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 - DISCONTINUED OPERATIONS
During the quarter ended June 30, 2012, the Company discontinued its Addictionary and PlanetTagger product lines. Addictionary was a social word play engine. PlanetTagger was a location-enabled integrated social media platform. The Company has classified all amounts presented in these financial statements to reflect the impact of the discontinuance of operations. The Company realized a gain of $1,558 during the current quarter from discontinued operations due to the winding down of these discontinued operations. The assets (receivables) related to the discontinued operations have been written down to a net realizable value of $475 and the liabilities associated with the sale of these assets are recorded at $13,825 as of September 30, 2011.
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Receivables associated with assets held for sale, net
|
|
$
|
30
|
|
|
$
|
2,200
|
|
Computer equipment
|
|
|
9,681
|
|
|
|
26,411
|
|
Software
|
|
|
8,393
|
|
|
|
8,393
|
|
Patents, trademarks, and domain names
|
|
|
7,183
|
|
|
|
7,083
|
|
Product development costs
|
|
|
194,321
|
|
|
|
194,423
|
|
Less: Accumulated depreciation and amortization
|
|
|
(219,133
|
)
|
|
|
(228,825
|
)
|
Total assets held for sale - Discontinued operations
|
|
$
|
475
|
|
|
$
|
9,685
|
|
|
|
|
|
|
|
|
|
|
Total liabilities associated with assets held for sale -
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
13,825
|
|
|
$
|
77,937
|
|
The following tables present the revenues and expenses related to the above projects for the three month and nine month periods ended September 30, 2011, and September 30, 2010. Prior period income statement amounts applicable to the above projects have been reclassified and included under income (loss) from discontinued operations.
|
|
Three Months Ended,
|
|
|
Three Months Ended,
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
REVENUE
|
|
$
|
15,750
|
|
|
$
|
44,250
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
15,528
|
|
|
|
110,493
|
|
Salaries and wages
|
|
|
177
|
|
|
|
184,710
|
|
Product development costs
|
|
|
287
|
|
|
|
26,053
|
|
Total Operating Expenses
|
|
|
15,992
|
|
|
|
321,256
|
|
OPERATING LOSS
|
|
|
(242
|
)
|
|
|
(277,006
|
)
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Gain on sale of equipment
|
|
|
1,800
|
|
|
|
-
|
|
Total Other Income (Expenses)
|
|
|
1,800
|
|
|
|
-
|
|
LOSS FROM DISCONTINUED OPERATIONS
|
|
$
|
1,558
|
|
|
$
|
(277,006
|
)
|
SPECTRUMDNA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - DISCONTINUED OPERATIONS (Continued)
|
|
Nine Months Ended,
|
|
|
Nine Months Ended,
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
REVENUE
|
|
$
|
234,259
|
|
|
$
|
114,850
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
387,653
|
|
|
|
336,720
|
|
Salaries and wages
|
|
|
266,625
|
|
|
|
517,246
|
|
Product development costs
|
|
|
25,297
|
|
|
|
72,355
|
|
Total Operating Expenses
|
|
|
679,575
|
|
|
|
926,321
|
|
OPERATING LOSS
|
|
|
(445,316
|
)
|
|
|
(811,471
|
)
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Gain on sale of equipment
|
|
|
2,649
|
|
|
|
-
|
|
Total Other Income (Expenses)
|
|
|
2,649
|
|
|
|
-
|
|
LOSS FROM DISCONTINUED OPERATIONS
|
|
$
|
(442,667
|
)
|
|
$
|
(811,471
|
)
|
NOTE 3 - RELATED PARTY TRANSACTIONS
As of September 30, 2011, and December 31, 2010, the Company recorded accounts payable balances of $ -0- and $261, respectively. From time to time, employees of the Company procure goods or services on behalf of the Company which require reimbursement or are owed non-salaried compensation.
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 nine months ended September 30, 2011 and 2010, the Company recorded $165,955 and $664,229, 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 nine months ended September 30, 2011 and 2010, the Company recorded $114,962 and $398,312, respectively, in compensation expense related to share-based payment 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.
During the first three quarters 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 3,393,229 common stock options as the employees to whom the options had been granted left the Company.
