Xhibit Corp. - FORM 10-Q/A - September 10, 2014

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Xhibit Corp.	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Xhibit Corp.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Xhibit Corp.	ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - Xhibit Corp.	ex32-2.htm
EXCEL - IDEA: XBRL DOCUMENT - Xhibit Corp.	Financial_Report.xls

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

(Amendment No. 1)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

Commission file number: 000-52678

XHIBIT CORP.

(Exact name of registrant as specified in its charter)

Nevada		20-0853320
(State of incorporation)		(I.R.S. Employer Identification Number)

1520 E. Pima Street

Phoenix, AZ 85034

(Address of principal executive offices)

(602) 254-9777

(Registrant’s telephone number)

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 [ ] NO [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 Exchange Act). YES [ ] NO [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 14, 2013 the Company had 107,839,234 shares of its $0.0001 par value common stock issued and outstanding.

This Quarterly Report on Form 10-Q/A amends the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, originally filed by Xhibit Corp. (“Xhibit” or the “Company”) with the Securities and Exchange Commission (“SEC”) on November 15, 2013. The following items have been revised:

·	Part I — Item 1.Financial Statements

·	Part I — Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

As disclosed in a Current Report on Form 8-K the Company filed with the SEC on April 16, 2014, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) determined on April 11, 2014 that the Company’s previously filed financial statements for: (i) the three and six month periods ended June 30, 2013 included in the Form 10-Q filed with the SEC on August 19, 2013 and (ii) the three and nine month periods ended September 30, 2013 included in the Form 10-Q filed with the SEC on November 15, 2013 needed to be restated to correct the accounting for the SkyMall merger in such financial statements. The Audit Committee’s determination was based upon analysis of the issues raised in comment letters from the SEC related to the Company’s accounting for the SkyMall Merger. Please refer to Note 2, “Restatement” to the Notes to Condensed Consolidated Financial Statements for more information on the restatement.

The following tables show the effects of the restatement on the Company's condensed consolidated balance sheet as of September 30, 2013 and condensed consolidated statements of operations for the three and nine month periods ended September 30, 2013:

	As of September 30, 2013
	As Previously Recorded			As Restated			Variance
Total current assets	$	20,210,420		$	20,210,420		$	-
Total assets	$	68,455,317		$	194,051,317		$	125,596,000
Total current liabilities	$	49,256,562		$	49,256,562		$	-
Total liabilities	$	49,256,562		$	49,256,562		$	-
Additional paid-in capital	$	32,936,818		$	185,570,318		$	152,633,500
Accumulated deficit	$	(13,748,847	)	$	(40,786,347	)	$	(27,037,500	)
Total stockholders' equity	$	19,198,755		$	144,794,755		$	125,596,000

	Three-Month Period Ended September 30, 2013
	As Previously Recorded			As Restated			Variance
Revenues	$	20,366,673		$	20,366,673		$	-
Gross profit	$	7,687,137		$	7,687,137		$	-
Total operating expenses	$	14,668,154		$	41,705,654		$	27,037,500
Loss from operations	$	(6,981,017	)	$	(34,018,517	)	$	(27,037,500	)
Net loss	$	(7,062,268	)	$	(34,099,768	)	$	(27,037,500	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.31	)	$	(0.25	)

	Nine-Month Period Ended September 30, 2013
	As Previously Recorded			As Restated			Variance
Revenues	$	39,903,469		$	39,903,469		$	-
Gross profit	$	13,490,400		$	13,490,400		$	-
Total operating expenses	$	25,769,519		$	52,807,019		$	27,037,500
Loss from operations	$	(12,279,119	)	$	(39,316,619	)	$	(27,037,500	)
Net loss	$	(12,469,890	)	$	(39,507,390	)	$	(27,037,500	)
Basic and diluted net loss per share	$	(0.14	)	$	(0.36	)	$	(0.22	)

Except as described above, no other revisions are being made to the financial statements and disclosures presented in the original Form 10-Q. This amended Form 10-Q does not reflect events occurring after the filing of the original Form 10-Q, or modify or update the disclosure contained therein in any other way other than as required to reflect the revisions discussed above. Information in the amended financial statements and disclosures that is not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q with the SEC on November 15, 2013.

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		Page No.

