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Share Name | Share Symbol | Market | Type |
---|---|---|---|
X Factor Communications Holdings Inc (CE) | USOTC:XFCH | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.0001 | 0.00 | 01:00:00 |
Delaware | 45-1545032 | |
(State or Other Jurisdiction of
Incorporation or Organization)
|
(I.R.S. Employer Identification No.)
|
PART I – FINANCIAL INFORMATION
|
||
Item 1.
|
Financial Statements
|
|
Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012*
|
1
|
|
Unaudited Consolidated Statements of Operations for the six and three months ended June 30, 2013 and 2012
|
2
|
|
Unaudited Consolidated Statement of Stockholders’ Deficit for the six months ended June 30, 2013
|
3
|
|
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012
|
4
|
|
Notes to Unaudited Consolidated Financial Statements
|
5
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
25
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
34
|
Item 4.
|
Controls and Procedures
|
34
|
PART II – OTHER INFORMATION
|
||
Item 1.
|
Legal Proceedings
|
36
|
Item 1A.
|
Risk Factors
|
36
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
36
|
Item 3.
|
Defaults upon Senior Securities
|
36
|
Item 4.
|
Mine Safety Disclosures
|
36
|
Item 5.
|
Other Information
|
36
|
Item 6
|
Exhibits
|
36
|
Signatures
|
37
|
|
Certifications
|
|
*
|
The Consolidated Balance Sheet at December 31, 2012 has been derived from the audited financial statements included in our Annual Report on Form 10-K that was filed on May 16, 2013.
|
June 30,
|
December 31,
|
|||||||
2013
|
2012
|
|||||||
Assets
|
||||||||
Current assets:
|
||||||||
Cash
|
$
|
185,556
|
$
|
311,843
|
||||
Accounts receivable, net of allowance for doubtful accounts
of $27,900 and $26,200, respectively
|
140,973
|
79,964
|
||||||
Other current assets
|
26,810
|
27,793
|
||||||
Total current assets
|
353,339
|
419,600
|
||||||
Equipment and leasehold improvements
|
15,695
|
24,705
|
||||||
Total assets
|
$
|
369,034
|
$
|
444,305
|
||||
Liabilities and Stockholders’ Deficit
|
||||||||
Current liabilities:
|
||||||||
Line of credit
|
$
|
97,836
|
$
|
97,846
|
||||
Current portion of note payable, net of discount of $2,256 at both dates
|
24,800
|
24,800
|
||||||
Current portion of capital leases payable
|
5,075
|
10,705
|
||||||
Accounts payable
|
634,413
|
624,045
|
||||||
Accrued expenses
|
248,625
|
137,213
|
||||||
Current portion of unearned revenues
|
36,167
|
30,008
|
||||||
Derivative financial instruments
|
27,006
|
165,640
|
||||||
Total current liabilities
|
1,073,922
|
1,090,257
|
||||||
Long term liabilities:
|
||||||||
Note payable, less current portion, net of discount of $4,720 and $5,848,
respectively
|
305,530
|
304,402
|
||||||
Notes payable – related parties
|
292,466
|
282,680
|
||||||
Total long term liabilities
|
597,996
|
587,082
|
||||||
Total liabilities
|
1,671,918
|
1,677,339
|
||||||
Commitments and contingencies
|
||||||||
Stockholders’ deficit:
|
||||||||
Preferred stock, $.0001 par value; 20,000,000 shares authorized,
|
||||||||
no shares issued and outstanding
|
—
|
—
|
||||||
Common stock, $.0001 par value; 100,000,000 shares authorized,
|
||||||||
18,155,471 and 17,214,934 shares issued and outstanding, respectively
|
1,816
|
1,721
|
||||||
Additional paid-in capital
|
7,320,504
|
6,519,602
|
||||||
Accumulated deficit
|
(8,625,204
|
)
|
(7,754,357
|
)
|
||||
Total stockholders’ deficit
|
(1,302,884
|
)
|
(1,233,034
|
)
|
||||
Total liabilities and stockholders' deficit
|
$
|
369,034
|
$
|
444,305
|
Six Months Ended
|
Three Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2013
|
2012
|
2013
|
2012
|
|||||||||||||
Revenue
|
$
|
387,900
|
$
|
325,793
|
$
|
248,237
|
$
|
142,864
|
||||||||
Cost of revenue
|
119,083
|
133,158
|
47,646
|
58,124
|
||||||||||||
Gross profit
|
268,817
|
192,635
|
200,591
|
84,740
|
||||||||||||
Operating expenses
|
||||||||||||||||
Salaries and fringe benefits
|
455,772
|
220,875
|
217,638
|
127,393
|
||||||||||||
General and administrative
|
775,241
|
838,683
|
361,193
|
386,796
|
||||||||||||
Depreciation and amortization