Changes in stock options issued to employees, advisors, and board members for the periods ended September 30, 2011 and December 31, 2010 are as follows:
SPECTRUMDNA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – SHARE BASED PAYMENT (Continued)
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2009
|
|
|
13,762,075
|
|
|
$
|
0.31
|
|
Granted
|
|
|
7,520,000
|
|
|
|
0.12
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(6,739,067
|
)
|
|
|
0.23
|
|
Outstanding, December 31, 2010
|
|
|
14,543,008
|
|
|
$
|
0.26
|
|
Exercisable, December 31, 2010
|
|
|
10,020,716
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
14,543,008
|
|
|
|
0.26
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(3,393,229
|
)
|
|
|
0.20
|
|
Outstanding, September 30, 2011
|
|
|
11,149,779
|
|
|
|
0.29
|
|
Exercisable, September 30, 2011
|
|
|
11,149,779
|
|
|
|
0.29
|
|
The following table summarizes information about stock options granted to employees, advisors, and board members at September 30, 2011:
OPTIONS OUTSTANDING
|
|
|
|
|
|
|
|
|
OPTIONS EXERCISABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Range
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
of
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
Prices
|
|
|
Options
|
|
|
Price
|
|
|
(in years)
|
|
|
Options
|
|
|
Price
|
|
|
(in years)
|
|
|
0.04
|
|
|
|
1,620,000
|
|
|
$
|
0.04
|
|
|
|
5.09
|
|
|
|
1,620,000
|
|
|
$
|
0.04
|
|
|
|
5.09
|
|
|
0.50
|
|
|
|
1,819,643
|
|
|
|
0.50
|
|
|
|
5.85
|
|
|
|
1,819,643
|
|
|
|
0.50
|
|
|
|
5.85
|
|
|
0.55
|
|
|
|
1,620,000
|
|
|
|
0.55
|
|
|
|
6.73
|
|
|
|
1,620,000
|
|
|
|
0.55
|
|
|
|
6.73
|
|
|
0.56
|
|
|
|
749,167
|
|
|
|
0.56
|
|
|
|
6.84
|
|
|
|
749,167
|
|
|
|
0.56
|
|
|
|
6.84
|
|
|
0.46
|
|
|
|
400,000
|
|
|
|
0.46
|
|
|
|
7.01
|
|
|
|
400,000
|
|
|
|
0.46
|
|
|
|
7.01
|
|
|
0.21
|
|
|
|
420,000
|
|
|
|
0.21
|
|
|
|
8.65
|
|
|
|
420,000
|
|
|
|
0.21
|
|
|
|
8.65
|
|
|
0.11
|
|
|
|
1,406,698
|
|
|
|
0.11
|
|
|
|
7.42
|
|
|
|
1,406,698
|
|
|
|
0.11
|
|
|
|
7.42
|
|
|
0.17
|
|
|
|
552,083
|
|
|
|
0.17
|
|
|
|
7.54
|
|
|
|
552,083
|
|
|
|
0.17
|
|
|
|
7.54
|
|
|
0.34
|
|
|
|
250,000
|
|
|
|
0.34
|
|
|
|
7.68
|
|
|
|
250,000
|
|
|
|
0.34
|
|
|
|
7.68
|
|
|
0.33
|
|
|
|
200,000
|
|
|
|
0.33
|
|
|
|
7.73
|
|
|
|
200,000
|
|
|
|
0.33
|
|
|
|
7.73
|
|
|
0.19
|
|
|
|
106,771
|
|
|
|
0.19
|
|
|
|
8.04
|
|
|
|
106,771
|
|
|
|
0.19
|
|
|
|
8.04
|
|
|
0.20
|
|
|
|
500,000
|
|
|
|
0.20
|
|
|
|
8.30
|
|
|
|
500,000
|
|
|
|
0.20
|
|
|
|
8.30
|
|
|
0.14
|
|
|
|
156,250
|
|
|
|
0.14
|
|
|
|
8.47
|
|
|
|
156,250
|
|
|
|
0.14
|
|
|
|
8.47
|
|
|
0.13
|
|
|
|
156,250
|
|
|
|
0.13
|
|
|
|
8.52
|
|
|
|
156,250
|
|
|
|
0.13
|
|
|
|
8.52
|
|
|
0.09
|
|
|
|
280,416
|
|
|
|
0.09
|
|
|
|
8.68
|
|
|
|
280,416
|
|
|
|
0.09
|
|
|
|
8.68
|
|
|
0.07
|
|
|
|
25,000
|
|
|
|
0.07
|
|
|
|
8.76
|
|
|
|
25,000
|
|
|
|
0.07
|
|
|
|
8.76
|
|
|
0.22
|
|
|
|
200,000
|
|
|
|
0.22
|
|
|
|
8.76
|
|
|
|
200,000
|
|
