Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - ProText Mobility, Inc. | v194864_ex31-2.htm |
EX-32.2 - EX-32.2 - ProText Mobility, Inc. | v194864_ex32-2.htm |
EX-32.1 - EX-32.1 - ProText Mobility, Inc. | v194864_ex32-1.htm |
EX-31.1 - EX-31.1 - ProText Mobility, Inc. | v194864_ex31-1.htm |
EX-10.1 - EX-10.1 - ProText Mobility, Inc. | v194864_ex10-1.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 June 30, 2010
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
|
11-3621755
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
6800 Jericho Turnpike, Suite
208E,
|
|
Syosset, New York
|
11791
|
(Address
of principal executive offices)
|
(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 ¨ 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):
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 August
17, 2010 is 118,352,700 shares.
INDEX
Page
No.
|
|
Factors
Affecting Forward-Looking Statements
|
2
|
PART
I FINANCIAL INFORMATION
|
|
ITEM
1 – Financial Statements:
|
|
Consolidated
Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009
(Audited)
|
3–4
|
Consolidated
Statements of Operations For the Three and Six Months ended June 30, 2010
(Unaudited) and 2009 (Unaudited)
|
5
|
Consolidated
Statements of Cash Flows For the Six Months ended June 30, 2010
(Unaudited) and 2009 (Unaudited )
|
6-7
|
Notes
to Consolidated Financial Statements (Unaudited)
|
8
-17
|
ITEM
2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
18-21
|
ITEM
3 – Quantitative and Qualitative Disclosure about Market
Risk
|
21
|
ITEM
4 –Controls and Procedures
|
21
|
PART
II:
|
|
Item
1 – Legal Proceedings
|
22
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
22
|
Item
3 – Defaults upon Senior Securities
|
22
|
Item
4 – Removed and Reserved
|
22
|
Item
5 - Other Information
|
22
|
Item
6 – Exhibits
|
23
|
Signature
Page
|
24
|
1
This
quarterly report on Form 10-Q contains forward-looking
statements. These statements relate to future events or our future
financial performance. We have attempted to identify forward-looking statements
by terminology including “anticipate,” “believe,” “can,” “continue,” “could,”
“estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should”
or “will” or the negative of these terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, that may cause our or our industry’s actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking
statements.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We do not undertake any duty to update any of the
forward-looking statements after the date of this quarterly report on Form 10-Q
to conform these statements to actual results, unless required by
law.
2
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Current
assets:
|
||||||||
Cash
|
$ | 49,270 | $ | 37,890 | ||||
Accounts
receivable
|
206 | 238 | ||||||
Prepaid
expenses
|
7,640 | 12,671 | ||||||
Total
current assets
|
57,116 | 50,799 | ||||||
Property
and equipment - net
|
38,045 | 68,094 | ||||||
Other
assets:
|
||||||||
Capitalized
software costs, less accumulated amortization
|
||||||||
of
$171,637 and $82,120, respectively
|
273,571 | 252,001 | ||||||
Website
development costs, less accumulated
amortization of
|
||||||||
of
$12,500 and $5,000, respectively
|
32,500 | 40,000 | ||||||
Security
deposit
|
9,454 | 9,454 | ||||||
Total
other assets
|
315,525 | 301,455 | ||||||
Total
assets
|
$ | 410,686 | $ | 420,348 |
See notes
to consolidated unaudited financial statements
3
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Continued)
LIABILITIES AND
STOCKHOLDERS' DEFICIT
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Current
liabilities:
|
||||||||
Current
portion of long term debt and capital leases
|
15,868 | 47,991 | ||||||
Current
portion of 10% convertible notes payable
|
118,193 | 233,832 | ||||||
Convertible
short term bridge notes payable, net of
|
||||||||
discount
of $189,973 and $111,574 respectively
|
1,501,363 | 1,642,249 | ||||||
Non
convertible short term bridge notes payable
|
129,790 | 273,067 | ||||||
Due
to stockholders
|
251,762 | 307,838 | ||||||
Accounts
payable
|
395,056 | 295,771 | ||||||
Accrued
expenses
|
252,394 | 501,727 | ||||||
Total
current liabilities
|
2,664,426 | 3,302,475 | ||||||
Other
liabilities:
|
||||||||
Obligations
under capital lease, net of current portion
|
4,509 | 5,735 | ||||||
Deferred
rent
|
5,695 | 7,541 | ||||||
Total
liabilities
|
2,674,630 | 3,315,751 | ||||||
Stockholders'
deficit
|
||||||||
Preferred
stock - $.0001 par value, authorized - 25,000,000 shares;
|
||||||||
Series
A Preferred stock - $.0001 par value, 1,526,718 designated; issued and
outstanding
- 901,237 repectively |
90 | 90 | ||||||
Series
B Preferred stock - $.0001 par value, 550,055 designated; issued and
outstanding -
|
||||||||
363,036
and 220,022 respectively
|
36 | 22 | ||||||
Common
stock - $.0001 par value, authorized - 250,000,000 shares;
|
||||||||
issued
and outstanding -118,012,187, and 79,203,336 shares
respectively
|
11,801 | 7,921 | ||||||
Additional
paid-in capital
|
34,786,180 | 26,470,579 | ||||||
Accumulated
deficit
|
(37,062,051 | ) | (29,374,015 | ) | ||||
Total
stockholders' deficit
|
(2,263,944 | ) | (2,895,403 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 410,686 | $ | 420,348 |
See notes
to consolidated unaudited financial statements
4
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
For
