative measures to properly and accurately account for the recording of the non-cash aspects of these issuances by utilizing external financial consulting services prior to the review by our principal independent accounting firm.  Aside from these efforts, there were no other changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II - OTHER INFORMATION




Item 1.  Legal Proceedings.




As of the date of this document, we know of no legal proceedings pending or threatened or judgments entered against the Company or any of our directors or officers in his or her capacity as such.




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




During the quarter ended March 31, 2011, the Company did not have any unregistered sales of equity securities.




Item 3.  Defaults Upon Senior Securities.




None.




Item 4.  [Removed and Reserved.]




Item 5.  Other Information.




None.




Item 6.  Exhibits.




31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)31.2
Certification of Principal 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)




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SIGNATURES





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





SPECTRUMDNA, INC.(Registrant)Dated: May 16, 2011
By:
/s/ James A. BanisterJames A. Banister,President and Chief Executive Officer(Principal Executive Officer)Dated: May 16, 2011
By:
/s/ Rebecca D. HershingerRebecca D. Hershinger,Chief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer)


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