|
|
0.22
|
|
|
|
8.76
|
|
|
0.08
|
|
|
|
200,000
|
|
|
|
0.08
|
|
|
|
8.76
|
|
|
|
200,000
|
|
|
|
0.08
|
|
|
|
8.76
|
|
|
0.05
|
|
|
|
487,500
|
|
|
|
0.05
|
|
|
|
9.01
|
|
|
|
487,500
|
|
|
|
0.05
|
|
|
|
9.01
|
|
Totals
|
|
|
|
11,149,778
|
|
|
$
|
0.29
|
|
|
|
6.96
|
|
|
|
11,149,778
|
|
|
$
|
0.29
|
|
|
|
6.96
|
|
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 stock options 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 11,149,778 options outstanding, 7,710,135 were issued under the Plan.
SPECTRUMDNA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – SHARE BASED PAYMENT (Continued)
As of September 30, 2011, the aggregate intrinsic value of the options outstanding and exercisable was $0 and $0, respectively. As of September 30, 2010, the aggregate intrinsic value of the options outstanding and exercisable was $21,060 and $21,060, respectively. The total fair value of shares vested during the nine months ended September 30, 2011 and 2010 was $3,106 and $173,733, respectively.
Warrants
In connection with the Bridge Financing and Private Offering discussed in Note 7 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 September 30, 2011 and December 31, 2010 are as follows:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2009
|
|
|
1,048,586
|
|
|
$
|
0.25
|
|
Granted
|
|
|
17,160,000
|
|
|
|
0.24
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2010
|
|
|
18,208,586
|
|
|
$
|
0.24
|
|
Exercisable, December 31, 2010
|
|
|
18,208,586
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2010
|
|
|
18,208,586
|
|
|
$
|
0.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2011
|
|
|
18,208,586
|
|
|
$
|
0.24
|
|
Exercisable, September 30, 2011
|
|
|
18,208,586
|
|
|
$
|
0.24
|
|
The following table summarizes information about stock warrants granted to employees, investors, and board members as of September 30, 2011:
WARRANTS OUTSTANDING
|
|
|
WARRANTS EXERCISABLE
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
Range of
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
Prices
|
|
|
Warrants
|
|
|
Price
|
|
|
(in years)
|
|
|
Warrants
|
|
|
Price
|
|
|
(in years)
|
|
$
|
0.25
|
|
|
|
17,203,586
|
|
|
$
|
0.25
|
|
|
|
3.32
|
|
|
|
17,203,586
|
|
|
$
|
0.25
|
|
|
|
3.32
|
|
|
0.10
|
|
|
|
1,005,000
|
|
|
|
0.10
|
|
|
|
3.30
|
|
|
|
1,005,000
|
|
|
|
0.10
|
|
|
|
3.30
|
|
Totals
|
|
|
|
18,208,586
|
|
|
$
|
0.24
|
|
|
|
3.32
|
|
|
|
18,208,586
|
|
|
$
|
0.24
|
|
|
|
3.30
|
|
SPECTRUMDNA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - EQUITY TRANSACTIONS
The Company issued 838,000 shares of common stock as consideration for services rendered by the Company’s legal counsel (during 2010 and 2011) at a value of $.03 per share during the six month period ended June 30, 2011. Also during this period, the Company cancelled $49,200 in deferred compensation that was contributed by former related parties. This amount was closed to additional paid in capital.