the Six Months Ended June 30,
|
For
the Three Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 16,419 | $ | 17,409 | $ | 8,796 | $ | 8,312 | ||||||||
Cost
of Sales
|
||||||||||||||||
Commissions
|
224 | 506 | 28 | 262 | ||||||||||||
Amortization
of Software Costs
|
67,474 | 33,365 | 34,939 | 17,541 | ||||||||||||
Cost
of Sales
|
67,698 | 33,871 | 34,967 | 17,803 | ||||||||||||
Gross
Loss
|
(51,279 | ) | (16,462 | ) | (26,171 | ) | (9,491 | ) | ||||||||
Operating
expenses:
|
||||||||||||||||
Selling
|
27,150 | 21,395 | 2,391 | 9,285 | ||||||||||||
Web
site costs
|
65,311 | 44,397 | 34,323 | 22,218 | ||||||||||||
General
and administrative
|
1,940,948 | 1,449,409 | 1,088,270 | 602,816 | ||||||||||||
Depreciation
and amortization
|
37,548 | 37,167 | 19,647 | 11,489 | ||||||||||||
Total
operating expenses
|
2,070,957 | 1,552,369 | 1,144,631 | 645,808 | ||||||||||||
Loss
from operations
|
(2,122,236 | ) | (1,568,831 | ) | (1,170,802 | ) | (655,299 | ) | ||||||||
Other
(income) expenses:
|
||||||||||||||||
Interest
|
119,820 | 142,604 | 57,230 | 86,637 | ||||||||||||
Interest
- related party
|
- | 1,008 | - | - | ||||||||||||
Loss
(gain) on extinguishment of liabilities
|
31,263 | (15,128 | ) | 31,263 | - | |||||||||||
Debt
Conversion Expense
|
159,638 | - | 159,638 | - | ||||||||||||
Other
(income) expenses
|
- | - | - | 762 | ||||||||||||
Amortization
of deferred financing costs
|
- | 10,000 | - | 10,000 | ||||||||||||
Amortization
of note discounts
|
187,664 | 184,000 | 73,199 | 86,328 | ||||||||||||
Total
other expenses :
|
498,385 | 322,484 | 321,330 | 183,727 | ||||||||||||
Net
loss
|
(2,620,621 | ) | (1,891,315 | ) | (1,492,132 | ) | (839,026 | ) | ||||||||
Common
stock dividends to be issued
|
||||||||||||||||
for
Series B Preferred Stock
|
(90,430 | ) | - | (55,430 | ) | - | ||||||||||
Deemed
preferred stock dividend related to
|
||||||||||||||||
warrant
modification
|
(2,023,804 | ) | - | - | - | |||||||||||
Deemed
preferred stock dividend related to
|
||||||||||||||||
issuance
of warrants and common stock
|
(2,953,181 | ) | - | (574,438 | ) | - | ||||||||||
Net
loss applicable to common stock holders
|
$ | (7,688,036 | ) | $ | (1,891,315 | ) | $ | (2,122,000 | ) | $ | (839,026 | ) | ||||
Per
share data
|
||||||||||||||||
Loss
per share - basic and diluted
|
$ | (0.08 | ) | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.01 | ) | ||||
Weighted
average number of
|
||||||||||||||||
shares
outstanding- basic and diluted
|
96,161,391 | 74,162,496 | 112,628,931 | 74,796,032 |
See notes
to consolidated unaudited financial statements
5
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (2,620,621 | ) | $ | (1,891,315 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
used
in operating activities:
|
||||||||
Loss
(gain) on extinguishment of debt
|
31,263 | (15,128 | ) | |||||
Debt
modification expense
|
159,638 | - | ||||||
Bad
Debt
|
- | (250 | ) | |||||
Warrants/options
issued for consulting services
|
169,687 | 89,563 | ||||||
Common
stock issued for services
|
48,600 | 21,000 | ||||||
Common
stock issued for compensation
|
- | 87,500 | ||||||
Stock
issued for interest
|
14,796 | 35,798 | ||||||
Compensatory
element of stock options
|
632,381 | 611,706 | ||||||
Depreciation
|
30,049 | 27,511 | ||||||
Amortization
of deferred financing costs
|
- | 10,000 | ||||||
Amortization
of software and website development costs
|
74,974 | 33,365 | ||||||
Amortization
of intangible assets
|
- | 9,657 | ||||||
Amortization
of discount related to debt
|
187,664 | 184,000 | ||||||
Increase
(decrease) in cash flows as a result of
|
||||||||
changes
in asset and liability account balances:
|
||||||||
Accounts
receivable
|
32 | 1,218 | ||||||
Prepaid
expenses and other assets
|
5,031 | 15,898 | ||||||
Deferred
rent
|
(1,846 | ) | (978 | ) | ||||
Accounts
payable and accrued expenses
|
163,935 | 142,745 | ||||||
Total
adjustments
|
1,516,204 | 1,253,605 | ||||||
Net
cash used in operating activities
|
(1,104,418 | ) | (637,710 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Capitalized
software costs
|
(89,044 | ) | (127,794 | ) | ||||
Capitalized
website development costs
|
(15,000 | ) | ||||||
Net
cash used in investing activities
|
(89,044 | ) | (142,794 | ) |
6
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
For the Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sale of Preferred B securities
|
1,300,000 | - | ||||||
Payments
to stockholders
|
(56,076 | ) | (200,020 | ) | ||||
Proceeds
from bridge notes payable
|
200,000 | 1,150,000 | ||||||
Payments
of bridge notes payable
|
(210,000 | ) | (75,000 | ) | ||||
Payments
of note payable - equipment
|
(6,815 | ) | (2,684 | ) | ||||
Payments
under capital lease
|
(22,267 | ) | (75,072 | ) | ||||
Net
cash provided by financing activities
|
1,204,842 | 797,224 | ||||||
Net
increase in cash
|
11,380 | 16,720 | ||||||
Cash
at beginning of period
|
37,890 | 25,217 | ||||||
Cash
at end of period
|
$ | 49,270 | $ | 41,937 | ||||
Supplemental
Schedules of Noncash Investing
|
||||||||
and
Financing Activities:
|
||||||||
Common
stock issued in connection with settlement agreement
|
$ | 72,000 | $ | - | ||||
Common
stock issued in connection with extinguishment of payable
|
$ | 14,000 | $ | - | ||||
Common
stock issued as a result of debt conversion
|
$ | 311,404 | $ | - | ||||
Common
stock issued in lieu of accrued interest