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of September 30, 2013 (Restated and Unaudited) and December 31, 2012	1

	Condensed Consolidated Statements of Operations for the Three-Month Periods Ended September 30, 2013 (Restated and Unaudited) and 2012 (Unaudited)	2

	Condensed Consolidated Statements of Operations for the Nine-Month Periods Ended September 30, 2013 (Restated and Unaudited) and 2012 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2013 (Restated and Unaudited) and 2012 (Unaudited)	4

	Notes to Condensed Consolidated Financial Statements (Restated and Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 6.	Exhibits	38

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Part I. FINANCIAL INFORMATION

Item 1 - FINANCIAL STATEMENTS

Restatement of 2013 Financial Statements

As discussed in Note 2 to the Condensed Consolidated Financial Statements, the Company restated its financial statements for the quarterly period ended September 30, 2013 to correct the accounting for the SkyMall merger.

XHIBIT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2013			2012
ASSETS	(Restated and Unaudited)			(Audited)
Current assets:
Cash	$	5,632,040		$	363,172
Accounts receivable, net		2,863,492			699,207
Inventories		9,204,203			-
Prepaid expenses		2,510,685			79,191
Total current assets		20,210,420			1,141,570

Security deposit		-			32,731
Property and equipment, net		6,110,244			1,429,773
Intangibles, net		167,043,462			2,752,974
Other assets		687,191			-

TOTAL ASSETS	$	194,051,317		$	5,357,048

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	15,240,652		$	363,160
Accrued expenses		1,792,482			168,094
Accrued payroll and related expenses		630,785			109,482
Accrued interest, related parties		44,202			16,164
Customer deposits		17,663,441			-
Revolving line of credit		7,650,000			-
Term debt, related party		5,000,000				-
Notes payable, related parties		1,235,000			700,000
Deferred lease incentive - current portion		-			123,203
Total current liabilities		49,256,562			1,480,103

Deferred rent liability		-			236,476
Deferred lease incentive - non-current portion		-			616,013

Total liabilities		49,256,562			2,332,592

SHAREHOLDERS' EQUITY
Preferred stock, authorized 80,000,000 shares, $0.0001 par value, none issued or outstanding		-			-
Common stock, authorized 480,000,000 shares, $0.0001 par value, 107,839,234 and 67,310,726 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		10,784			6,731
Additional paid-in capital		185,570,318			4,296,682
Accumulated deficit		(40,786,347	)		(1,278,957	)
Total shareholders' equity		144,794,755			3,024,456

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	194,051,317		$	5,357,048

See notes to condensed consolidated financial statements (unaudited)

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XHIBIT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

	2013			2012
Revenues:	(Restated)
Internet marketing revenues	$	2,084,876		$	2,910,099
Net revenues from nutraceutical sales		233,200			-
Merchandise sales, net		10,596,252			-
Placement fees		2,958,325			-
Gift cards and other		4,494,020			-
Total revenues		20,366,673			2,910,099
Cost of revenues:		12,679,536			1,303,730
Gross profit		7,687,137			1,606,369

Operating expenses:
Catalog expenses		1,675,973			-
Sales and marketing		4,351,681			266,158
Customer service and fulfillment		644,385			-
General and administrative		4,349,592			944,080
Non-cash stock-based compensation resulting from sale of stock between affiliate shareholders		27,037,500			-
Impairment charge		2,287,300			-
Restructuring charge		876,924			-
Development expenses		482,299			146,952
Total operating expenses		41,705,654			1,357,190

Income (loss) from operations		(34,018,517	)		249,179
Other income (expense):
Interest expense		(55,412	)		(17,655)
Other income (expense)		(12,283)			637

Income (loss) before income taxes		(34,086,212	)		232,161
Income tax provision		13,556			--
Net income (loss)	$	(34,099,768	)	$	232,161

Net income (loss) per common share:
Basic and diluted	$	(0.31	)	$	0.00

Weighted-average shares used to calculate net income (loss) per common share:
Basic and diluted		109,960,598			66,632,691

See notes to condensed consolidated financial statements (unaudited)

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XHIBIT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

	2013			2012
Revenues:	(Restated)
Internet marketing revenues	$	5,168,138		$	7,419,332
Net revenues from nutraceutical sales		7,094,136			-
Merchandise sales, net		16,003,383			-
Placement fees		4,649,961			-
Gift cards and other		6,987,851			-
Total revenues		39,903,469			7,419,332
Cost of revenues:		26,413,069			4,139,066
Gross profit		13,490,400			3,280,266

Operating expenses:
Catalog expenses		2,435,336			-
Sales and marketing		7,979,897			754,419
Customer service and fulfillment		958,626			-
General and administrative		10,103,656			2,438,497
Non-cash stock-based compensation resulting from sale of stock between affiliate shareholders		27,037,500			-
Impairment charge		2,287,300			-
Restructuring charge		876,924			-
Development expenses		1,127,780			336,777
Total operating expenses		52,807,019			3,529,693

