Attached files
file | filename |
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EX-99.2 - ProText Mobility, Inc. | v165743_ex99-2.htm |
EX-99.3 - ProText Mobility, Inc. | v165743_ex99-3.htm |
EX-99.5 - ProText Mobility, Inc. | v165743_ex99-5.htm |
EX-99.4 - ProText Mobility, Inc. | v165743_ex99-4.htm |
EX-99.6 - ProText Mobility, Inc. | v165743_ex99-6.htm |
EX-99.1 - ProText Mobility, Inc. | v165743_ex99-1.htm |
EX-31.1 - ProText Mobility, Inc. | v165743_ex31-1.htm |
EX-32.2 - ProText Mobility, Inc. | v165743_ex32-2.htm |
EX-31.2 - ProText Mobility, Inc. | v165743_ex31-2.htm |
EX-32.1 - ProText Mobility, Inc. | v165743_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
FOR
THE QUARTERLY PERIOD ENDED September 30, 2009
|
||
OR
|
||
¨
|
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 001-31590
EchoMetrix,
Inc.
(Exact
name of small business issuer as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
11-3621755
(I.R.S.
Employer
Identification
No.)
|
|
6800 Jericho Turnpike, Suite
208E,
Syosset, New York
(Address
of principal executive offices)
|
|
11791
(Zip
Code)
|
Issuer's
telephone number, including area code (516)
802-0223
N/A
(Former
name or former address, if changed since last report)
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 ¨
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 x
No ¨
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 definitions of “large accelerated filer,” “accelerated
filer,” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated filer ¨
|
Smaller reporting company x
|
(Do not check if a smaller
|
|||
reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchanges Act) Yes ¨ No x
State the
number of shares outstanding of each of the registrant's classes of common
equity, as of the latest practicable date.
The
outstanding number of the issuer's common stock, par value $.0001, as of
November 16, 2009 is 79,095,018 shares.
ECHOMETRIX,
INC. AND SUBSIDIARIES
INDEX
Page No.
|
|
PART
I FINANCIAL INFORMATION
|
|
ITEM
1 – Financial Statements:
|
|
Consolidated
Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
2008
|
2–3
|
Consolidated
Statements of Operations For the Three and Nine months ended September 30,
2009 (Unaudited) and 2008 (Unaudited – Restated)
|
4
|
Consolidated
Statements of Cash Flows For the Nine months ended September 30, 2009
(Unaudited) and 2008 (Unaudited – Restated)
|
5-6
|
Notes
to Consolidated Financial Statements (Unaudited)
|
7
-18
|
ITEM
2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
19-24
|
ITEM
3 – Quantitative and Qualitative Disclosure about Market
Risk
|
24
|
ITEM
4T –Controls and Procedures
|
24
|
PART
II:
|
|
Item
1 – Legal Proceedings
|
25
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
25
|
Item
3 – Defaults upon Senior Securities
|
26
|
Item
4 – Submission of Matters to A Vote of Securities Holders
|
26
|
Item
5 - Other Information
|
26
|
Item
6 – Exhibits
|
26
|
Signature
Page
|
27
|
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 1,089,089 | $ | 25,217 | ||||
Accounts
receivable less allowance for doubtful accounts
|
||||||||
of
$0 and $250 respectively
|
1,735 | 1,891 | ||||||
Prepaid
expenses
|
15,926 | 18,780 | ||||||
Total
current assets
|
1,106,750 | 45,888 | ||||||
Property
and equipment - net
|
83,456 | 130,953 | ||||||
Other
assets:
|
||||||||
Capitalized
software costs, less amortization
|
||||||||
of
$77,497 and $22,043, respectively
|
219,035 | 86,914 | ||||||
Website
development costs, less amortization of $1,667
|
28,333 | - | ||||||
Deferred
finance costs, less amortization of $10,000 and $330,339,
respectively
|
- | 10,000 | ||||||
Security
deposit
|
9,454 | 13,454 | ||||||
Intangible
assets, less amortization of $38,627 and $28,970,
respectively
|
- | 9,657 | ||||||
Total
other assets
|
256,822 | 120,025 | ||||||
Total
assets
|
$ | 1,447,028 | $ | 296,866 |
See notes
to consolidated unaudited financial statements
2
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Continued)
LIABILITIES AND
STOCKHOLDERS' DEFICIT
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Current
liabilities:
|
||||||||
Note
payable - bank
|
$ | - | $ | 49,007 | ||||
Current
portion of long term debt and capital leases
|
39,710 | 57,101 | ||||||
Current
portion of 10% convertible notes payable
|
279,000 | 668,000 | ||||||
Convertible
short term bridge notes payable, net of
|
||||||||
discount
of $284,319 and $59,279 respectively
|
1,740,681 | 1,170,721 | ||||||
Non
convertible short term bridge notes payable
|
260,000 | 60,000 | ||||||
Due
to former executives
|
655,136 | 887,755 | ||||||
Due
to affiliates
|
47,671 | 47,671 | ||||||
Accounts
payable
|
227,886 | 538,158 | ||||||
Accrued
expenses
|
378,515 | 369,824 | ||||||
Total
current liabilities
|
3,628,599 | 3,848,237 | ||||||
Other
liabilities:
|
||||||||
Obligations
under capital lease, net of current portion
|
9,829 | 59,325 | ||||||
Note
payable - equipment, net of current portion
|
4,571 | 7,377 | ||||||
Deferred
rent
|
8,030 | 9,498 | ||||||
Total
liabilities
|
3,651,029 | 3,924,437 | ||||||
Stockholders'
deficit
|
||||||||
Preferred
stock - $.0001 par value, authorized - 25,000,000
shares;
|
||||||||
issued
and outstanding - 1,121,259 and 901,237 respectively
|
2,000,090 | 90 | ||||||
Common
stock - $.0001 par value, authorized - 250,000,000
shares;
|
||||||||
issued
and outstanding -79,656,221 and 71,787,304,
|
||||||||
shares,
respectively
|
7,970 | 7,178 | ||||||
Additional
paid-in capital
|
23,913,003 | 19,214,710 | ||||||
Accumulated
deficit
|
(28,125,064 | ) | (22,849,549 | ) | ||||
Total
stockholders' deficit
|
(2,204,001 | ) | (3,627,571 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 1,447,028 | $ | 296,866 |
See notes
to consolidated unaudited financial statements
3
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Nine Months Ended September 30,
|
For
the Three Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited-Restated)
|
(Unaudited)
|
(Unaudited-Restated)
|
|||||||||||||
Revenues
|
$ | 25,689 | $ | 96,907 | $ | 8,280 | $ | 4,815 | ||||||||
Cost
of Sales
|
||||||||||||||||
Software
|
695 | 40,109 | 189 | 3,512 | ||||||||||||
Write
off Inventory
|
- | 219,669 | - | 207,689 | ||||||||||||
Cost
of Sales
|
695 | 259,778 | 189 | 211,201 | ||||||||||||
Gross
Profit (Loss)
|
24,994 | (162,871 | ) | 8,091 | (206,386 | ) | ||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
|
34,279 | 75,132 | 12,884 | 4,297 | ||||||||||||
Web
site costs
|
64,312 | 81,286 | 19,915 | 15,715 | ||||||||||||
General
and administrative
|
2,546,744 | 1,911,985 | 1,097,338 | 263,496 | ||||||||||||
Depreciation
and amortization
|
572,218 | 138,241 | 317,684 | 98,911 | ||||||||||||
Total
operating expenses
|
3,217,553 | 2,206,644 | 1,447,821 | 382,419 | ||||||||||||
Loss
from operations
|
(3,192,559 | ) | (2,369,515 | ) | (1,439,730 | ) | (588,805 | ) | ||||||||
Other
expenses (income):
|
||||||||||||||||
Interest
|
331,198 | 1,225,676 | 188,594 | 42,409 | ||||||||||||
Interest