|
$ | 228,750 | $ | - | ||||
Debt
discount related to restricted stock issued in
|
||||||||
connection
to bridge loans
|
$ | 31,438 | $ | 135,269 | ||||
Debt
discount related to restricted stock issued in connection
to
|
||||||||
modification
of debt instruments
|
$ | 154,054 | $ | - | ||||
Increase
in fair value of embedded conversion feature recognized in
|
||||||||
in
connection with debt modification
|
$ | 26,653 | $ | - | ||||
Debt
discount related to warrants granted in connection to bridge
loans
|
$ | 38,795 | $ | 60,911 | ||||
Debt
discount of beneficial conversion feature
|
||||||||
in
relation to bridge loans
|
$ | 15,121 | $ | 43,012 | ||||
Common
stock dividends to be issued for Series B Preferred Stock
|
$ | 90,430 | $ | - | ||||
Deemed
preferred stock dividend related to warrant modification
|
$ | 2,023,804 | $ | - | ||||
Deemed
preferred stock dividend related to issuance
|
||||||||
of
warrants and common stock
|
$ | 2,953,181 | $ | - |
7
NOTES TO
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1
- DESCRIPTION OF BUSINESS
AND GOING CONCERN
Echometrix,
Inc. is a software company that develops technology that understands and
interprets the digital web. The Company currently maintains two operating
divisions; the FamilySafe Parental Controls division and the Data Analytics
division. Through FamilySafe Inc, a wholly owned subsidiary, we offer software
products intended to protect children from dangers on the Internet and the world
of mobile texting. Our award-winning products have been specially engineered to
monitor, block and alert parents the moment a child encounters inappropriate
material from any Internet or mobile related source. Our Data Analytics division
has developed an advanced data analytics tool developed to meet the changing
needs of marketing and media executives which enables the real-time aggregation,
measurement, and analysis of vast amounts of anonymous User Generated Content
from publicly-available Internet sources.
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 $2,620,621and
$1,891,315 for the six months ended June 30, 2010 and 2009,
respectively. In addition, the Company had negative working capital
of $2,607,310 and an accumulated deficit of $37,062,051 at June 30,
2010.
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. This plan which was completed in the fourth quarter of fiscal year
2009 includes a corporate restructuring, which repositions Echometrix as a
business-to-business (B2B) company. By realigning the Company into
two separate and distinct divisions, FamilySafe and Data Analytics, Echometrix
will refocus its business on high-growth, global resellers with established
consumer brands. In line with accelerating growth through this realignment,
Echometrix has completed and is launching a multi-language version of its
award-winning FamilySafe Internet product on a global basis. The Company is also
launching its new FamilySafe Mobile offering, the first ever, multi-language
parental text monitoring product which can be used on any mobile phone. These
products will only be available through major consumer-brand resellers and over
the past several months, Echometrix has been in discussions with numerous
consumer brands in the United States, Europe and South America. The Company's
new approach will provide parents with increased access to FamilySafe's
comprehensive child protection solution across all device platforms, including
computers and mobile phones. Millions of teens now use mobile phones as their
primary communication device and parents are increasingly concerned about new
dangers such as sexting and cyber-bullying. Data Analytics: Echometrix has
developed an advanced data analytics tool designed to enable the real-time
aggregation, measurement, and analysis of digital data
streams.
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 six months ended June 30, 2010, the Company raised
approximately $1,500,000 from the issuance of debt and preferred
stock.
8
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, 2010. The results of the six months ended June 30,
2010 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2010.
NOTE
2 - 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 June 30, 2010 and 2009 have been excluded
from the per share computations:
For the Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
2004
Stock Plan Options
|
230,000 | 870,000 | ||||||
Non
ISO Stock Options
|
25,791,922 | 20,938,157 | ||||||
Convertible
Preferred Stock
|
45,316,000 | 9,012,370 | ||||||
Convertible
Notes Payable
|
14,835,964 | 19,380,000 | ||||||
Warrants
|
87,172,317 | 17,421,084 |
(b)
Software Development Costs:
Research
and development costs are expensed as incurred. No research and development
costs were incurred during the six months ended June 30, 2010 and
2009.
In
accordance with the provisions of Accounting for the costs of computer software
to be sold or otherwise 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 six months and the fiscal year ended June 30, 2010 and December 31, 2009,
respectively, the Company capitalized $89,044 and $247,207, respectively of
software development costs. The software costs are amortized on a
straight line basis over the estimated useful life of three years. Amortization
expense for the six months ended June 30, 2010 and 2009 was $67,474 and $33,365
respectively.