|
9,010
|
32,109
|
4,501
|
16,044
|
||||||||||||
Total operating expenses
|
1,240,023
|
1,091,667
|
583,332
|
530,233
|
||||||||||||
Loss from operations
|
(971,206
|
)
|
(899,032
|
)
|
(382,741
|
)
|
(445,493
|
)
|
||||||||
Other (income) expenses
|
||||||||||||||||
Interest expense, including $16,318, $163,322, $10,393 and $36,149, respectively for related parties
|
33,024
|
207,868
|
19,592
|
54,713
|
||||||||||||
Change in the fair value of derivative financial
instruments for related parties
|
(138,634
|
)
|
80,217
|
(140,177
|
)
|
(41,079
|
)
|
|||||||||
Professional fees related to Merger
|
—
|
202,867
|
—
|
69,676
|
||||||||||||
Loss on modification or extinguishment
of debt
|
—
|
515,135
|
—
|
185,273
|
||||||||||||
Other expenses
|
5,251
|
2,825
|
3,309
|
2,825
|
||||||||||||
Total other (income) expenses
|
(100,359
|
)
|
1,008,912
|
(117,276
|
)
|
271,408
|
||||||||||
Net loss
|
$
|
(870,847
|
)
|
$
|
(1,907,944
|
)
|
$
|
(265,465
|
)
|
$
|
(716,901
|
)
|
||||
Net loss attributable to common stockholders per share (see Note 3):
|
||||||||||||||||
Basic and diluted
|
17,492,449
|
—
|
17,698,370
|
—
|
||||||||||||
Weighted average number of common shares outstanding (see Note 3):
|
||||||||||||||||
Basic and diluted
|
$
|
(0.05
|
)
|
—
|
$
|
(0.01
|
)
|
—
|
Common
|
Additional
|
Total
|
||||||||||||||||||
Common
|
Shares
|
Paid in
|
Accumulated
|
Stockholders’
|
||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||
Balance at January 1, 2013
|
17,214,934
|
$
|
1,721
|
$
|
6,519,602
|
$
|
(7,754,357
|
)
|
$
|
(1,233,034
|
)
|
|||||||||
Issuance of common shares sold in Offerings
|
820,537
|
83
|
559,917
|
—
|
560,000
|
|||||||||||||||
Cash costs of Offerings
|
—
|
—
|
(58,238
|
)
|
—
|
(58,238
|
)
|
|||||||||||||
Equity based compensation – warrants issued in Offerings
|
—
|
—
|
(39,851
|
)
|
—
|
(39,851
|
)
|
|||||||||||||
Warrants issued to Placement Agent in Offerings
|
—
|
—
|
5,918
|
—
|
5,918
|
|||||||||||||||
Warrants issued in Offerings
|
—
|
—
|
33,933
|
—
|
33,933
|
|||||||||||||||
Equity based compensation – shares issued in settlement of accounts payable
|
120,000
|
12
|
89,988
|
—
|
90,000
|
|||||||||||||||
Equity based compensation – options issued to employees and consultants
|
—
|
—
|
209,235
|
—
|
209,235
|
|||||||||||||||
Net loss
|
—
|
—
|
—
|
(870,847
|
)
|
(870,847
|
)
|
|||||||||||||
Balance at June 30, 2013
|
18,155,471
|
$
|
1,816
|
$
|
7,320,504
|
$
|
(8,625,204
|
)
|
$
|
(1,302,884
|
)
|
Six Months Ended
|
||||||||
June 30,
|
||||||||
2013
|
2012
|
|||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$
|
(870,847
|
)
|
$
|
(1,907,944
|
)
|
||
Adjustments to reconcile net loss to net cash used in operating activities
|
||||||||
Depreciation and amortization
|
9,010
|
32,109
|
||||||
Capitalized interest payments for notes - related parties
|
12,009
|
33,545
|
||||||
Capitalized interest income for note receivable
|
(558
|
)
|
(561
|
)
|
||||
Accretion of discount on notes
|
1,128
|
132,139
|
||||||
Amortization of prepaid financing costs
|
—
|
11,869
|
||||||
Change in fair value of derivative financial instruments for related parties
|
(138,634
|
)
|
80,217
|
|||||
Bad debt expense
|
1,700
|
300
|
||||||
Loss on modification or extinguishment of debt
|
—
|
515,135
|
||||||
Equity-based compensation
|
209,235
|
3,960
|
||||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(64,934
|
)
|
153,821
|
|||||
Other current assets
|
1,541
|
(29,922
|
)
|
|||||
Accounts payable
|
100,368
|
235,808
|
||||||
Accrued expenses
|
111,414
|
(133,802
|
)
|
|||||
Unearned revenue
|
6,159
|
(43,217
|
)
|
|||||
Net cash used in operating activities
|
(622,409
|
)
|
(916,543
|
)
|
||||
Cash flows from investing activities:
|
||||||||
Refund of deposit for company to be acquired in Merger
|
—
|
75,000
|
||||||
Net cash provided by investing activities
|
—
|
75,000
|
||||||
Cash flows from financing activities:
|
||||||||
Sale of common stock
|
560,000
|
1,236,250
|
||||||
Costs incurred in connection with Offerings
|
(58,238
|
)
|
(209,407
|
)
|
||||
Net payments of line of credit
|
(10
|
)
|
—