- related party
|
1,008 | 7,647 | - | 2,951 | ||||||||||||
Gain
on extinguishment of liabilities
|
(256,721 | ) | - | (241,593 | ) | - | ||||||||||
Other
(income) expenses
|
(2,529 | ) | (61,092 | ) | (2,530 | ) | (61,092 | ) | ||||||||
Amortization
of deferred financing costs
|
10,000 | 67,348 | - | 11,865 | ||||||||||||
Total
other expenses (income):
|
82,956 | 1,239,579 | (55,529 | ) | (3,867 | ) | ||||||||||
|
||||||||||||||||
Net
loss
|
(3,275,515 | ) | (3,609,094 | ) | (1,384,201 | ) | (584,938 | ) | ||||||||
Deemed
preferred stock dividend
|
(2,000,000 | ) | - | (2,000,000 | ) | - | ||||||||||
Net
loss applicable to common stock holders
|
$ | (5,275,515 | ) | $ | (3,609,094 | ) | $ | (3,384,201 | ) | $ | (584,938 | ) | ||||
Per
share data
|
||||||||||||||||
Loss
per share - basic and diluted
|
$ | (0.07 | ) | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.01 | ) | ||||
Weighted
average number of
|
||||||||||||||||
shares
outstanding- basic and diluted
|
73,913,381 | 62,988,742 | 77,558,174 | 66,838,456 |
See notes
to consolidated unaudited financial statements
4
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Nine months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited-Restated)
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (3,275,515 | ) | $ | (3,609,094 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
used
in operating activities:
|
||||||||
Gain
on payoff of capital lease
|
(15,128 | ) | - | |||||
Write
off of inventory
|
- | 219,669 | ||||||
Bad
debt expense
|
(250 | ) | - | |||||
Gain
on extinguishment of debt
|
(241,593 | ) | - | |||||
Warrants/options
issued for consulting services
|
477,563 | - | ||||||
Warrants/options
issued to employees
|
360,000 | - | ||||||
Common
stock issued for compensation
|
84,000 | 57,300 | ||||||
Common
stock issued for services
|
21,000 | - | ||||||
Stock
issued for debt service
|
72,411 | 61,587 | ||||||
Stock
issued for legal settlement
|
- | 165,750 | ||||||
Compensatory
element of stock options
|
389,150 | 472,007 | ||||||
Depreciation
|
47,497 | 47,100 | ||||||
Amortization
of debt discount
|
- | 116,996 | ||||||
Amortization
of deferred financing costs
|
10,000 | 67,348 | ||||||
Amortization
of software and website development costs
|
57,120 | 14,324 | ||||||
Amortization
of intangible assets
|
9,657 | 19,313 | ||||||
Amortization
of discount related to issuance of restricted stock
|
203,508 | - | ||||||
Amortization
of beneficial conversion feature
|
182,877 | 37,074 | ||||||
Amortization
of discount related to issuance of warrants
|
71,518 | - | ||||||
Interest
and compensation expense as a result of modification
|
- | |||||||
of
warrant exercise price
|
128,017 | 985,500 | ||||||
Increase
(decrease) in cash flows as a result of
|
||||||||
changes
in asset and liability account balances:
|
||||||||
Accounts
receivable
|
406 | 89,049 | ||||||
Inventories
|
- | 28,479 | ||||||
Prepaid
expenses and other assets
|
6,854 | (5,815 | ) | |||||
Deferred
rent
|
(1,468 | ) | (210 | ) | ||||
Accounts
payable and accrued expenses
|
(149,543 | ) | 23,224 | |||||
Total
adjustments
|
1,713,594 | 2,398,695 | ||||||
Net
cash used in operating activities
|
(1,561,921 | ) | (1,210,399 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Acquisition
expenses less cash acquired
|
- | 373 | ||||||
Capitalized
software costs
|
(187,575 | ) | (67,303 | ) | ||||
Capitalized
website development costs
|
(30,000 | ) | - | |||||
Net
cash used in investing activities
|
(217,575 | ) | (66,930 | ) |
See notes
to consolidated unaudited financial statements
5
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
For
the Nine months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited-Restated)
|
|||||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sale of Preferred B securities
|
2,000,000 | - | ||||||
Borrowings
(payments) from stockholders
|
(232,619 | ) | 513,200 | |||||
Proceeds
from warrants exercised in relation to convertible notes
payable
|
- | 114,796 | ||||||
Proceeds
from Subscription payable
|
- | 80,000 | ||||||
Proceeds
from bridge notes payable
|
1,600,000 | 335,000 | ||||||
Payments
of bridge notes payable
|
(255,000 | ) | (25,000 | ) | ||||
Payments
of 10% investor notes payable
|
(150,000 | ) | - | |||||
Payments
of note payable - equipment
|
(4,237 | ) | (644 | ) | ||||
Payments
under capital lease
|
(65,769 | ) | (49,020 | ) | ||||
Payments
of notes payable - bank
|
(49,007 | ) | (2,963 | ) | ||||
Proceeds
from sale of securities
|
- | 318,000 | ||||||
Net
cash provided by financing activities
|
2,843,368 | 1,283,369 | ||||||
Net
increase in cash
|
1,063,872 | 6,040 | ||||||
Cash
at beginning of period
|
25,217 | 4,821 | ||||||
Cash
at end of period
|
$ | 1,089,089 | $ | 10,861 | ||||
Supplemental
Disclosure of cash flow information:
|
||||||||
Cash
payment made during the period - Interest
|
$ | 10,406 | $ | 6,635 | ||||
Supplemental
Schedules of Noncash Investing
|
||||||||
and
Financing Activities:
|
||||||||
Common
stock issued in connection with settlement agreement
|
$ | 45,000 | $ | - | ||||
Computer
equipment under capital lease
|
$ | - | $ | 36,811 | ||||
Convertible
notes converted to common stock
|
$ | 439,000 | $ | 1,388,000 | ||||
Stock
issued for acquisition of EchoMetrix Inc.
|
$ | - | $ | 39,000 | ||||
Common
stock issued in connection with bridge notes payable
|
$ | - | $ | 18,182 | ||||
Common
Stock and options issued for services
|
$ | - | $ | 57,300 | ||||
Debt
discount related to restricted stock issued in
|
||||||||
connection
to bridge loans
|
$ | 247,181 | $ | - | ||||
Debt
discount related to warrants granted in connection to bridge
loans
|
$ | 94,368 | $ | - | ||||
Debt
discount of beneficial conversion feature
|
||||||||
in
relation to bridge loans
|
$ | 341,393 | $ | 64,582 | ||||
Deemed dividend on issuance of preferred stock | $ | 2,000,000 | - |
See notes
to consolidated unaudited financial statements
6
ECHOMETRIX,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September
30, 2009
NOTE
1 - PLAN OF
ORGANIZATION
EchoMetrix,
Inc. develops software services committed to real-time online protection and
family safety. The Company develops and sells software products
that offer parental controls that enable parents, both in home and remotely, to
monitor and regulate their child’s computer activities. The Company
also offers its product, the Pulse, a technology to corporations, within various
verticals, to help management analyze real-time, natural language expressions
and measure sentiment and behavior in digital content from sources such as
blogs, forums and instant messaging.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As reflected in the
financial statements, the Company incurred net losses of $3,275,515 and
$3,609,094 for the nine months ended September 30, 2009 and 2008 (restated),
respectively. In addition, the Company had negative working capital
of $2,521,849 and an accumulated deficit of $28,109,064 at September 30,
2009.