9
(c)
Revenue Recognition:
The
Company recognizes revenues in accordance with authoritative guidance and when
there is persuasive evidence of an arrangement, delivery has occurred or
services have been rendered, the sales price is determinable and collectability
is reasonably assured. Software products revenue is derived from online Internet
sales and is recognized upon the settlement of credit card charges, typically
within three days of the sale.
(d) Use
of Estimates:
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
(e) Debt
Extinguishment
In May
2010, the Company offered certain of its existing note holders the opportunity
to exchange their principal and interest balances for common stock or for new
loans with different terms. The exchange of one of the 10% loans was deemed to
be debt extinguishment (as disclosed in Note 4) according to the ASC Topic
No.405- Liabilities and 470-50 - Debt, Modifications and
Extinguishments.
ASC
470-50-40-10 (formerly EITF Issue 96-19) establishes the criteria for debt
extinguishment and modification. If the debt is substantially different, then
the debt is extinguished, and a gain or loss is calculated and recorded. The
Company determined that an extinguishment occurred as the present value of the
cash flows under the terms of the new instrument, was over 10% from the present
value of the remaining cash flows under the terms of the original notes. The
Company recorded a loss on debt extinguishment of $34,763 which is included in
the Statement of Operations for the period ended of June 30, 2010.
(f)
Recent Accounting Pronouncements:
In May of
2010, EchoMetrix applied the provisions of ASC 470-50 “Debtors Accounting for a
Modification or Exchange of Debt Instruments” when it modified the terms of its
10% and Bridge notes. The Company evaluated these transactions under ASC 470-50
to determine if the modification was substantial and if extinguishment
accounting should be applied. If the change in fair value of the conversion
option is less than 10% of the carrying value of the debt, (and the debt
modification was not determined to be substantial) then ASC 470-20 applies. The
Company evaluated the new debt instrument and applied debt conversion expense.
(Note 4 and 5)
The
Company evaluates the new accounting provisions for guidance applicable to
EchoMetrix, Inc. During the period, the Company does not believe
there are any new pronouncements that will materially impact the
Company.
NOTE
3 – 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.
10
As a
result of the adoption of the provision of Share Based Compensation, the
Company's results for the six months ended June 30, 2010 and 2009 include
share-based compensation expense for employees and board of directors totaled
approximately $607,000 and $542,000, respectively, which have been included in
the general and administrative expenses line item in the accompanying
consolidated statement of operations. No income tax benefit has been
recognized in the income statement for share-based compensation arrangements as
the Company has provided a 100% valuation allowance on its’ net deferred tax
asset. Stock option compensation expense is the estimated fair value of options
granted amortized on a straight-line basis over the requisite service period for
the entire portion of the award. The Company has not adjusted the expense by
estimated forfeitures, as required for employee options, since the forfeiture
rate based upon historical data was determined to be immaterial.
During
the six months ended June 30, 2010 the Company granted 2,500,000 fully vested
options to an employee with an exercise price of $0.10 and a five year
term. The Company granted its board of directors and advisory board
members an aggregate of 810,722 fully vested options with
five year terms and exercise prices between $0.10 and $0.17.
The fair
value of options at the date of grant is estimated using the Black-Scholes
option pricing model. During the six months ended June 30, 2010 and 2009 the
assumptions made in calculating the fair values of options are as
follows:
For the Six Months Ended June 30,
|
||||||
2010
|
2009
|
|||||
Expected
term (in years)
|
5
|
5
|
||||
Expected
volatility
|
100.31%-104.89%
|
99.09%-100.00%
|
||||
Expected
dividend yield
|
0
|
0
|
||||
Risk-free
interest rate
|
2.97%-4.01%
|
2.90%-3.71%
|
Accounting
for Non-employee Awards:
The
Company records its stock-based compensation expense in accordance with ASC
718-10, formerly SFAS 123R, “Share Based Payment” to its non-employee
consultants for stock granted.
Stock
compensation expense related to non-employee options was approximately $163,571
and $59,114 for six months ended June 30, 2010 and 2009, respectively.
These amounts are included in the Consolidated Statements of Operations within
the general and administrative expenses line item.
During
the six months ended June 30, 2010, the Company granted 1,785,714 fully vested
options to non-employees. The options are exercisable at a range of $0.07
to $0.18 and have a five year term.
The
following table represents our stock options granted, exercised, and forfeited
during the six months ended June 30, 2010.
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
||||||||||||||
|
Exercise
|
Remaining
|
Aggregate
|
|||||||||||||
|
Number
|
Price
|
Contractual
|
Intrinsic
|
||||||||||||
Stock Options
|
of Shares
|
per Share
|
Term
|
Value
|
||||||||||||
Outstanding
at January 1, 2010
|
25,069,001
|
$
|
0.18
|
3.3829
|
$
|
0
|
||||||||||
Granted
|
4,555,770
|
$
|
0.11
|
4.8428
|
0
|
|||||||||||
Exercised
|
(950,000)
|
$
|
0.09
|
|||||||||||||
Forfeited/expired
|
(2,652,849)
|
$
|
0.42
|
|||||||||||||
Outstanding
at June 30, 2010
|
26,021,922
|
$
|
0.14
|
3.4675
|
$
|
0
|
||||||||||
Exercisable
at June 30, 2010
|
24,271,922
|
$
|
0.14
|
3.4304
|
$
|
0
|
11
As of
June 30, 2010, there was $394,099 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
4 - 10% CONVERTIBLE NOTES PAYABLE
In May of
2010, the Company sent each noteholder an inducement letter which (i) offered to
lower their conversion from $0.40 to $0.14 per share or (ii) exchange their
existing note for a new note with the same principal and interest terms to
extend the maturity date by 9 months. In exchange for the new note, each
noteholder would receive one restricted share of the Company’s common stock and
one warrant (with a $0.35 exercise price and 1 year term) for each one dollar of
principal outstanding.