|
|||||
Principal repayments of note payable
|
—
|
(85,227
|
)
|
|||||
Proceeds from notes payable - related parties
|
—
|
75,000
|
||||||
Principal repayments of obligations under capital leases
|
(5,630
|
)
|
(5,313
|
)
|
||||
Net cash provided by financing activities
|
496,122
|
1,011,303
|
||||||
Net change in cash
|
(126,287
|
)
|
169,760
|
|||||
Cash - beginning of period
|
311,843
|
78,639
|
||||||
Cash - end of period
|
$
|
185,556
|
$
|
248,399
|
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the period for interest
|
$
|
15,578
|
$
|
24,887
|
||||
Non-cash investing and financing activities:
|
||||||||
Equity-based compensation costs of Offerings
|
$
|
39,851
|
$
|
—
|
||||
Conversion of promissory notes and interest to common stock
|
$
|
—
|
$
|
728,049
|
||||
Accounts receivable used to offset notes payable – related parties
|
$
|
2,223
|
$
|
4,700
|
||||
Cancellations of derivative liabilities
|
$
|
—
|
$
|
39,130
|
||||
Accrued costs incurred in connection with Offering
|
$
|
—
|
$
|
72,805
|
||||
Common stock issued in settlement of accounts payable
|
$
|
90,000
|
$
|
118,449
|
Common
Stock
After
Exchange
|
Membership
Units
Before
Exchange
|
|||||||
Common
|
7,239,216
|
1,304,210
|
||||||
Preferred (A )
|
1,996,685
|
359,683
|
||||||
Total shares or units
|
9,235,901
|
1,663,893
|
Common
Stock
After
Exchange
|
Membership
Units
Before
Exchange
|
|||||||
Options – issued
|
2,161,920
|
389,490
|
||||||
Warrants – issued
|
1,012,757
|
182,457
|
||||||
Options – weighted average exercise price
|
$
|
0.579
|
$
|
3.210
|
||||
Warrants – weighted average exercise price
|
$
|
0.229
|
$
|
1.270
|
Six Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
June 30, 2012
|
June 30, 2012
|
|||||||
Pro forma net loss attributable to common stockholders:
|
$
|
(1,907,944
|
)
|
$
|
(716,901
|
)
|
||
Basic and diluted loss per share
|
$
|
(0.13
|
)
|
$
|
(0.05
|
)
|
||
Weighted average number of common shares outstanding:
|
||||||||
Basic and diluted
|
14,264,887
|
14,264,887
|
Six Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
June 30, 2013
|
June 30, 2013
|
|||||||
Historical net loss attributable to common stockholders:
|
$
|
(870,847
|
)
|
$
|
(265,465
|
)
|
||
Basic and diluted loss per share
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
||
Weighted average number of common shares outstanding:
|
||||||||
Basic and diluted
|
17,492,449
|
17,698,370
|
Six Months
|
Three Months
|
|||||||||||||||
Ended
|
Ended
|
|||||||||||||||
June 30,
|
June 30,
|
June 30,
|
June 30,
|
|||||||||||||
2013
|
2012
|
2013
|
2012
|
|||||||||||||
Digital media software and services
|
$
|
294,751
|
$
|
71,684
|
$
|
212,072
|
$
|
35,069
|
||||||||
Webcasting
|
93,149
|
254,109
|
36,165
|
107,795
|
||||||||||||
$
|
387,900
|
$
|
325,793
|
$
|
248,237
|
$
|
142,864
|
●
|
Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
|
● |
Level 2 - inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
|
● |
Level 3 - unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
|
June 30,
|
December 31,
|
|||||||
2013
|
2012
|
|||||||
Equipment and software
|
$
|
515,331
|
$
|
515,331
|
||||
Leasehold improvements
|
3,210
|
3,210
|
||||||
Equipment and leasehold improvements, at cost
|
518,541
|
518,541
|
||||||
Accumulated depreciation and amortization
|
(502,846
|
)
|
(493,836
|
)
|
||||
$
|
15,695
|
$
|
24,705
|
June 30,
|
December 31,
|
|||||||
2013
|
2012
|
|||||||
Note receivable
|
$
|
12,121
|
$
|
11,563
|
||||
Prepaid insurance
|
11,329
|
12,294
|
||||||
Prepaid leases
|
3,360
|
3,936
|
||||||
$
|
26,810
|
$
|
27,793
|
June 30,
|
December 31,
|
|||||||
2013
|
2012
|
|||||||
Compensation and payroll taxes (A)
|
$
|
220,423
|
$
|
112,506
|
||||
Operating expenses payable
|
15,000
|
2,630
|
||||||
Travel and related expenses
|
6,388
|
21,771
|
||||||
Accrued interest payable
|
6,814
|
306
|
||||||
$
|
248,625
|
$
|
137,213
|
(A)
|
The Company has temporarily delayed the payment of some of the compensation paid to certain employees and officers. These funds will bear interest at 8.5% interest and will be paid when sufficient cash is available.