These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty. Management's efforts have been directed towards the
development and implementation of a plan to generate sufficient revenues to
cover all of its present and future costs and expenses. The plan
includes, among other things, implementing numerous sales campaigns of parental
control software, and concentrating on the new Pulse product.
If the
Company does not generate sufficient revenues from the sales of its products in
an amount necessary to meet its cash needs, the Company will need additional
financing to continue to operate. As the Company increases sales from its
products and services, the Company expects to increase cash flows from
operations. The Company has been successful in raising financing from equity and
debt transactions. During the nine months ended September 30, 2009, the Company
raised approximately $3,600,000 from the issuance of debt and preferred stock
(Note 9).
7
EchoMetrix,
Inc. is organized as a single reporting unit and believes that it operates as a
single business. References in this report to “EchoMetrix”, the “Company”, “we”,
“us” or “our” refers to EchoMetrix Inc. and its consolidated
subsidiaries.
The
accompanying consolidated financial statements have been prepared, in accordance
with accounting principles generally accepted in the United States (“U.S. GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany transactions have been eliminated in
consolidation. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's Annual report on
Form 10-K filed on April 15, 2009. The results of the nine months ended
September 30, 2009 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2009.
NOTE
2 - RESTATEMENT OF SEPTEMBER 30, 2008 FINANCIAL RESULTS
In the
first quarter ended March 31, 2008, the Company amended the conversion
provisions, and warrant exercising price under its 10% convertible notes by
significantly reducing the conversion price of the debt and warrant exercise
price with the conversion price reduction being contingent upon the concurrent
exercising of the warrant to purchases the Company’s common stock. The Company
did not record the interest expense and increase to additional paid in capital
associated with the accounting for the modification in accordance with U.S.
generally accepted accounting principles.
The
following adjustments are a result of an accounting change by the Company to
properly reflect the accounting for the modification of the conversion price of
the Company’s convertible notes, and the reduction in the related warrant
exercise price in accordance with generally accepted accounting
principles on stock based compensation and modifications of
debt.
The
Company recorded for the nine months ended September 30, 2008 a debit to
interest expense of $985,500 and the corresponding credit was to additional paid
in capital. The impact on the net loss was an increase of $985,500 for the nine
months ended September 30, 2008.
NOTE
3 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES
(a)
Earnings Per Share:
The
Company utilizes the guidance per FASB Codification “ASC 260 "Earnings Per
Share". Basic earnings per share is calculated on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted earnings per share, which is calculated by dividing
net income available to common stockholders by the weighted average number of
common shares used in the basic earnings per share calculation, plus the number
of common shares that would be issued assuming conversion of all potentially
dilutive securities outstanding, is not presented separately as it is
anti-dilutive. Such securities, shown below, presented on a common share
equivalent basis and outstanding as of September 30, 2009 and 2008 have been
excluded from the per share computations:
8
For
the Nine Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
2004
Stock Plan Options
|
870,000 | 1,150,000 | ||||||
Non
ISO Stock Options
|
21,629,001 | 7,369,632 | ||||||
Convertible
Preferred Stock
|
31,014,570 | 9,012,370 | ||||||
Convertible
Notes Payable
|
21,853,856 | 5,485,714 | ||||||
Warrants
|
41,405,284 | 10,996,084 |
(b)
Recent Accounting Pronouncements:
In June
2008, FASB issued guidance in the Earnings Per Share Topic of the Codification
on determining whether instruments granted in share-based payment transactions
are participating securities. The guidance clarified that all
unvested share-based payment awards that contain non-forfeitable rights to
dividends are participating securities and provides guidance on how to compute
basic EPS under the two-class method. The guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. We adopted this
guidance effective January 1, 2009 and it had no impact on our financial
statements.
On
January 1, 2009, the Company adopted ASC 260-10-45-61A, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“ASC 260-10-45-61A”). This standard clarified that all outstanding
unvested share-based payment awards that contain rights to non-forfeitable
dividends participate in undistributed earnings with common shareholders. Awards
of this nature are considered participating securities and the two-class method
of computing basic and diluted earnings per share must be applied. The adoption
of ASC 260-10-45-61A did not have any impact on the Company’s financial
condition or results of operations.
On
January 1, 2009, the Company adopted the updated provisions of ASC 810,
which established requirements for ownership interests in subsidiaries held by
parties other than the Company, noncontrolling interest (previously referred to
as “minority interest”) to be clearly identified, presented, and disclosed in
the consolidated statement of financial position within equity but separate from
the parent’s equity. All changes in the parent’s ownership interests are
required to be accounted for consistently as equity transactions, and any
noncontrolling equity investments in unconsolidated subsidiaries must be
measured initially at fair value. The adoption of the updated provisions of ASC
810 did not have a material effect on the Company’s financial condition, results
of operations or cash flows. The Company reclassified the consolidated
statements of operations for 2008 to conform to the presentation required under
ASC 810. There was no effect on the consolidated balance sheets as the Company’s
noncontrolling interest in Polar was eliminated prior to December 31,
2008.
In April
2009, the FASB issued guidance in the Fair Value Measurements and Disclosures
Topic of the Codification on determining fair value when the volume and level of
activity for an asset or liability have significantly decreased and identifying
transactions that are not orderly. The guidance emphasizes that even
if there has been a significant decrease in the volume and level of activity,
the objective of a fair value measurement remains the same. Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants. The guidance provides a
number of factors to consider when evaluating whether there has been a
significant decrease in the volume and level of activity for an asset or
liability in relation to normal market activity. In addition, when
transactions or quoted prices are not considered orderly, adjustments to those
prices based on the weight of available information may be needed to determine
the appropriate fair value. The guidance is effective for interim or
annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. We adopted this guidance effective for the quarter
ending June 30, 2009. There is no impact of the adoption on our
financial statements as of September 30, 2009.
In April
2009, FASB issued guidance in the Financial Instruments Topic of the
Codification on interim disclosures about fair value of financial
instruments. The guidance requires disclosures about the fair value
of financial instruments for both interim reporting periods, as well as annual
reporting periods. The guidance is effective for all interim and
annual reporting periods ending after June 15, 2009 and shall be applied
prospectively. The adoption of this guidance had no impact on our
financial statements as of September 30, 2009, other than the additional
disclosure.
In June
2009, the FASB issued SFAS 165, “Subsequent Events,” which was
later superseded by the FASB Codification and included in topic 855. This update
to the Codification established general standards of accounting for disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, this
Statement sets forth the period after the balance sheet date during which
management should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. This update to the Codification was adopted in the third quarter of
2009 and did not have a significant impact on the Company’s financial
statements.
In July
2009, the FASB issued ASC topic 105 (formerly Statement of Financial Standard
(SFAS) 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles”). ASC 105 establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by entities in the preparation of financial
statements in conformity with GAAP. This pronouncement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted this pronouncement in the third
quarter of 2009. Adoption did not have a significant impact on the Company’s
financial statements.