The
Company exchanged $41,596 of principal, issuing 41,596 of the Company’s
restricted common stock and 41,596 warrants (at an exercise price of $0.35 with
a one year term) and after applying the 10% test as dictated by ASC 470-50, the
Company recorded a loss on extinguishment of debt of $34,763 which is included
in the accompanying statement of operations. The new note is a nine month note
with interest calculated at 10% per annum paid in stock on a quarterly basis.
The note is senior to any cash distributions to the Company’s primary investor
and has mandatory principal repayment terms when and if options and warrants are
exercised and the Company receives the cash proceeds.
10%
Noteholders converted $115,639 of their principal balances debtors and received
common stock. The Company applied the accounting per ASC 470-20, when conversion
prices are lowered to induce conversion and recorded debt conversion expense
totaling $61,878 as a result of the decrease in the conversion price from $0.40
to $0.14. The offset of the conversion was to additional paid in
capital.
As of
June 30, 2010 the remaining 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 $2,100 and $3,300 for the six months ended June 30, 2010 and
2009, respectively and is included in interest expense on the consolidated
statement of operations and in accrued expenses on the consolidated balance
sheet as of June 30, 2010 and December 31, 2009, respectively.
As
reflected on the balance sheets, the value of the 10% convertible notes at June
30, 2010 and December 31, 2009 amounted to $118,193 and $233,832, respectively
and are classified as current due to the fact that they are in default for the
non payment by the maturity date.
NOTE
5- BRIDGE NOTES PAYABLE
Convertible
Bridge Notes Payable:
In May of
2010, the Company sent each noteholder an inducement letter which (i) offered to
lower their conversion from $0.15 to $0.14 per share of principal and to lower
the accrued interest from $0.14 to $0.12 or (ii) exchange their existing note
for a new note with the same principal and interest terms to extend the maturity
date by 9 months. In exchange for the new note, each noteholder would
receive one restricted share of the Company’s common stock and one warrant (with
a $0.35 exercise price and 1 year term) for each one dollar of principal
outstanding.
12
Convertible
note holders converted $195,765 of their principal balance into 1,398,319 shares
of the Company’s common stock. In accordance with ASC 470-20, the Company
applied the guidance for debt inducement, and recorded an expense for the debt
modification of $44,952 result of the decrease in the conversion price from
$0.15 to $0.14.
In
addition, the Company exchanged $1,066,366 of principal bridge notes payable
(which includes non convertible loans that exchanged their loans for convertible
loans ($112,512 of principal) and issued 1,066,366 of the Company’s restricted
common stock and 1,066,366 of warrants (at an exercise price of $0.35) with a
one year term. The new notes are for nine months and interest is
calculated at 10% per annum, payable quarterly in stock. The notes are
convertible at any time at $0.14 and carry mandatory principal repayments when
options or warrants are exercised and the company receives cash
proceeds.
The Company evaluated the extension
event under ASC 470-50 “Debtor’s Accounting
for a Modification or Exchange of Debt Instruments” to determine if the modification was
substantial. Because the change in fair value of the conversion option was
less than 10% of the carrying value of the
debt, the debt
modification determined not
to be substantial and
as a result, no gain or loss was
recorded.
The
Company evaluated the modification of the debt instrument and as a result
recorded a debt discount amounting to $200,975 of which $24,621 related to the
increase in the fair value of the embedded conversion feature.
Non
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 and is payable at the end of the term. As of June 30, 2010 and
December 31, 2009 the total of $124,790 of principal and accrued interest of
$30,016 and $27,481, respectively is outstanding and currently in default for
non payment of principal on maturity date.
As of
June 30, 2010, the Company’s non-convertible bridge loan payable principal
balance amounting to $129,790 was in default.
NOTE
6 - DUE TO STOCKHOLDERS
At June
30, 2010 and December 31, 2009, the Company was indebted to its former CEO,
William Bozsnyak, in the amounts of $63,718, respectively, for working capital
advances made to the Company. For the six months ended June 30, 2009,
interest expense was $1,008, which was calculated at 5.5%. At June 30,
2010 and December 31, 2009, $164,100 in accrued interest was due to Mr.
Bozsnyak.
At June
30, 2010 and as of December 31, 2009, $23,943 and $80,019, respectively, was
owed for unpaid salaries and accrued vacation.
13
NOTE 7 - EQUITY
TRANSACTIONS
Common
Stock:
Payment of
Interest
For the
six months ended June 30, 2010, the Company issued 133,209 shares (valued at
$14,795) of the Company’s common stock as payment for interest due on the
Company’s 10% convertible notes.
Senior Secured Bridge Notes
Issued
During
the six months ended June 30, 2010, the Company issued 445,000 shares (valued at
$31,438) of the Company’s restricted common stock in connection with the
issuance of promissory notes amounting to $200,000.
Services
Rendered
The
Company issued 540,000 shares (valued at $48,600) for the three months ended
June 30, 2010 of the Company’s restricted common stock as payment for
compensation.
Legal
Settlements
In
February of 2010, the Company issued a $5,000 cash payment and 800,000 shares of
the Company’s common stock valued at $72,000 to a former consulting company
under the terms of a settlement agreement.