Loss from operations		(39,316,619	)		(249,427	)
Other income (expense):
Interest expense		(108,838	)		(37,323	)
Other income (expense)		4,828			637
Loss on debt conversion		(66,431	)		-
Loss before income taxes		(39,487,060	)		(286,113)
Income tax provision		20,330			-

Net loss	$	(39,507,390	)	$	(286,113	)

Net loss per common share:
Basic and diluted	$	(0.44	)	$	(0.00	)

Weighted-average shares used to calculate net loss per common share:
Basic and diluted		90,480,880			61,714,643

See notes to condensed consolidated financial statements (unaudited)

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XHIBIT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

	2013			2012
Cash flows from operating activities:	(Restated)
Net loss	$	(39,507,390	)	$	(286,113	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,097,768			61,740
Non-cash stock-based compensation		2,627,758			-
Expenses paid by shareholder and donated to the company		-			11,185
Tenant improvement allowance		(92,402)			(20,534	)
Loss on debt conversion		66,431			-
Non-cash stock-based compensation resulting from the sale of stock between affiliate shareholders		27,037,500			-
Impairment charge		2,287,300			-
Restructuring charge		876,924				-
Bad debt expense		813,038			-
Non-cash interest expense for amortization of deferred financing costs		12,283				-
Changes in operating assets and liabilities:
Accounts receivable		915,856			(4,007)
Accounts receivable, related party		-			8,750
Inventories		8,181,643			-
Prepaid expenses		(788,499	)		43,483
Other assets		(183,634	)		-
Accounts payable		(3,509,826	)		205,847
Accrued expenses		(17,311)	(		-
Accrued payroll and related expenses		(213,203)			-
Accrued interest, related parties		28,038			-
Accounts payable, related party		-			(14,820	)
Deferred rent liability		33,437			165,195
Customer deposits		(7,273,271	)		-
Net cash provided by (used in) operating activities		(6,607,560	)		170,726

Cash flows from investing activities:
Cash acquired in SkyMall merger		4,369,535			-
Purchases of property and equipment		(1,083,310	)		(619,554	)
Net cash provided by (used in) investing activities		3,286,225			(619,554	)

Cash flows from financing activities:
Borrowings on bank line of credit		2,900,000			-
Term debt borrowings		5,000,000			-
Deferred financing fees paid		(294,797)				-
Proceeds from note payable to related party		1,035,000			700,000
Repayment of note payable to related party		(50,000)			(333,516	)
Net cash provided by financing activities		8,590,203			366,484

Net increase (decrease) in cash		5,268,868			(82,344	)
Cash, beginning of period		363,172			241,077
Cash, end of period	$	5,632,040		$	158,733

Supplemental disclosure of non-cash financing activities:
Issuance of common stock in connection with note conversion	$	450,000		$	-
Issuance of common stock in connection with merger		151,096,000			-
Stock cancellation		444			-
Shares issued for intangible assets acquired					2,908,200
Construction in progress paid for with tenant improvement allowance		-			790,550

Cash paid for:
Interest	$	96,555		$	25,000
Taxes		20,330			-

See notes to condensed consolidated financial statements (unaudited)

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XHIBIT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Restated and Unaudited)

NOTE 1 - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Organization and Business

Xhibit Corp. (the “Company” or “Xhibit”), f/k/a NB Manufacturing, Inc., was incorporated on September 19, 2001 in the State of Nevada. The original purpose of the Company was to provide manufacturing services. Effective November 12, 2012 the Company changed its legal name from NB Manufacturing, Inc. to Xhibit Corp. by amending its Articles of Incorporation with the State of Nevada.

On September 4, 2012, the merger contemplated by a merger agreement dated as of April 25, 2012 by and among Xhibit, NB Manufacturing Subsidiary, LLC, a Nevada limited liability company (the "Merger Sub"), Xhibit Interactive, LLC ("Interactive"), a Nevada limited liability company, f/k/a Xhibit, LLC, and a certain director and officer of the then NB Manufacturing, Inc. (the "Merger Agreement"), as amended as of May 23, 2012, was completed as of the filing of Articles of Merger with the Secretary of State of the State of Nevada, merging the Merger Sub into Interactive (the “Merger”).

As a result of the Merger and pursuant to the Merger Agreement, Interactive became a wholly-owned subsidiary of the Company, and on June 4, 2012, the Company issued 55,383,452 shares of its common stock to holders of units of Interactive at a rate of 1.2641737582 shares of the Company's common stock for each Interactive unit.