|
Debt Service Payment Based on
Revenue for the year ended or ending
|
% of Revenue
|
Date Debt Service Paid
|
||
December 31, 2012
|
4%
|
July 1, 2013
|
||
December 31, 2013
|
5%
|
July 1, 2014
|
||
December 31, 2014
|
6%
|
July 1, 2015
|
||
December 31, 2015
|
7%
|
July 1, 2016
|
||
Balloon
|
August 1, 2016
|
June 30,
|
December 31,
|
|||||||
2013
|
2012
|
|||||||
Notes payable
|
$
|
337,306
|
$
|
337,306
|
||||
Discount
|
(6,976
|
)
|
(8,104
|
)
|
||||
Note payable, net of discount
|
330,330
|
329,202
|
||||||
Less: current portion of notes payable, net of discount of $2,256(A)
|
(24,800
|
)
|
(24,800
|
)
|
||||
Notes payable, net of current portion
|
$
|
305,530
|
$
|
304,402
|
(A)
|
In March 2012, the Company issued a promissory note to the President of the Company in an aggregate principal amount of $30,460 for an aggregate purchase price of $25,000. This promissory note, along with accrued interest of $183 was repaid in August 2012. This note was unsecured and beginning on August 1, 2012, bore interest at 10% per annum payable on the maturity date. The $5,460 difference between the amount lent to the Company and the face amount of the promissory note is classified as a discount of the note and was expensed; using the effective interest method, over the four month period ending on August 1, 2012, the date that interest began to accrue on the promissory note. The effective interest rate of this note was 16.4% in 2012.
|
(B)
|
In March 2012, the Company issued a promissory note to an acquaintance of the President in an aggregate principal amount of $60,920 for an aggregate purchase price of $50,000. In August 2012, $30,920 of this promissory note along with accrued interest of $367 was repaid and we issued 40,000 shares of our common stock at a price of $0.75 per share, in exchange for the conversion of the remaining $30,000 of this promissory note. This note was unsecured and beginning on August 1, 2012, bore interest at 10% per annum payable on the maturity date. The $10,920 difference between the amount loaned to the Company and the face amount of the promissory note was classified as a discount of the note and was expensed; using the effective interest method, over a four month period, the date that interest began to accrue on the promissory note. The effective interest rate of this note was 16.4% in 2012.
|
(C)
|
The Company has two notes payable outstanding to the President of the Company and another officer of the Company. The maturity date of these notes is the later of August 1, 2014 or such date when all debt owed by the Company to the NJEDA has been paid by the Company. These notes are unsecured and bear interest at 8.50% per annum. Interest is required to be paid monthly, however, when interest payments have not been paid, the Company and these Related Parties have settled such amounts by issuing additional promissory notes equivalent to the related interest expense. Unpaid interest of $7,605 and $7,644 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $3,863 and $3,866 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. In February 2012 these notes were amended to make them convertible into equity at a conversion rate of $0.595 per share of common stock of the Company. The Company recorded a charge of $52,329 associated with the amendment in February 2012. The unpaid principal and interest of these notes amounted to $186,126 and $178,521 as of June 30, 2013 and December 31, 2012, respectively.
|
(D)
|
The Company has two notes payable outstanding to current stockholders of the Company. When X-Factor entered into the NJEDA agreements, the Company ceased making principal payments on these notes to be in compliance with the NJEDA note. These notes were amended in February 2012 and the maturity date of these notes is the later of August 1, 2014 or such date when all debt owed by X-Factor to the NJEDA has been paid. These notes are unsecured and bear interest at a rate of 8.5% per annum and were initially convertible into equity at a conversion rate of $0.649 per share of common stock. In February 2012, these notes were amended to make them convertible into equity at a conversion rate of $0.595 per share of common stock of the Company. The Company recorded a charge of $60,668 associated with the amendment in February 2012. In addition, beginning in March 2012, interest was paid quarterly in arrears in the form of additional convertible promissory notes. In August 2012 these stockholders sold $123,427 of these promissory notes to investors and in September 2012 we issued 207,440 shares of our common stock to the investors at a price of $0.595 per share, in exchange for the conversion of those promissory notes along with $856 of accrued interest. Unpaid interest of $3,442 and $5,512 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $1,748 and $4,118 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. The unpaid principal and interest of these notes amounted to $84,212 and $80,770 as of June 30, 2013 and December 31, 2012, respectively. The effective interest rate of these notes was 11.7% in 2012.
Detachable warrants to acquire 48,216 shares common stock of the Company at $0.819 with an expiration date of January 2018 were issued in connection with the above mentioned notes. The $16,346 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model. The $16,346 fair value is classified as a discount of the notes and was expensed, using the effective interest method, over the original terms of the debt. When the notes were amended in February 2012 the unamortized discount of $841 was expensed to Loss on Modification or Extinguishment of Debt. The unamortized discount related to these warrants amounted to $0 and $1,188 as of June 30, 2013 and December 31, 2012, respectively.
|
(E)
|
In 2011, the Company issued promissory notes, each in the principal amount of $25,000, to two stockholders of the Company. These notes initially matured in three months and bore interest at 10% on any overdue principal. One note was repaid in 2011 while the maturity date of the other note was amended to the later of August 1, 2014 or such date when all debt owed to the NJEDA has been paid by the Company. In February 2012, this note was amended to make it convertible into equity at a conversion rate of $0.595 per share of common stock of the Company, with interest to be paid quarterly in arrears in the form of additional convertible promissory notes. Unpaid interest of $962 and 1,321 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $472 and $669 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. The Company recorded a charge of $8,299 associated with the amendment in February 2012. In June 2013 and 2012, respectively, $2,333 and $4,700 due from this investor, which was included in accounts receivable, was offset against this note. The unpaid principal and interest of this note amounted to $22,128 and $23,389 as of June 30, 2013 and December 31, 2012, respectively.