Extinguishment of Accounts
Payable
During
the six months ended June 30, 2010 the Company issued 100,000 shares (valued at
$14,000) of its common stock in lieu of an account payable of $17,500. The
resulting gain of $3,500 is included within the loss (gain) on extinguishment of
liabilities line item in the accompanying consolidated statement of
operations.
Option and Warrant
Exercises
During
the quarter ended June 30, 2010 the Company issued 1,113,154 shares of common
stock as a result of cashless exercises of 950,000 options and 800,000
warrants.
Debt Conversion of
Interest
In the
six months ended June 30, 2010, the Company issued 1,906,152 shares of its
common stock as a result of converting $228,750 of accrued interest (which was
accrued through May 31, 2010) on the bridge note holders and recorded debt
conversion expense of $52,808 which is included in the debt conversion expense
line item in the accompanying statement of operations.
Debt
Conversion
In
connection with the inducement letter issued to noteholders in the second fiscal
quarter of 2010, the Company issued 825,991 and 1,398,319 shares of its common
stock for $115,639 and $195,765 of the 10% and Bridge notes, respectively and
recorded debt conversion expense of $106,830 which is included in the debt
conversion expense line item in the accompanying statement of operations.
.
Debt
Exchange
Due to
the exchange of debt instruments in the six months ending June 30, 2010, the
Company issued 1,107,935 shares of its restricted common stock to the 10% and
Bridge note holders. The Company recorded the change in the fair value of the
embedded conversion option of $26,653 as a debt discount.
Issuance of Common Stock as
a Result of Sale of Securities
In
the three months ended the Company issued 739,092 shares of common
stock as a dividend payable on Preferred Stock B for the quarter ended
December 31, 2009 and March 31, 2010. In connection with Amendment No. 2
to the Series B Convertible Preferred Stock effective March 4, 2010 the Company
issued the pro rata portion of common stock amounting to 29,700,000
shares.
14
Warrants
:
Effective
June 9, 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. Although these expired June 30, 2010 the Company intends to file
Amendment No. 5 to its S-1 Registration Statement to extend the Class A and
Class B warrants to January 31, 2011.
For the
six months ended June 30, 2010, in connection with Amendment No. 2 to the Series
B Convertible Preferred Stock agreement, the Company cancelled warrants issued
in the fiscal year 2009 of 22,002.200 with an exercise price of $0.15.
Pursuant to Amendment No. 2 which was effective June 4, 2010, the Company issued
25,300,000 cashless warrants with an exercise price of $0.03 and term of five
years, and 25,300,000 non cashless warrants with an exercise price of $0.06 and
a five year term. As a result of this modification, the Company recorded
$2,023,805 of a deemed dividend which is included in the accompanying
consolidated statement of operations.
Pursuant
to Amendment No. 2 to the Series B Convertible Preferred Stock agreement, when
proceeds were received in the second quarter of 2010, the Company issued
7,700,000 of cashless warrants with an exercise price of $0.03 and term of five
years, and 7,700,000 non cashless warrants with an exercise price of $0.06 and a
five year term.
During
the six months ended June 30, 2010, the Company issued 1,107,935 warrants at an
exercise price of $0.35 and a one year term in connection with the debt exchange
(Note 4 and 5).
During
the six months ended June 30, 2010, 800,000 warrants were exercised on a net
cashless basis.
NOTE
8 - 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 could, 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. In connection with the
Stock Purchase Agreement and Certificate of Designation, the Preferred B
stockholders were entitled to a quarterly dividend paid in common stock.
In accordance with the agreement, dividends totaling 739,092 were issued in the
six months ended June 30, 2010.
15
On March
4, 2010, Echo Metrix, Inc. (the “Company”) entered into Amendment No. 2
(“Amendment No. 2”) to the Series B Convertible Preferred Stock Purchase
Agreement, dated July 29, 2009, as amended by Amendment No. 1 to the Series B
Convertible Preferred Stock Purchase Agreement, with Rock Island Capital, LLC
(the “Purchaser”), dated September 4, 2009 (as amended, the “Purchase
Agreement”).
Pursuant
to the Purchase Agreement, the Company agreed to sell to the Purchaser, in
tranches (with the last tranche to occur within approximately 60 days from
execution of Amendment No. 2), an aggregate of 550,055 shares of Series B
Preferred Stock (of which 220,022 shares were sold prior to execution of
Amendment No.2) for an aggregate purchase price of $5,000,000 (of which
$2,000,000 was sold prior to execution of Amendment No. 2). In addition, the
Company agreed to issue to the Purchaser five-year warrants to purchase
50,000,000 shares at an exercise price of $0.03, exercisable on a cashless
basis, and 50,000,000 shares at an exercise price of $0.06, not exercisable on a
cashless basis, in tranches pro rata with the sale of the Series B Preferred
Stock. The exercise price of the warrants not exercisable on a cashless basis
shall be reduced to $0.03 if the closing price of the Company’s common stock has
a volume weighted average price of less than $0.06 for a thirty day period
during the term of such warrants. The Company also agreed to issue to the
Purchaser 45,000,000 shares of common stock (the “Additional Shares”), in
tranches pro rata with the sale of the Series B Preferred Stock. As amended by
Amendment No. 3, the Purchaser may terminate the Purchase Agreement upon 10
days’ written notice, in which event the Purchaser shall not be obligated to
make any additional purchases under the Purchase Agreement.
In
connection with the Purchase Agreement, the Company filed an Amended and
Restated Certificate of Designation of Series B Preferred Stock (the
“Certificate of Designation”) filed with the State of Delaware on June 5,
2010.