9
NOTE
4 – EMPLOYEE STOCK COMPENSATION
The
Company’s 2004 Stock Plan (the “Plan”), which is shareholder approved, permits
the grant of share options and shares to its employees for up to 1,500,000
shares of Common Stock as stock compensation. All stock options under
the 2004 Stock Plan are granted at the fair market value of the Common Stock at
the grant date. Employee stock options vest ratably over a three-year period and
generally expire 5 years from the grant date.
Accounting
for Employee Awards:
The
Company adheres to the provisions of Share Based Compensation as defined in the
FASB codification, topic ASC 718. The codification focuses primarily on
accounting for transactions in which an entity obtains employee services through
share-based payment transactions. This guidance requires an entity to
measure the cost of employee services received in exchange for the award of
equity instruments based on the fair value of the award at the date of
grant. The cost is recognized over the period during which an
employee is required to provide services in exchange for the award. The Company
has not adjusted the expense by estimated forfeitures for employee options,
since the forfeiture rate based upon historical data was determined to be
immaterial.
10
The fair
value of options at the date of grant is estimated using the Black-Scholes
option pricing model. During the nine months ended September 30, 2009 and 2008
the assumptions made in calculating the fair values of options are as
follows:
For
the Nine Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
Expected
term (in years)
|
5
|
5
|
||||||
Expected
volatilty
|
99.09%-100.00%
|
89.23%-95.46%
|
||||||
Expected
dividend yield
|
0%
|
0%
|
||||||
Risk-free
interest rate
|
2.90%-3.71%
|
3.47%-4.26%
|
During
the nine months ended September 30, 2009 the Company granted 8,340,844 of
options to employees, consultants and board of directors. The options
are exercisable at a range of $0.08 to $0.18 and have a five year
term. Of the total granted options, 1,275,000 have vested and the
remaining 7,065,844 vest over a three year period.
Stock
compensation expense related to employee and board of director options was
approximately $760,000 and $163,000 for nine months ended September 30, 2009 and
2008, respectively. These amounts are included in the Consolidated
Statements of Operations within the general and administrative expenses line
item.
Accounting for Non-employee
Awards:
During
the nine months ended September 30, 2009, the Company granted 1,400,000 of the
options to non-employees. The options are exercisable at a range of
$0.08 to $0.30 and have a five year term. Of the total options
granted, 750,000 have vested and the remaining 650,000 options vest over a three
year period.
Stock
compensation expense related to non-employee options was approximately $88,000
and $71,000 for nine months ended September 30, 2009 and 2008,
respectively. These amounts are included in the Consolidated
Statements of Operations within the general and administrative expenses line
item.
The
following table represents our stock options granted, exercised, and forfeited
during the nine months ended September 30, 2009.
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
||||||||||||||
|
Exercise
|
Remaining
|
Aggregate
|
|||||||||||||
|
Number
|
Price
|
Contractual
|
Intrinsic
|
||||||||||||
Stock Options
|
of Shares
|
per Share
|
Term
|
Value
|
||||||||||||
Outstanding
at January 1, 2009
|
13,438,157
|
$
|
0.24
|
2.4235
|
$
|
0
|
||||||||||
Granted
|
9,740,844
|
$
|
0.13
|
4.4026
|
0
|
|||||||||||
Exercised
|
-
|
-
|
||||||||||||||
Forfeited/expired
|
(680,000
|
)
|
0. 54
|
0.0000
|
0
|
|||||||||||
Outstanding
at September 30, 2009
|
22,499,001
|
$
|
0.18
|
3.0178
|
$
|
0
|
||||||||||
Exercisable
at September 30, 2009
|
21,581,830
|
$
|
0.18
|
2.9740
|
$
|
0
|
11
As of
September 30, 2009, there was $76,703 of unrecognized compensation cost, related
to nonvested stock options, which is expected to be recognized over a weighted
average period of approximately 2 years.
NOTE
5 - 10% CONVERTIBLE NOTES PAYABLE
During
2005 and 2006, the Company raised capital via a private placement to accredited
investors of units (“Units”), each Unit consisting of (a) a 10% convertible note
with the original principal amount of $10,000 and (b) warrants to purchase
10,000 shares of common stock, exercisable at $0.50 per share, for $10,000 per
Unit. The convertible notes matured in two years from the date of issue, if not
converted earlier. As of September 30, 2009 all of the 10% convertible notes
outstanding were in default. The default provision requires an
additional 2% interest per annum until the loans are repaid or converted. The 2%
default penalty totaled approximately 8,891 for the nine months ended
September 30, 2009 and is included in interest expense on the consolidated
statement of operations and in accrued expenses on the consolidated balance
sheet as of September 30, 2009. The Notes are convertible at any time at the
option of the holder into Common Stock at the conversion rate of $0.40 per
share. The Company raised a gross amount of $2,895,000 from the
offerings. The Company allocated the proceeds received between the
debt and the warrant based upon their relative fair values. The
resulting discount is accreted over a two year period, the life of the note,
using the effective interest method. If the debt is converted earlier
than the maturity date, the unamortized amount will be charged to operations at
that time. When comparing the fair value of the notes to the note value there
was a beneficial conversion feature. This amount was recorded as a discount to
the notes and is accreted over the two year life of the note using the effective
interest method. For the nine months ended September 30, 2009 and
2008, an aggregate of $0 and $76,802 was charged to interest expense for the
effective interest method, respectively.
As stated
in Note 2, the Company modified certain terms of the notes, including a lower
conversion price and a lower exercise price on the warrants. The
modification of the notes in the fiscal quarter ended March 31, 2008 resulted in
additional interest expense of $985,500 with a credit to additional paid in
capital.
As
reflected on the balance sheets at September 30, 2009 and December 31, 2008, the
note value, net of discount, was $279,000 and $668,000, respectively. During the
nine months ended September 30, 2009 the Company settled in principal note of
$300,000 for $150,000 in cash and recorded a gain on extinguishment of debt of
$150,000. In addition, the Company converted principal totaling $89,000 and
accrued interest of $2,840 into 768,638 shares of common stock at conversion
rates between 10 cents and 13 cents. For the nine months ended September 30,
2009 the Company recorded interest expense as a result of the modification of
debt (due to lower conversion price) totaling $61,167. As of September 30, 2009
the notes are classified as current due to the fact that they are in default for
the non payment by the maturity date.
Subsequent
to September 30, 2009 the Company paid a total of $46,891 of the outstanding
principal to these note holders. In addition, in October 2009, a note holder
converted their remaining principal balance of $4,160 into 25,998 shares of
common stock of the Company at a conversion price of 15.9 cents.
NOTE
6- BRIDGE NOTES PAYABLE
Convertible
Bridge Notes Payable:
On
October 4, 2007, the Company issued a short term promissory note in the
principal amount of $150,000. This note was payable on September 30, 2008 and
bears an interest rate equal to the prime rate plus three percent, 6.25% per
annum at September 30, 2009 and is payable at the end of the
term. This note of $150,000 principal and accrued interest of $22,854
is outstanding and in default at September 30, 2009. In October of
2009 the Company repaid a portion of the principal loan totaling
$25,210.
12
On
November 7, 2007 the Company began a private placement to accredited investors
of 10% short term promissory notes. These notes are payable the earlier of
August 15, 2008 or when the Company raises $1,000,000 in its next qualified
financing as defined. The notes bear interest at a rate of 10% per annum,
payable at the end of the term. The principal amounts of the notes are
convertible into the Company’s common stock by the holder, at any time prior to
the repayment of the principal, at the rate of $0.15 per share. As of September
30, 2009, the total of $300,000 of principal and accrued interest of $66,910 is
outstanding and currently in default for non payment of principal on maturity
date. In October of 2009, the Company repaid $20,168 towards the principal
balance of these notes.