Detachable warrants to acquire 29,606 shares of common stock of the Company at $0.002 with an expiration date of May 2021 were issued in connection with the above mentioned notes. The $24,200 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model. The $24,200 fair value was classified as a discount of the notes and was expensed, using the effective interest method, over the original three month terms of the debt. The effective interest rate of these notes and the related warrants was 245%.
|
(F)
|
In 2011, the Company raised $800,000 by issuing convertible notes to certain stockholders of the Company (the “Bridge Notes”). The Bridge Notes bear interest at 6.00% per annum, payable quarterly in arrears, and are convertible at the option of the Company into additional Bridge Notes. Unpaid interest of $0 and $19,068 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $0 and $6,892 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. The Bridge Notes originally matured on the first anniversary of their issuance ($600,000 of the principal amount) or on August 1, 2014 ($200,000 of the principal amount), or could be prepaid at the Company’s option, and are subordinated to the Company’s NJEDA debt. These notes were amended in February 2012 and the related maturity date of these notes was amended to be the later of: (a) August 1, 2014 or (b) such date when all debt owed to the NJEDA has been paid by the Company. The Bridge Notes are convertible to an equity interest in the Company using a conversion price which will be based on defined terms of a future equity offering. In connection with the issuance of the Bridge Notes, for each $100,000 of notes issued, holders of Bridge Notes received 163,182 shares of common stock of the Company (the “Issued Shares”). As a result of the issuance of the Issued Shares we considered the Bridge Note investors to be Related Parties; $600,000 of the Bridge Notes are convertible into shares of common stock of the Company at the option of the holders, while $200,000 of the Bridge Notes must be converted to equity of the Company in the event of a future equity offerings. We also paid our investment bankers a fee of 10% of the gross proceeds of the financing. The $80,000 fee was classified as prepaid financing costs and was expensed, using the effective interest method, over the terms of the Bridge Notes and expensed as a component of Loss on Modification or Extinguishment of Debt. Upon the closing of the Merger, $728,049 of Bridge Notes ($700,000 of principal and $28,049 of unpaid interest) was converted into 970,733 shares of common stock of the Company. In August 2012, $105,845 owed for the remaining Bridge Notes ($100,000 of principal and $5,845 of unpaid interest) was repaid.
We accounted for the issuance of the Bridge Notes and the Issued Shares by allocating the $800,000 of proceeds received to each of the instruments based on their relative fair value. The fair value of the Issued Shares was based on recent sales of shares of common stock. Since the redemption amount of the Bridge Notes is convertible into shares of common stock, we recorded the effects of a beneficial conversion feature. The value of the beneficial conversion feature was limited to the proceeds allocated to the Bridge Notes. The $457,600 value of the Issued Shares and the $342,400 value of the beneficial conversion feature was classified as a discount of the Bridge Notes and expensed, using the effective interest method, over the terms of the Bridge Notes. The effective interest rate of the Bridge Notes and the beneficial conversion features (adjusted for the amended terms of the maturity date of the Bridge Notes) was approximately 41%.
To determine the accounting treatment of the conversion of the $728,049 of Bridge Notes, the Company followed the guidance espoused in FASB ASC Topic 470-20, “
Debt – Debt with Conversion and Other Options”
(“ASC 470-20”)
.
ASC 470-20 requires that the conversion of the Bridge Notes should be accounted for as an “extinguishment of debt”. The Company recorded a charge for this extinguishment of debt as a Loss on Modification or Extinguishment of Debt of $168,430 in May 2012.
|
Quoted Prices
|
Observable
|
Unobservable
|
||||||||||||||
In Active
|
Measurement
|
Measurement
|