In the
six months ended June 30, 2010, the Company received $1,300,000 from the sale of
Series B Convertible Preferred Stock, and issued an additional 143,014 preferred
B shares.
NOTE
9 - COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
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. The Company has been vigorously
defending this action and is still in the discovery phase.
16
Attorney General
Inquiry
On or
about September 24, 2009, the Company received a subpoena duces tecum from the
Attorney General’s Office of the State of New York that seeks documents and
information related to the PULSE. The Company has been cooperating with the
Attorney General’s Office, and while prepared to vigorously
defend itself, the Company is in settlement negotiations with the
Attorney General’ Office to amicably resolve the inquiry. As of the date of this
filing, no value or estimate has been assessed to a settlement.
Federal Trade Commission
Civil Investigative Demand
On or
about December 16, 2009, the Company received a Civil Investigative Inquiry from
the Federal Trade Commission (“FTC”) related to PULSE. The Company has
been cooperating with the FTC’s investigation, and while prepared to vigorously
defend itself, the Company is in discussions for a settlement with the FTC in
order to amicably resolve the investigation. As of the date of this filing, no
value or estimate has been assessed to a settlement.
Almut Von
Biedermann
On May
10, 2010, the Company was served with an action from Ms. Von Biederman for
breach of contract seeking damages in excess of $75,000. The Company intends to
vigorously defend the action, and has accrued $20,000 of prior consulting fees
due to Ms. Von Biedermann.
NOTE
10 - SUBSEQUENT EVENTS
In July
of 2010, the Company issued 115,138 shares of its restricted Common Stock for
consulting services rendered valued at 15,000.
In August
of 2010, the Company issued 20,000 shares pursuant to a 10b-5 plan and 205,128
shares as a result of 300,000 warrants which were exercised on a cashless
basis.
On July
29, 2010 the Company entered into Amendment No. 3 the Stock Purchase Agreement
of its Series B Convertible Preferred Stock with Rock Island Capital LLC whereby
it amended the termination clause to remove the penalties and the termination
payment fee.
17
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,
2009.
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.
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 is a software company that develops technology that understands and
interprets the digital web. The Company currently maintains two operating
divisions; the FamilySafe Parental Controls division and the Data Analytics
division. Through FamilySafe Inc, a wholly owned subsidiary, we offer software
products intended to protect children from dangers on the Internet and the world
of mobile texting. Our products have been specially engineered to monitor, block
and alert parents the moment a child encounters inappropriate material from any
Internet or mobile related source. Our Data Analytics division has developed an
advanced data analytics tool designed to enable real-time aggregation,
measurement, and analysis of digital data streams.
The
accompanying 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 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 leveraging the Company’s core competencies.
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.
18
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. This plan which was implemented in the fourth quarter of fiscal
year 2009 includes a corporate restructuring, which repositions Echometrix as a
business-to-business (B2B) company. By realigning the Company into two
separate and distinct divisions, FamilySafe and Data Analytics, Echometrix will
refocus its business on high-growth, global resellers with established consumer
brands. In line with accelerating growth through this realignment, Echometrix
has completed and is launching a multi-language version of its award-winning
FamilySafe Internet product on a global basis. The Company is also launching its
new FamilySafe Mobile offering, the first ever, multi-language parental text
monitoring product which can be used on any text-enabled mobile phone. These
products will only be available through major consumer-brand resellers and over
the past two months, Echometrix has been in discussions with numerous consumer
brands in the United States, Europe and South America. The Company's new
approach will provide parents with increased access to FamilySafe's
comprehensive child protection solution across all device platforms, including
computers and mobile phones. Millions of teens now use mobile phones as their
primary communication device and parents are increasingly concerned about new
dangers such as sexting and cyber-bullying. Data Analytics: Echometrix is
further developing the Data Analytics platform by integrating new analytical
capabilities, innovative tools, and solutions to meet the ever-increasing growth
of digital data streams.
Results
of Operations
Comparison
of the Results for the Six Months Ended June 30, 2010 and June 30,
2009
Revenue
for the six months ended June 30, 2010 and 2009 was $16,419 and $17,409,
respectively, a slight decrease of $990. Gross loss decreased to $51,279 from
$16,462 due to the increased amortization of software costs in the current
period ended June 30, 2010 compared to the same period in the prior
year.
Operating
costs totaled $2,070,957 for the six months ended June 30, 2010 compared to
$1,552,369 for the prior six month period ending June 30, 2009. This
increase of $518,588 is due primarily to the increase of $491,539 in general and
administrative expenses. Included in general and administrative costs are
salaries and employee benefits including stock based compensation, professional
fees (including legal accounting and consulting fees) rent and general
insurance. Salaries, employee benefits and stock based compensation
increased by approximately $327,743. Professional fees increased by
approximately $179,026 compared to the six months ended June 30, 2009. The
increase in general and administrative expenses is a direct result of the
Company’s focus on the parental control product for the mobile market for
consulting services, legal and non cash stock based compensation for services of
outside consultants and advisors.
Loss
(gain) on extinguishment of debt for the six months ended June 30, 2010
consisted of a gain of $3,500 for an extinguishment of accounts payable and a
loss on extinguishment related to debt modification accounting of $34,763. The
prior six months ended June 30, 2010 of $15,128 related to a gain for a pay off
of a capital lease.
During
the six months ended June 30, 2010 the Company recorded debt conversion expense
totaling $159,638 compared to zero for the same comparative prior
period.