During
2008, the Company issued 10% short term promissory notes to accredited
investors. These notes have maturity dates ranging from a period of three months
to twelve months, bear interest at a rate of 10% per annum, payable at the end
of the term. The Company raised a total of $905,000 from these
promissory notes for the year ended December 31, 2008 and issued 1,715,000
restricted shares of the Company’s common stock to the note holders. The
principal amounts of the notes are convertible into the Company’s common stock
by the holder, at any time prior to the repayment of the principal, at rates
ranging from $0.14 to $0.20 per share. These shares were valued at the fair
market value on the date of each note. As a result of the issuance of these
convertible notes and related restricted shares and warrants, the Company
recorded a total discount of $290,349 with a corresponding credit to common
stock and additional paid in capital. The discount is accreted over the term of
the note using the straight line method. For the nine months ended
September 30, 2009, the Company amortized a total of $59,279 of the discount.
During the period ended September 30, 2009 the Company repaid $80,000 of
principal and converted a total of accrued interest and principal of $222,833
($200,000 was principal) into 1,591,667 shares of common stock of the
Company. For the nine months ended September 30, 2009 the Company
recorded interest expense as a result of the modification of debt (due to a
lower conversion price) of $66,850. As of September 30, 2009, a total of
$500,000 principal and accrued interest totaling $49,556 of these short term
promissory notes are currently in default and outstanding. In October of 2009,
the Company repaid a portion of principal of these notes totaling
$84,201.
During
2009, the Company issued 10% short term promissory notes to accredited
investors. These notes have maturity dates ranging from a period of nine months
to eighteen months, bear interest at a rate of 10% per annum, payable at the end
of the term. The Company raised a total of $1,225,000 from these
promissory notes for the nine months ended September 30, 2009 and issued
2,455,000 restricted shares of the Company’s common stock to the note holders.
The principal amounts of the notes are convertible into the Company’s common
stock by the holder, at any time prior to the repayment of the principal, at
rates ranging from $0.14 to $0.15 per share. These shares were valued at the
fair market value on the date of each note. As a result of the issuance of these
convertible notes and related restricted shares and warrants, the Company
recorded a total discount of $654,106 with a corresponding credit to common
stock and additional paid in capital. The discount is accreted over the term of
the note using the straight line method. For the nine months ended
September 30, 2009, the Company amortized a total of $369,741 of the discount.
In July 2009, the Company issued 1,071,429 shares of restricted common stock for
converting $150,000 of principal (accrued interest was $0) at 14 cents. As of
September 30, 2009, a total of $1,075,000 principal and accrued interest
totaling $52,231 of these short term bridge promissory notes are currently
outstanding, of which $100,000 of principal and $7,333 of accrued interest is
currently in default. In October of 2009, the Company repaid a
portion of the principal portion of the notes in default totaling
$16,807.
13
Non
Convertible Bridge Notes Payable:
During
2008, the Company issued 10% short term promissory notes to accredited
investors. These notes have maturity dates ranging from a period of three months
to twelve months, bear interest at a rate of 10% per annum, payable at the end
of the term. The Company raised a total of $85,000 from these
promissory notes for the year ended December 31, 2008 and issued 120,000
restricted shares of the Company’s common stock to the note holder. These shares
were valued at the fair market value on the date of each note. As a result of
the issuance of these notes and related restricted shares, the Company recorded
a total discount of $20,400 with a corresponding credit to common stock and
additional paid in capital. The Company amortized the $20,400 in the fiscal year
ended December 31, 2008. The Company repaid $25,000 of these notes in the year
ended December 31, 2008. As of September 30, 2009, a total of $60,000
principal and $8,461 of accrued interest of these short term non convertible
promissory notes are currently in default and outstanding. In October of 2009,
the Company repaid a portion of the principal totaling $10,084.
During
2009, the Company issued 10% short term promissory notes to accredited
investors. These notes have maturity dates ranging from a period of three months
to nine months, bear interest at a rate of 10% per annum, payable at the end of
the term. The Company raised a total of $300,000 from these
promissory notes for the nine months ended September 30, 2009 and issued 300,000
restricted shares of the Company’s common stock to the note holders. These
shares were valued at the fair market value on the date of each note. As a
result of the issuance of these notes and related restricted shares, the Company
recorded a total discount of $28,836 with a corresponding credit to common stock
and additional paid in capital. The discount is accreted over the term of the
note using the straight line method. For the nine months ended September
30, 2009, the Company amortized a total of $28,836 of the discount. During the
nine months ended September 30, 2009 the Company repaid $100,000 of principal.
As of September 30, 2009, a total of $200,000 of principal and $13,944 of
accrued interest of these short term non convertible promissory notes are
currently in default and outstanding. In October of 2009, the Company repaid a
portion of the principal totaling $16,639.
NOTE
7 - DUE TO FORMER EXECUTIVES
At
September 30, 2009 and December 31, 2008, the Company was indebted to its former
CEO, William Bozsnyak, in the amounts of $163,718, respectively, for working
capital advances made to the Company.
For the
nine months ended September 30, 2009 and September 30, 2008, interest expense
was charged in the amounts of $1,008 and $4,696 respectively. The
interest rate used in this calculation is the same interest rate paid to the
Company’s short term lender under the revolving line of credit, 7.25% at
September 30, 2009 and December 31, 2008. At September 30, 2009 and December 31,
2008, $164,100 and $163,092 in accrued interest was due to Mr. Bozsnyak,
respectively.
The
Company also owed Mr. Bozsnyak $0 and $1,297 as of September 30, 2009 and
December 31, 2008, respectively, for travel expenses and online advertising
incurred on behalf of the Company.
At
September 30, 2009 and December 31, 2008, $327,318 and $463,271, respectively,
was owed for unpaid salaries and accrued vacation to Mr. Bozsnyak, Mr. Caruso
and Mr. O’Connor. A total of $88,997 was owed to Mr. Bozsnyak December 31,
2008, as equity compensation per his employment agreement.
In
December of 2008, the Company and Mr. O’Connor entered into a separation
agreement when he resigned. Pursuant to the agreement, in full consideration of
all unpaid compensation totaling $172,222, the Company agreed to a lump sum cash
payment of $40,000 and the remaining $132,222 of compensation was to be paid in
options (881,481 cashless options at an exercise price of $0.15) of the Company.
In October of 2009, the Company entered into a settlement agreement with the
former Chief Operating Officer, Mr. O’Connor. Pursuant to the
settlement agreement, the Company arranged for a third party to purchase 750,000
shares of the Company’s common stock for $110,000. In consideration for the
stock purchase agreement, Mr. O’Connor forgave the $40,000 lump sum cash
payment, the 881,481 options and a debt of $47,907 owed to a company that Mr.
O’Connor owns. This amount is included in the Due to Affiliates line item on the
consolidated balance sheet.
14
NOTE
8 - EQUITY TRANSACTIONS
During
the nine months ended September 30, 2009, the Company issued 438,183 shares of
the Company’s restricted common stock as payment in kind for interest due for
the months of January through August 2009 on the Company’s 10% convertible
notes.
During
the nine months ended September 30, 2009, the Company issued 2,755,000 shares of
the Company’s restricted common stock as a result of promissory notes issued
amounting to $1,600,000 (Note 6).
In
addition, the Company issued 720,000 shares of the Company’s restricted common
stock as payment for services and compensation to employees recording a charge
to stock compensation for $105,000.