||||||||||||||
Markets
|
Criteria
|
Criteria
|
Total
|
|||||||||||||
June 30, 2013:
|
||||||||||||||||
Derivative instruments (A )
|
—
|
—
|
$
|
(27,006
|
)
|
$
|
(27,006
|
)
|
||||||||
December 31, 2012:
|
||||||||||||||||
Derivative instruments (A )
|
—
|
—
|
$
|
(165,640
|
)
|
$
|
(165,640
|
)
|
June 30,
|
June 30,
|
|||||||
2013
|
2012
|
|||||||
Derivative financial instruments, beginning of period
|
$
|
165,640
|
$
|
39,130
|
||||
Cancellation of derivative – reclassified to stockholders’ deficit
|
—
|
(39,130
|
)
|
|||||
Recognition of beneficial conversion feature of notes after modification of debt (recognized in results of operations)
|
—
|
121,296
|
||||||
Change in fair value of derivative financial instruments (recognized in
the results of operations)
|
(138,634
|
)
|
(41,079
|
)
|
||||
Derivative financial instruments, at end of period
|
$
|
27,006
|
$
|
80,217
|
Six Months Ended
|
Three Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2013
|
2012
|
2013
|
2012
|
|||||||||||||
Notes payable – Related Parties
|
$
|
12,009
|
$
|
36,377
|
$
|
6,084
|
$
|
15,546
|
||||||||
Notes payable - Related Parties – discount amortization
|
—
|
126,945
|
—
|
20,602
|
||||||||||||
Note payable – NJEDA
|
10,175
|
12,783
|
5,115
|
5,889
|
||||||||||||
Unpaid compensation
|
4,309
|
—
|
4,309
|
—
|
||||||||||||
Accounts payable
|
3,386
|
11,719
|
1,966
|
7,940
|
||||||||||||
Note payable - NJEDA – discount amortization
|
1,128
|
5,194
|
564
|
2,466
|
||||||||||||
Amortization of prepaid financing costs
|
—
|
11,869
|
—
|
858
|
||||||||||||
Obligations under capital leases
|
1,133
|
1,687
|
709
|
764
|
||||||||||||
Line of credit
|
1,442
|
1,855
|
1,126
|
928
|
||||||||||||
Interest income – notes receivable
|
(558
|
)
|
(561
|
)
|
(281
|
)
|
(280
|
)
|
||||||||
$
|
33,024
|
$
|
207,868
|
$
|
19,592
|
$
|
54,713
|
Outstanding
|
Exercisable
|
|||||||||||
Weighted
|
Weighted
|
|||||||||||
Number
|
Average
|
Number
|
Average
|
|||||||||
of
|
Exercise
|
of
|
Exercise
|
|||||||||
Options
|
Price
|
Options
|
Price
|
|||||||||
Outstanding, January 1, 2013
|
5,600,590
|
$
|
0.689
|
4,414,828
|
$
|
0.671
|
||||||
Granted
|
173,500
|
0.740
|
||||||||||
Forfeited or expired
|
—
|
—
|
||||||||||
June 30, 2013
|
5,774,090
|
$
|
0.691
|
5,125,756
|
$
|
0.683
|
Outstanding |
Exercisable
|
||||||||||||||
Weighted
|
|||||||||||||||
Average
|
Weighted
|
Weighted
|
|||||||||||||
Number
|
Remaining
|
Average
|
Number
|
Average
|
|||||||||||
of
|
Contractual
|
Exercise
|
of
|
Exercise
|
|||||||||||
Range of Price
|
Options
|
Life (In Years)
|
Price
|
Options
|
Price
|
||||||||||
$
|
0.364
|
1,134,499
|
3.5
|
$
|
0.364
|
1,134,499
|
$
|
0.364
|
|||||||
0.659 – 0.780
|
3,427,157
|
9.0
|
0.744
|
2,828,823
|
0.743
|
||||||||||
0.825 – 0.865
|
1,212,434
|
8.0
|
0.846
|
1,162,434
|
0.847
|
||||||||||
0.364 – 0.865
|
5,774,090
|
7.7
|
0.691
|
5,125,756
|
$
|
0.683
|
Weighted
|
||||||||
Number
|
Average
|
|||||||
of
|
Exercise
|
|||||||
Options
|
Price
|
|||||||
Outstanding, January 1, 2013
|
1,185,762 | $ | 0.759 | |||||
Granted
|
173,500 | 0.740 | ||||||
Vested
|
(710,928 | ) | 0.758 | |||||
Forfeited or expired
|
— | — | ||||||
December 31, 2012
|
648,334 | 0.756 |
Six Months
|
||||
Ended
|
||||
June 30, 2013
|
||||
Number of options granted
|
173,500 | |||
Exercise price
|
$ | 0.74 | ||
Risk-free interest rate
|
1.2 | % | ||
Expected lives in years
|
7.0 | |||
Expected volatility
|
26.3 | % | ||
Expected dividend yields
|
None
|
|||
Fair value of common stock
|
$ | 0.74 | ||
Fair value per option
|
$ | 0.218 | ||
Fair value of options granted
|
$ | 37,823 |
Six Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
June 30, 2013
|
June 30, 2013
|
|||||||
Salaries and fringe benefits
|
$ | 50,799 | $ | 18,555 | ||||
General and administrative
|
158,436 | 39,423 | ||||||
$ | 209,235 | $ | 57,978 |
Weighted
|
||||||||
Average
|
||||||||
Exercise
|
||||||||
Warrants
|
Price
|
|||||||
Outstanding, January 1, 2013
|
1,788,775
|
$
|
0.461
|
|||||
Granted
|
1,054,824
|
1.471
|
||||||
Forfeited or expired
|
—
|
—
|
||||||
Outstanding, June 30, 2013
|
2,843,599
|
$
|
0.836
|
Six Months
|
||||
Ended
|
||||
June 30, 2013
|
||||
Number of warrants granted
|
1,054,824
|
|||
Exercise price
|
$
|
1.471
|
||
Risk-free interest rate
|
1.0
|
%
|
||
Expected lives in years