Comparison
of the Results for the Three Months Ended June 30, 2010 and June 30,
2009
Revenue
for the three months ended June 30, 2010 and 2009 was $8,769 and $8,312,
respectively, a slight increase of $484. Gross loss increased to $26,171 from
$9,491 due to the increased amortization of software costs in the three months
ended June 30, 2010 compared to the same period in the prior year.
Operating
costs totaled $1,144,631 for the three months ended June 30, 2010 compared to
$645,808 for the prior three month period ended June 30, 2009. This
increase of $495,823 is due primarily to the increase of $485,454 in general and
administrative expenses. Included in general and administrative costs are
salaries and employee benefits including stock based compensation, professional
fees (including legal accounting and consulting fees) rent and general
insurance. Salaries, employee benefits and stock based compensation
increased by approximately $485,678. Professional fees increased slightly by
approximately $36,722 compared to the six months ended June 30, 2009. The
increase in general and administrative expenses is a direct result of the
Company’s focus on the parental control product for the mobile market for
consulting services, legal and non cash stock based compensation for services of
outside consultants and advisors.
Loss
(gain) on extinguishment of debt for the three months ended June 30, 2010
consisted of a gain of $3,500 for an extinguishment of accounts payable and a
loss on extinguishment related to debt modification accounting of $34,763. There
were no extinguishments in the comparable prior period.
During
the three months ended June 30, 2010 the Company recorded debt conversion
expense totaling $159,638 compared to zero for the same comparative prior
period.
19
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 June 30, 2010, the Company had
cash and cash equivalents of $49,270 and a working capital deficiency of
$2,607,310. 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 six months ended June 30, 2010 and 2009 was
$1,104,418 and $673,710, respectively. The current period net cash
used in operating activities relates to the net loss of $2,620,621 offset by
adjustments totaling $1,516,204, which primarily relates to $865,464 of non cash
stock compensation expense, debt modification expense of $159,638 and
depreciation and amortization of $292,687. The prior comparative period’s
net cash used in operating was due to a net loss of $1,891,315 offset by non
cash stock compensation of $845,567 and $264,533 of depreciation and
amortization.
Net cash
used in investing activities for the six months ended June 30, 2010 and 2009 was
$89,044 and $142,794 and are attributable to the additions of software
costs. The Company has spent the six months ended June 30, 2010 in
developing the parental control product for the mobile market.
Net cash
provided by financing activities was $1,204,842 and $797,224 for the six months
ended June 30, 2010 and 2009, respectively. The increase was a result of the
proceeds from the sale of the Company’s Preferred B Stock totaling $1,300,000 in
the current period compared to net proceeds from bridge note holders in the
prior comparable six months totaling $1,075,000.
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
secure 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 six months
ended June 30, 2010, and 2009 the Company capitalized $89,044 and $142,794 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 six month period ended June
30, 2010 and 2009 was $74,974 and $33,365 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 six month
period ended June 30, 2010.
20
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.
Critical
Accounting Policies:
Refer to
the Annual Report on Form 10-K for the year ended December 31, 2009 filed with
SEC for a listing of all such accounting principles.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Not
Applicable
Item 4. Controls and
Procedures.
Internal
Controls
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(a)
|
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
(“Exchange Act”), 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
June 30, 2010 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.
|
|
(b)
|
Changes in Internal
Controls. There were no changes in our internal controls over
financial reporting that occurred during the three month period ended June
30, 2010 that have materially affected, or are reasonably like to
materially affect, our internal controls over financial
reporting.
|
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.
21
PART
II
Item
1. Legal Proceedings.
Attorney General
Inquiry
By
subpoena duces tecum dated September 24, 2009, the Attorney General’s Office of
the State of New York advised the Company that it had opened an inquiry to
determine whether an action or proceeding should be instituted against the
Company or any other entity pursuant to Executive Law §63(12). The Company has
been cooperating with the Attorney General’s Office, and while prepared to
vigorously defend itself, the Company is in settlement negotiations with the
Attorney General’ Office to amicably resolve the inquiry.
Federal Trade Commission
Civil Investigative Demand
By Civil
Investigative Demand dated December 16, 2009, the Federal Trade Commission
“(“FTC”) advised the Company that it had opened an investigation to determine if
there is, has been or may be any violations of laws administered by the
FTC. The Company has been cooperating with the FTC’s investigation,
and while prepared to vigorously defend itself, the Company is in settlement
negotiations with the FTC in order to amicably resolve the
investigation.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Pursuant
to the purchase agreement with Rock Island Capital LLC, as amended, the Company
issued 6,480,000 shares of Common Stock, 84,078 shares of its Preferred B Stock,
and 7,700,000 of the three cents cashless warrants and 7,700,000 of
the six cents non cashless warrants for proceeds received from April 10, 2010
through June 30, 2010.
The above
securities were issued pursuant to the exemption from registration under Section
4(2) of the Securities Act for transactions not involving a public
offering.
Item
3. Defaults upon Senior Securities.
The
Company is currently in default on the 10% convertible notes totaling $118,193
of principal as of June 30, 2010. In addition, the Company is in
default on the principal of short term bridge notes payable totaling $254,790 as
of June 30, 2010.
Item
4. Removed and Reserved.
Item
5. Other Information.
None.
22
Item
6. Exhibits.
(a) Exhibits
10.1
Amendment No. 3 to the Series B Convertible Preferred Stock Purchase Agreement,
dated July 29, 2009
31.1
Certification of Principal Executive Officer pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of Sarbanes-Oxley Act.
23
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EchoMetrix, Inc.
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(Registrant)
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|
By:
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/s/ Erica Zalbert
|
Erica
Zalbert, Principal Financial Officer
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|
Date:
August 23,
2010
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24