In
connection with the conversion of $89,000 of the Company’s 10% convertible notes
and accrued interest of $2,840, the Company issued 768,638 shares of common
stock for the nine month period ended September 30, 2009.
During
the nine months ended September 30, 2009 the Company issued 2,663,096 shares of
common stock for the conversion of $350,000 principal and $22,833 of accrued
interest of bridge notes payable.
In August
of 2009, the Company issued 500,000 shares of restricted common stock as part of
an amendment to a settlement agreement with the Company’s former
President. In consideration for accelerating the remaining payments
of $95,000, the Company and Mr. Carrizzo settled for a lump sum cash payment of
$50,000 and 500,000 restricted shares of common stock, which were valued at
$45,000.
The
Company issued 24,000 shares of common stock in connection with warrants
exercised in the year ending 2008.
15
Warrants
:
On June
1, 2009, the Company filed a Post Effective Amendment No. 4 to its Registration
Statement on Form S-1 (“Post Effective Amendment” to extend the terms to
exercise the Class A Warrant from June 30, 2009 to June 30, 2010 and to extend
the term of the Class B Warrant from December 31, 2009 to June 30,
2010. The extended date became effective upon the date on which the
Securities and Exchange Commission declared the Post-Effective Amendment, which
was June 9, 2009.
During
the nine months ended September 30, 2009 and the fiscal year ended December 31,
2008, the Company issued 1,325,000 and 2,871,400 warrants, respectively in
connection with promissory notes issued and sales of its restricted common
stock. All warrants have a three to five year term and are
exercisable at a range of $0.14 to $0.35 per share. In addition, the Company
issued 2,200,000 warrants in connection with a consulting agreement, at an
exercise price of $0.15 per share. For the nine months ended September 30, 2009,
the Company recorded $336,000 of compensation expense, which is included in the
general and administrative line item in the accompanying consolidated statement
of operations.
During
the nine months ended September 30, 2009 the Company granted warrants in
connection with employment agreements totaling 4,000,000 shares all at an
exercisable price of $0.10 and for a five year term. For the nine
months ended September 30, 2009, the Company recorded $360,000 of compensation
expense, which is included in the general and administrative line item in the
accompanying consolidated statement of operations.
In
connection with the sale of the Company’s Preferred B Convertible Stock, an
investor received warrants of 22,002,200
For the
year ended December 31, 2008, 3,080,276 of warrants were exercised for total
proceeds of approximately $114,000. There were no warrants exercised in the nine
months ended September 30, 2009.
NOTE
9 - PREFERRED B
On July
29, 2009, the Company and Rock Island Capital, LLC (“Rock Island”) entered
into a Series B Convertible Preferred Stock Purchase Agreement, as amended on
September 9, 2009 (the “Agreement”). Pursuant to the Agreement, the
Company has sold to assignees of Rock Island an initial tranche of $2,000,000 of
its Series B Convertible Preferred Stock (220,022 shares), in the aggregate, at
a purchase price per share of $9.09, and has issued to such assignees Warrants
to purchase 22,002,200 shares of the Company’s Common Stock, in the aggregate,
at an exercise price of $0.15 per share. Each share of Series B
Convertible Preferred Stock is convertible into 100 shares of the Company’s
Common Stock at the sole discretion of the holder. Pursuant to the
Agreement, Rock Island may designate one member for service on the Company’s
board of directors. Under the terms of the Agreement, Rock Island and
its assignees may, at their discretion, purchase additional shares of Series B
Convertible Preferred Stock and Warrants in two additional tranches of
$2,000,000 and $1,000,000 payable on or before December 2, 2009, and January 8,
2010, respectively.
The
Company recorded the beneficial conversion feature and the warrant associated
with such investment as a deemed preferred dividend of $2,000,000 with a
corresponding credit to additional paid in capital.
NOTE
10 - COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
16
Charles
Davis
On May
23, 2008, the Company responded to a letter dated May 22, 2008 and sent a
notification to return personal and intellectual property belonging to the
Company from the former Chief Technology Officer, Charles Davis. Mr.
Davis claims independent rights to use technology owned and developed by
EchoMetrix, Inc. The Company maintains that Mr. Davis is in violation
of his confidentiality obligations and has demanded all records, software and
data owned by EchoMetrix, Inc and subsidiaries to be returned to the Company
immediately.
17
Freifeld
On or
about November 2008, the plaintiffs, Freifelds brought an action against the
Company seeking summary judgment in lieu of complaint on two debt
conversions. The plaintiffs converted their notes and received the
Company’s stock certificates in November 2008. Subsequently, the plaintiffs
brought suit, requesting repayment of their converted notes. The
Company has retained legal counsel and has filed pre-answer motion for summary
judgment for the Company. The Plaintiffs have moved for summary
judgment in lieu of a complaint and we cross-moved for summary judgment. The
Court has indicated that it is going to set the matter down for an evidentiary
hearing. On September 3, 2009 the courts dismissed the Plaintiffs motion for
summary judgment in favor of the Company. On July 9, 2009, the Plaintiffs filed
discovery for the deposition schedule for October 27, 2009.
18
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The
following is a discussion of our results of operations and current financial
position. This discussion should be read in conjunction with our
unaudited consolidated financial statements and related notes included elsewhere
in this report, as well as our audited consolidated financial statements and
related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2008.
As used
in this quarterly report on Form 10-Q, references to the “Company,” “we,” “us,”
“our” or similar terms include EchoMetrix, Inc. and its consolidated
subsidiaries.
Forward
Looking Statements
Except
for the historical information contained herein, the matters discussed below or
elsewhere in this quarterly report may contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those contemplated by the forward-looking statements. We make
such forward-looking statements under the provisions of the "safe harbor"
section of the Private Securities Litigation Reform Act of
1995. Forward-looking statements reflect the Company's views and
assumptions based on information currently available to management. Such views
and assumptions are based on, among other things, the Company's operating and
financial performance over recent years and its expectations about its business
for the current and future fiscal years. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Such statements are subject to certain risks, uncertainties
and assumptions, including, but not limited to, (a) the Company's ability to
secure necessary capital in order to continue to operate (b) the Company's
ability to complete and sell its products and services, (c) the Company's
ability to achieve levels of sales sufficient to cover operating expenses, (d)
prevailing economic conditions which may significantly deteriorate, thereby
reducing the demand for the Company's products and services, (e) regulatory or
legal changes affecting the Company's business and (f) the effectiveness of the
Company's relationships in the parental control and monitoring software and
services, and imaging products business.
General
EchoMetrix,
Inc. develops software services committed to real-time online protection and
family safety. The Company develops and sells software products
that offer parental controls that enable parents, both in home and remotely, to
monitor and regulate their child’s computer activities. The Company
also offers its product, the Pulse, a technology to corporations, within various
verticals, to help management analyze real-time, natural language expressions
and measure sentiment and behavior in digital content from sources such as
blogs, forums and instant messaging.
The
accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. The unaudited consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. Management's efforts have been directed towards the
development and implementation of a plan to generate sufficient revenues to
cover all of its present and future costs and expenses. The plan
includes, among other things, implementing numerous online sales campaigns of
parental control software, and concentrating on the new Pulse
product.
19
If the
Company does not generate sufficient revenues from the sales of its products in
an amount necessary to meet its cash needs, the Company will need additional
financing to continue to operate. As the Company increases sales from its
products and services, the Company expects to increase cash flows from
operations.