NOTE 6 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine months ended June 30, 2011, the Company incurred a net loss of $706,304. In addition, at the quarter ended September 30, 2011 and year ended December 31, 2010, the Company had accumulated deficits of $9,751,476 and $9,045,172, respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company's continuation as a going concern is contingent upon its ability to obtain financing and to generate revenues and cash flow to meet its obligations on a timely basis. As the result of the discontinuance of the Addictionary and PlanetTagger product lines, the Company's intends to refocus its business. The Company has appointed a new Board of Directors and Management team to direct this effort.
The Company has been able to generate working capital in the past through private placements and issuing promissory notes. It is the Company’s belief that these avenues will remain available. However, no assurance can be made that these efforts will be successful.
NOTE 7 - 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.
SPECTRUMDNA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – RESTATEMENT (Continued)
The table below highlights the material income statement items that were affected by these restatements:
|
|
For the Nine
Months Ended
September 30, 2010(As Originally
|
|
|
|
|
|
For the Nine
Months Ended
September 30, 2010
|
|
|
|
|
|
For the Nine
Months Ended
September 30, 2010
|
|
|
|
Filed)
|
|
|
to Restatement
|
|
|
(Restated)
|
|
|
Operations
|
|
|
(As Filed Herein)
|
|
General and administrative
|
|
$
|
436,823
|
|
|
$
|
270,620
|
|
|
$
|
707,443
|
|
|
$
|
(602,636
|
)
|
|
$
|
104,807
|
|
Salaries and wages
|
|
|
1,190,134
|
|
|
|
(274,576
|
)
|
|
|
915,558
|
|
|
|
(251,329
|
)
|
|
|
664,229
|
|
Financing costs
|
|
|
2,876,803
|
|
|
|
(2,876,803
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense - beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion feature
|
|
|
28,397
|
|
|
|
18,835
|
|
|
|
47,232
|
|
|
|
-
|
|
|
|
47,232
|
|
Gain on conversion
|
|
|
25,000
|
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
853,965
|
|
|
|
853,965
|
|
Net Loss
|
|
|
(4,475,058
|
)
|
|
|
2,836,924
|
|
|
|
(1,638,134
|
)
|
|
|
-
|
|
|
|
(1,638,134
|
)
|
Basic and Fully Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Share
|
|
$
|
(0.07
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.02
|
)
|
|
$
|
-
|
|
|
$
|
(0.02
|
)
|
SPECTRUMDNA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended September 30, 2010, these adjustments resulted in the variances highlighted in the tables immediately above and are related to the following accounts:
·
|
Associated with a prepaid consulting agreement, to properly recognize consulting expenses in the first three quarters of 2010, general and administrative expenses increased by $4,703.
|
·
|
The reversal of certain stock based compensation related to the forfeiture of stock options when employees did not meet their requisite service requirements and left the Company prior to the first vesting date. In the third quarter of 2010, these reversals resulted in a decrease to salaries and wages expense of $8,659.
|
·
|
The reclassification of $265,917 related to certain stock-based compensation resulting in a decrease in Salaries and Wages and an increase in General and Administrative.
|
·
|
The reclassification of $2,876,803 in financing costs associated with the value of the warrants granted as part of Private Offering resulting in a decrease in financing cost expense and a corresponding decrease in additional paid in capital.
|
·
|
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
.
|
NOTE 8 - SUBSEQUENT EVENTS
Management has evaluated events and transactions that occurred after the balance sheet date for potential recognition and disclosure through February 12, 2013, the date on which the financial statements were available to be issued.
In April of 2012, the Company entered into an agreement with its President and CEO, James Bannister, whereby Mr. Bannister returned 30,615,000 shares of common stock and warrants to acquire 148,586 shares of common stock in consideration for the transfer to Mr. Bannister of certain intellectual property owned by the Company. As additional compensation, the Company paid Mr. Bannister $7,500 in cash. Details of this transaction, along with related schedules and exhibits, are specified in an 8-K report filed with the SEC on April 16, 2012. The Company also raised $50,000 through the issuance of 20,000,000 units (one share of common stock and one warrant) to three investors. Details of this equity transaction are enumerated in the 8-K filed on April 16, 2012.
The Company recommenced development stage status during the third quarter of fiscal 2012, ending September 30, 2012.