|
4.2
|
|||
Expected volatility
|
26.7
|
%
|
||
Expected dividend yields
|
None
|
|||
Fair value of common stock
|
$
|
0.600
|
||
Fair value per warrant
|
$
|
0.038
|
||
Fair value of warrants granted
|
$
|
39,851
|
||
Outstanding | |||||||||||
Weighted
|
|||||||||||
Average
|
Weighted
|
||||||||||
Number
|
Remaining
|
Average
|
|||||||||
Of
|
Contractual
|
Exercise
|
|||||||||
Range of Price
|
Warrants
|
Life (In Years)
|
Price
|
||||||||
$
|
0.002
|
743,939
|
7.8
|
$
|
0.002
|
||||||
0.750 – 0.90
|
1,296,086
|
3.8
|
0.810
|
||||||||
1.100
|
401,787
|
3.0
|
1.100
|
||||||||
2.200
|
401,787
|
5.0
|
2.220
|
||||||||
$
|
0.002 – 2.200
|
2,843,599
|
4.9
|
0.836
|
Six Months Ended
|
Three Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2013
|
2012
|
2013
|
2012
|
|||||||||||||
General and administrative
|
$
|
—
|
$
|
3,960
|
$
|
—
|
$
|
2,475
|
||||||||
Loss on modification or extinguishment of debt
|
—
|
841
|
—
|
—
|
||||||||||||
Interest expense – amortization of warrants
|
916
|
6,613
|
408
|
2,221
|
||||||||||||
$
|
916
|
$
|
11,414
|
$
|
408
|
$
|
4,696
|
December 2012 Offering
|
June 2013 Offering
|
Total
|
||||||||
Shares sold
|
418,750
|
401,787
|
820,537
|
|||||||
Gross proceeds
|
$
|
335,000
|
$
|
225,000
|
$
|
560,000
|
||||
Warrants issued – exercise price of $0.90
|
209,375
|
—
|
209,375
|
|||||||
Warrants issued – exercise price of $1.10
|
—
|
401,787
|
401,787
|
|||||||
Warrants issued – exercise price of $2.20
|
—
|
401,787
|
401,787
|
Number of
|
Cost or
|
|||||||
Warrants
|
Valued at
|
|||||||
Cash costs:
|
||||||||
Placement Agent 10% fee of proceeds (Note A)
|
—
|
$
|
33,500
|
|||||
Legal fees
|
—
|
24,738
|
||||||
Total cash costs
|
—
|
58,238
|
||||||
Equity-based compensation:
|
||||||||
Warrants issued to Placement Agent (Note B)
|
41,875
|
5,918
|
||||||
Warrants issued to investors in December 2012 Offering (Note C)
|
209,375
|
29,594
|
||||||
Warrants issued to investors in June 2013 Offering (Note D)
|
803,574
|
4,339
|
||||||
Total equity-based compensation
|
1,054,824
|
39,851
|
||||||
Total costs
|
1,054,824
|
$
|
98,089
|
Total future minimum lease payments in 2013
|
$
|
5,303
|
||
Amount representing interest
|
(228
|
)
|
||
Present value of future minimum lease payments (all current)
|
$
|
5,075
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Digital media software and services
|
$
|
294,751
|
$
|
71,684
|
$
|
223,067
|
||||||
Webcasting
|
93,149
|
254,109
|
(160,960
|
)
|
||||||||
Total revenues
|
$
|
387,900
|
$
|
325,793
|
$
|
62,107
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Salaries
|
$
|
348,085
|
$
|
163,458
|
$
|
(184,627
|
)
|
|||||
Equity-based compensation
|
50,799
|
—
|
(50,799
|
)
|
||||||||
Commissions and bonuses
|
387
|
31,489
|
31,102
|
|||||||||
Employee insurance
|
9,390
|
9,576
|
186
|
|||||||||
Payroll taxes
|
47,111
|
16,352
|
(30,759
|
)
|
||||||||
Total salaries and fringe benefits
|
$
|
455,772
|
$
|
220,875
|
$
|
(234,897
|
)
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Professional fees and consultants – Operations
|
$
|
287,402
|
$
|
333,980
|
$
|
46,578
|
||||||
Professional fees and consultants – Legal (A)
|
37,301
|
107,166
|
69,865
|
|||||||||
Professional fees and consultants – Accounting (A)
|
114,302
|
182,647
|
68,345
|
|||||||||
Professional fees and consultants – Equity based (B)
|
158,436
|
3,960
|
(154,476
|
)
|
||||||||
Travel (A)
|
43,194
|
64,021
|
20,827
|
|||||||||
Communication expenses
|
16,144
|
26,315
|
10,171
|
|||||||||
Insurance (C)
|
32,559
|
13,311
|
(19,248
|
)
|
||||||||
SEC printing and filing fees
|
11,674
|
21,424
|
9,750
|
|||||||||
Computer and office supplies
|
31,391
|
46,586
|
15,195
|
|||||||||
Advertising and marketing
|
22,587
|
14,145
|
(8,442
|
)
|
||||||||
Miscellaneous expenses
|
20,251
|
25,128
|
4,877
|
|||||||||
Total general and administrative
|
$
|
775,241
|
$
|
838,683
|
$
|
63,442
|
Note A – 2012 expenses are primarily related to the preparation required to becoming a “Public Company”.
|
Note B – In 2013 an individual received equity based compensation in lieu of cash compensation for performing software development services.
|
Note C – Increase is primarily related to a Directors and Officers liability insurance policy the Company obtained upon becoming a “Public Company”.