During
the nine months ended September 30, 2009, the Company focused on three primary
operating priorities:
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·
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Product Design and
Delivery.
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The
Company announced its intent to commercialize its EchoMetrix technology
(the “Pulse” product) developed by the Company that it believes could provide
advertisers and marketers the ability to analyze natural language expression and
sentiment in real-time of digital content, such as blogs, emails, and uniquely
instant messaging and mobile text messaging. This automated ability to ascertain
emotional context in digital content has widespread uses and implications in the
evolving marketing and media landscape. The first half of 2009 was spent
signing beta users and preparing for the Pulse full distribution. The model is a
monthly per seat user model. The Company will charge between
$500-$5,000 per month, per computer. This model may change based on market and
strategic analysis of the product's placement within the industry. The
Company expects Pulse to be distributed through market research firms
and advertising.
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·
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Raising Awareness in the
Marketplace. We began a concerted effort to increase advertising and
promotion in order to foster awareness of the Sentry product line in the
marketplace.
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·
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Addressing
the Company's liquidity and capital needs. Since inception,
the Company has not generated any significant cash flows from operations.
Therefore, the Company has funded its operations by issuing notes
and by selling common stock and preferred stock. Management has
determined that the Company will require additional capital in order to
fully exploit the market for its products and services. See – Liquidity
and Capital Resources.
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These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty. Management's efforts have been directed towards the
development and implementation of a plan to generate sufficient revenues to
cover all of its present and future costs and expenses. The plan
includes, among other things, focusing on different market channels for the
parental control software, and concentrating on the new Pulse
product.
20
Results
of Operations
Comparison
of the Results for the Nine Months Ended September 30, 2009 and September 30,
2008 (restated)
Revenue
for the nine months ended September 30, 2009 and 2008 was $25,689 and $96,907,
respectively, a decrease of $71,218. The decrease relates to sales from bulk
orders from distributors in the prior comparative period totaling approximately
$74,000. The current period consists of on-line sales only.
Cost of
sales for the nine months ended September 30, 2009 and 2008 was $695 and
$259,778, respectively. The decrease in cost of sales is a directly
related to the Company’s write-off of outdated inventory in the prior period
totaling $219,669.
Selling
costs decreased to $34,279 from $75,132 for the nine months ended September 30,
2009 and 2008, respectively. This is directly attributable to the
Company’s focus on shifting sales channels from distributors to on-line
sales.
General
and administrative expenses increased to $2,546,744 from $1,911,985 for the nine
months ended September 30, 2009 and 2008, respectively. This increase
primarily consists of an increase in stock compensation costs of approximately
$362,000, and an increase in consulting fees of approximately $260,000. In
addition, professional fees (which includes legal, accounting, public relations
and website) increased approximately $26,000.
Depreciation
and amortization expenses increased to $572,218 for the nine months ended
September 30, 2009 from $138,241 for the prior comparative
period. The increase relates primarily to the amortization of debt
discount associated with the promissory notes issued in the later part of 2008
and the nine months ended September 30, 2009. Total amortization
related to such notes for the nine months ended September 30, 2009 totaled
$457,903 compared to $57,503 for the nine months ended September 30, 2008. The
remaining increase relates to amortization of software costs and website costs
of $57,120 for the nine months ended September 30, 2009 compared to $14,324 for
the same period in the prior year.
Interest
expense for the nine months ended September 30, 2009 and 2008 (as restated) was
$331,198 and $1,225,676, respectively, a decrease of $894,478. This decrease in
interest expense is a result of the conversion of $1,388,000 of notes in
the first quarter of fiscal year 2008,which resulted in the Company recording a
charge for the modification of debt (due to a lower conversion price and lower
warrant exercise price) of $985,500, compared to $128,017 of interest expense
for modification of debt (due to a lower conversion price) in the nine months
ended September 30, 2009.
Gain on
extinguishment of debt for the nine months ended September 30, 2009 consisted of
a gain of $150,000 for a settlement of a 10% note holder, a gain on a settlement
of an account payable of $87,183 and gain on pay off of capital lease of
$15,128.
Comparison
of the Results for the Three Months Ended September 30, 2009 and September 30,
2008 (restated)
Revenue
for the three months ended September 30, 2009 and 2008 was $8,280 and $4,815,
respectively, an increase of $3,465. The relatively flat increase relates to the
Company’s focus from distributors to on-line sales.
Cost of
sales for the three months ended September 30, 2009 and 2008 was $189 and
$211,201, respectively. The decrease in cost of sales is
related to the Company’s focus in the current period of reducing costs
overall and $207,689 of inventory was written off in the prior comparative
period.
Selling
costs increased to $12,844 from $4,297 for the three months ended September 30,
2009 and 2008, respectively. This is directly attributable to the
Company’s costs associated with new sales opportunities. The three months
ended September 30, 2008 included direct selling costs, such as
advertising.
21
General
and administrative expenses increased to $1,097,338 from $263,496 for the three
months ended September 30, 2009 and 2008, respectively. This increase
is primarily attributable to stock based compensation costs in the three months
ended September 30, 2009 totaling approximately $449,000 compared to
approximately $73,000 for the same period in the prior year. Also in the three
months ended September 30, 2009 the increase in consulting and professional fees
over the three months ended September 30, 2008 was approximately
$225,000.
Depreciation
and amortization expenses increased to $317,684 for the three months ended
September 30, 2009 from $98,911for the prior comparative period. The
increase relates primarily to the amortization of debt discount associated with
the promissory notes issued in the later part of 2008 and the nine months ended
September 30, 2009. Total amortization related to such notes for the
three months ended September 30, 2009 increased $225,155 over the three months
ended September 30, 2008.
Interest
expense for the three months ended September 30, 2009 and 2008 (as restated) was
$188,594 and $42,409, respectively, an increase of $146,185. This increase
primarily relates to the increased principal balance for bridge notes in
the current period.
The gain
on extinguishment of debt for the three months ended September 30, 2009
consisted of a gain of $150,000 for a settlement of a 10% note holder, and a
gain on a settlement of an account payable of $87,183.
22
Liquidity
and Capital Resources
The
Company's liquidity and capital needs relate primarily to working capital and
other general corporate requirements. To date, the Company has funded
its operations with stockholder loans, by issuing notes and by the sale of
common and preferred stock. Since inception, the Company has not
generated any significant cash flows from operations. At September
30, 2009, the Company had cash and cash equivalents of $1,089,089 and a working
capital deficiency of $2,521,849. If the Company does not generate
sufficient revenues from the sales of its products in an amount necessary to
meet its cash needs, the Company would need additional financing to continue to
operate. As the Company increases sales from its products and services, the
Company expects to increase cash flows from operations.
Net cash
used in operating activities for the nine months ended September 30, 2009 and
2008 (as restated) was $1,561,921 and $1,210,399,
respectively. The current period net cash used in operating
activities relates to the net loss of $3,275,515 offset by adjustments totaling
$1,713,594, which primarily relates to approximately $1,231,714 of non cash
stock compensation expense, depreciation and amortization of $582,218, and
approximately $128,000 of interest expense related to modification of debt.
Offsetting these decreases was the gain on extinguishment of debt in the nine
months ended September 30, 2009 totaling $241,593. The prior comparative
period’s net cash used in operating was due to a net loss of $3,609,094 offset
by the interest expense related to the modification of debt of $985,500 (Note
2), non cash stock compensation of $756,644 and a write off of inventory
totaling $219,669.