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Loss on Extinguishment or Modification of Debt
|
$
|
—
|
$
|
515,135
|
$
|
515,135
|
||||||
Professional fees related to Merger
|
—
|
202,867
|
202,867
|
|||||||||
Change in fair value of derivative financial instruments for Related Parties
|
(138,634
|
)
|
80,217
|
218,851
|
||||||||
Interest
|
31,896
|
63,860
|
31,964
|
|||||||||
Accretion of discount on notes
|
1,128
|
132,139
|
131,011
|
|||||||||
Amortization of prepaid financing costs
|
—
|
11,869
|
11,869
|
|||||||||
Other expenses
|
5,251
|
2,825
|
(2,426
|
)
|
||||||||
Total other (income) expenses
|
$
|
(100,359
|
)
|
$
|
1,008,912
|
$
|
1,109,271
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Digital media software and services
|
$
|
212,072
|
$
|
35,069
|
$
|
177,003
|
||||||
Webcasting
|
36,165
|
107,795
|
(71,630
|
)
|
||||||||
Total revenues
|
$
|
248,237
|
$
|
142,864
|
$
|
105,373
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Salaries
|
$
|
170,138
|
$
|
87,209
|
$
|
(82,929
|
)
|
|||||
Equity-based compensation
|
18,555
|
—
|
(18,555
|
)
|
||||||||
Commissions and bonuses
|
—
|
27,031
|
27,031
|
|||||||||
Employee insurance
|
3,863
|
5,447
|
1,584
|
|||||||||
Payroll taxes
|
25,082
|
7,706
|
(17,376
|
)
|
||||||||
Total salaries and fringe benefits
|
$
|
217,638
|
$
|
127,393
|
$
|
(90,245
|
)
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Professional fees and consultants – Operations
|
$
|
118,172
|
$
|
164,152
|
$
|
45,980
|
||||||
Professional fees and consultants – Legal (A)
|
21,270
|
47,160
|
25,890
|
|||||||||
Professional fees and consultants – Accounting
|
80,027
|
60,751
|
(19,276
|
)
|
||||||||
Professional fees and consultants – Equity based (B)
|
39,423
|
2,475
|
(36,948
|
)
|
||||||||
Travel (A)
|
26,231
|
32,782
|
6,551
|
|||||||||
Communication expenses
|
8,192
|
11,921
|
3,729
|
|||||||||
Insurance (C)
|
16,852
|
12,844
|
(4,008
|
)
|
||||||||
SEC printing and filing fees
|
5,857
|
17,851
|
11,994
|
|||||||||
Computer and office supplies
|
14,695
|
16,692
|
1,997
|
|||||||||
Advertising and marketing
|
19,430
|
6,645
|
(12,785
|
)
|
||||||||
Miscellaneous expenses
|
11,044
|
13,523
|
2,479
|
|||||||||
Total general and administrative
|
$
|
361,193
|
$
|
386,796
|
$
|
25,603
|
Note A – 2012 expenses are primarily related to the preparation required to becoming a “Public Company”.
|
Note B – In 2013 an individual received equity based compensation in lieu of cash compensation for performing software development services.
|
Note C – Increase is primarily related to a Directors and Officers liability insurance policy the Company obtained upon becoming a “Public Company”.
|
Favorable
|
||||||||||||
June 30,
|
(Unfavorable)
|
|||||||||||
2013
|
2012
|
Change
|
||||||||||
Loss on Extinguishment or Modification of Debt
|
$
|
—
|
$
|
185,273
|
$
|
185,273
|
||||||
Professional fees related to Merger
|
—
|
69,676
|
69,676
|
|||||||||
Change in fair value of derivative financial instruments for Related Parties
|
(140,177
|
)
|
(41,079
|
)
|
99,098
|
|||||||
Interest
|
19,028
|
30,787
|
11,759
|
|||||||||
Accretion of discount on notes
|
564
|
23,068
|
22,504
|
|||||||||
Amortization of prepaid financing costs
|
—
|
858
|
858
|
|||||||||
Other expenses
|
3,309
|
2,825
|
(484
|
)
|
||||||||
Total other expenses
|
$
|
(117,276
|
)
|
$
|
271,408
|
$
|
388,684
|
Payments Due By Period
|
||||||||||||||||
Obligations
|
Total
|
Less Than 1 Year
|
2 – 3 Years
|
4 – 5 Years
|
||||||||||||
Notes payable – Note A
|
$ | 337,306 | $ | 27,056 | $ | 206,834 | $ | 103,416 | ||||||||
Notes payable – related parties
|
292,466 | — | — | 292,466 | ||||||||||||
Capital leases
|
5,303 | 5,303 | — | — | ||||||||||||
Line of credit – Note B
|
97,836 | 97,836 | — | — | ||||||||||||
$ | 732,911 | $ | 130,195 | $ | 206,834 | $ | 395,882 |
Note A –
|
Payments are based on a percentage of the prior year’s revenues with any unpaid principal due on August 1, 2016. For purposes of this table we were unable to estimate our revenues for the next three years so we have assumed that the unpaid principal balance, after our payment in July 2013, will be paid equally in years 2, 3 and 4.
|
Note B –
|
There is no maturity date for the Line of Credit; however the Company has classified this obligation as a current liability.
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
32.1
|
Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
32.2
|
Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
|
X-FACTOR COMMUNICATIONS HOLDINGS, INC. | ||
Date: August 14, 2013
|
By: |
/s/ Charles Saracino
|
Charles Saracino, Chief Executive Officer
(Principal Executive Officer)
|
||
Date: August 14, 2013
|
By: |
/s/ Edwin F. Heinen
|
Edwin F. Heinen, Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
|
1 Year X Factor Communications (CE) Chart |
1 Month X Factor Communications (CE) Chart |
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