Net cash
used in investing activities for the nine months ended September 30, 2009 and
2008 (as restated) was $217,575 and $66,930 and are attributable to the
additions of software costs. The Company has spent the nine months
ended September 30, 2009 in final development stages of the Pulse
product.
Net cash
provided by financing activities was $2,843,368 and $1,283,369 for the nine
months ended September 30, 2009 and 2008 (as restated), respectively. The
increase was a direct result of the sale of the Company’s Preferred B Stock and
the net proceeds of $1,600,000 of short term bridge notes. This was offset by
payments to former shareholders, 10% note holders and bridge note holders
totaling $637,619. The prior comparative period’s financing
activities consisted of proceeds from sales of common shares and exercise of
warrants totaling approximately $848,000.
While the
Company has raised capital from equity and debt transactions as mentioned above,
we are dependent on improved operating results and raising additional funds over
the next twelve month period. There are no assurances that we will be able to
raise additional funding. In the event that we are unable to generate sufficient
cash flow or receive proceeds from offerings of debt or equity securities, the
Company may be forced to curtail or cease its activities.
Research
and Development
Research
and development costs are generally expensed as incurred. In accordance with the
provisions of FASB Codification Topic ACS 985-20, "Costs of Software to be Sold,
Leased, or Marketed,” software development costs are subject to capitalization
beginning when a product's technological feasibility has been established and
ending when a product is available for release to customers. For the nine months
ended September 30, 2009, and 2008 the Company capitalized $217,575 and $67,303
of software and website development costs, respectively. The software
and website costs are amortized on a straight line basis over the estimated
useful life of three years. Amortization expense for the nine month period ended
September 30, 2009 and 2008 was $57,120 and $14,324 respectively.
In
accordance with FASB Codification Topic ASC 360-10-15, Impairment or Disposal of
Long-Lived Assets, we review long-lived assets for impairment whenever
circumstances and situations change such that there is an indication that the
carrying amounts may not be recovered. In such circumstances, we will
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. Future cash flows are the future cash
inflows expected to be generated by an asset less the future outflows expected
to be necessary to obtain those inflows. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, we will recognize an impairment loss to adjust to
the fair value of the asset. There have been no impairments for the
nine month period ended September 30, 2009.
23
The
Company continually strives to enhance and improve the functionality of its
software products. As such all new programming must be tested, even
if it is only a small component of a larger existing element of the software,
before being released to the public. Testing is an ongoing process and generally
occurs in three areas. First, upgrades and enhancements are done on a continual
basis to prolong the lifecycle of the products and as new enhancements and
upgrades are completed, each item must be tested for performance and function.
Testing is also performed to assure that new components do not adversely affect
existing software. Finally, as with all software, testing must assure
compatibility with all third party software, new operating systems and new
hardware platforms.
Other
Accounting Policies:
Refer to
the Annual Report on Form 10-K for the year ended December 31, 2008 filed with
SEC for a listing of all such accounting principles.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Not
Applicable
Item 4T. Controls and
Procedures .
Internal
Controls
(a)
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Evaluation of Disclosure Controls
and Procedures. The Company maintains controls and procedures designed to
ensure that information required to be disclosed in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission. The Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30,
2009 and have concluded that, as of such date, our disclosure controls and
procedures were effective to provide reasonable assurance that 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 with the
time periods specified in the Commission's rules and
forms.
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(b)
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Changes in Internal
Controls. There were no significant changes in our internal
controls over financial reporting that occurred during the nine month
period ended September 30, 2009 that have materially affected, or are
reasonably like to materially affect, our internal controls over financial
reporting.
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The
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, does not expect that the Company's disclosure controls or the
Company's internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, have been detected. Because of the inherent limitations in a
cost effective control system, misstatements due to error or fraud may occur and
may not be detected. We will conduct periodic evaluations of our internal
controls to enhance, where necessary, our procedures and
controls.
24
PART
II
Item
1. Legal Proceedings.
Freifeld
On or
about November 2008, the plaintiffs, Freifelds brought an action against the
Company seeking summary judgment in lieu of complaint on two debt
conversions. The plaintiffs converted their notes and received the
Company’s stock certificates in November 2008. Subsequently, the plaintiffs
brought suit, requesting repayment of their converted notes. The
Company has retained legal counsel and has filed pre-answer motion for summary
judgment for the Company. The Plaintiffs have moved for summary
judgment in lieu of a complaint and we cross-moved for summary judgment. On
September 3, 2009 the courts dismissed the Plaintiffs motion for summary
judgment in favor of the Company. On July 9, 2009, the Plaintiffs filed
discovery for the deposition schedule for October 27, 2009.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On July
31, 2009, the Company, through a private sale, issued 25000 shares of its
restricted common stock in connection with a promissory note issued for
$25,000.
On June
20, 2009, the Company, through a private sale, issued 200,000 shares of its
restricted common stock in connection with a promissory note issued for
$200,000.
On August
5, 2009, the Company, through a private sale, issued 150,000 shares of its
restricted common stock in connection with a promissory note issued for
$150,000.
On August
7, 2009, the Company, through a private sale, issued 100,000 shares of its
restricted common stock in connection with promissory notes issued for $100,000
in total.
On August
12, 2009, the Company, through a private sale, issued 100,000 shares of its
restricted common stock in connection with promissory notes issued for $100,000
in total.
On August
14, 2009, the Company, through a private sale, issued 10,000 shares of its
restricted common stock in connection with a promissory note issued for
$10,000.
On
September 3, 2009, the Company, through a private sale, issued 20,000 shares of
its restricted common stock in connection with a promissory note issued for
$20,000.
On
September 4, 2009, the Company, through a private sale, issued 30,000 shares of
its restricted common stock in connection with a promissory note issued for
$30,000.
On
September 10, 2009, the Company, through a private sale, issued 15,000 shares of
its restricted common stock in connection with a promissory note issued for
$15,000.
On September 24, 2009, the Company issued 180,000 shares of
its common stock in connection with promissory notes issued.
25
The above
shares of common stock were issued pursuant to the exemption from registration
under Section 4(2) of the Securities Act.
Item
3. Defaults upon Senior Securities.
The
Company is currently in default on the 10% convertible notes totaling $279,000
of principal as of September 30, 2009. In addition, the Company is in
default on the short term bridge notes payable totaling $1,160,000 as of
September 30, 2009.
Item
4. Submission of Matters to a Vote of Securities
Holders.
NONE
Item
5. Other Information.
The
Company and the new Chief Financial Officer, Erica Zalbert entered into an
employment agreement for a period of three years commencing June 1,
2009.
Item
6. Exhibits
.
(a)
Exhibits
31.1 Certification
of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.
31.2 Certification
of and Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002.
32.1 Certification
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
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act.
99.1
Employment Agreement between EchoMetrix and Erica Zalbert
99.2
Certificate of Designation filed with the State of Delaware
99.3
Stock Purchase Agreement between EchoMetrix and Rock Island Capital
99.4
Addendum to Stock Purchase Agreement between EchoMetrix and Rock Island Capital
dated August 13, 2009
99.5
Addendum to Stock Purchase Agreement between EchoMetrix and Rock Island Capital
dated August 26, 2009
99.6.
Amendment Number 1 to Stock Purchase Agreement between EchoMetrix Inc and Rock
Island Capital dated September 4, 2009
26
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EchoMetrix, Inc.
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(Registrant)
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By:
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/s/ Erica Zalbert
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Erica
Zalbert, Chief Financial Officer
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(Principal Financial Officer) | |
Date:
November 16, 2009
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27