Immediately following the Merger, Xhibit had 66,583,676 shares of common stock outstanding and no derivative securities outstanding. The former members of Interactive owned 83.2% of Xhibit's outstanding securities, and Xhibit's shareholders owned 16.8% of Xhibit's outstanding securities.

Interactive was organized on July 18, 2011 as a Nevada limited liability company. On August 9, 2011, Interactive entered into a Unit Exchange Agreement whereby the members of SpyFire Interactive, LLC (“SpyFire”) and Stacked Digital, LLC (“Stacked”) exchanged 100% of their membership units for 18,292,319 of Interactive’s units. Concurrent with this transaction, SpyFire and Stacked became wholly-owned subsidiaries of Interactive. On September 21, 2012, Interactive filed with the State of Nevada an Amendment to its Articles of Organization to change the name of Xhibit, LLC to Xhibit Interactive, LLC.

On January 20, 2012 Interactive formed Xhibit, d.o.o., a wholly-owned Bosnian subsidiary, for the purpose of hiring highly skilled software coders, programmers and developers to provide the Company with high quality and economical in-house product development capabilities.

On May 24, 2012, the Company, through its wholly-owned subsidiary Interactive, acquired Social Bounce, LLC (“Bounce”), a social media and online game development company founded on August 2, 2011. Bounce was acquired to obtain intellectual property for the Company’s online and mobile gaming and social media platforms. Bounce had nominal assets and no operations prior to May 24, 2012. Bounce was merged into Interactive and Bounce ceased to exist.

On June 29, 2012, the Company formed a new wholly-owned subsidiary, FlyReply Corp. (“FlyReply”), and launched its newly developed product through this company, which provides turn-key cloud based marketing CRM solutions on a subscription basis to customers. This product was discontinued in September 2013.

On September 24, 2012, the Company acquired various intellectual property assets owned by several individuals and private companies giving it the right to the source code, software, database, websites and domain names previously owned or operated by Radio Connect, LLC, Twit Yap, LLC and Star Connect, LLC which the Company now refers to as its TwitYap social media properties. The Company obtained these assets for a total issuance of 727,050 shares of common stock. Refer to Notes 6 and 11 for further information related to the Company’s TwitYap properties.

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On December 1, 2012, the Company entered into a Marketing Services Agreement with WAT Works, LLC, a Utah limited liability company ("WAT Works"). The Company also hired five employees (including a 50% equity holder in WAT Works) at salaries ranging from $7,500 to $11,000 per month plus a bonus pool of five percent (5%) of EBITDA generated by these five at will employees in the consumer nutraceutical products industry. The Company’s agreement with WAT Works engaged it to select products developed by third party formulators and manufacturers and assist us in marketing this line of health and wellness related consumer products and services. The Company agreed to pay WAT Works its direct costs in delivering these services, which included reimbursement for rent (as they operate out of an office in Salt Lake City, Utah), reimbursement for manufacturing and formulation costs paid to a third party, and payment of a contractor for sales tracking software development. This Marketing Services Agreement was terminated on June 30, 2013 at no cost to the Company. During the first nine months of 2013, a majority of Interactive's revenues were generated by these five employees from the sales of a weight loss product, colon cleanser and green coffee supplement. Sales have been made in the United States, Australia and South Africa. During the quarter ended June 30, 2013, the Company discontinued all sales of nutraceutical products but continued to conduct internet marketing and advertising campaigns for customers that sell their own nutraceutical products through October 31, 2013 when all third party sales of nutraceutical products were discontinued as well.

On May 16, 2013, the Company entered into an Agreement and Plan of Merger (the “SkyMall Merger Agreement”), among Xhibit, Project SMI Corp., a Delaware corporation and wholly-owned subsidiary of Xhibit (“SMI Merger Sub”), SHC Parent Corp., a Delaware corporation (“SHC”), and TNC Group, Inc., an Arizona corporation and Stockholder Representative for the SHC stockholders. Pursuant to the terms of the Merger Agreement, on May 16, 2013, SMI Merger Sub merged with and into SHC (the “SkyMall Merger”), with SHC surviving the SkyMall Merger as a wholly-owned subsidiary of Xhibit. SHC is the parent corporation of SkyMall Interests, LLC, a Delaware limited liability company (“Interests”), SkyMall, LLC, a Delaware limited liability company (“SkyMall, LLC”), and SkyMall Ventures, LLC, a Delaware limited liability company (“Ventures,” and, with SHC, Interests and SkyMall, LLC, the “SkyMall Companies” or "SkyMall"). The Company issued 44,440,000 shares of common stock to the former shareholders of SHC as part of the SkyMall Merger.

Xhibit, through its subsidiaries other than the SkyMall Companies, is an online marketing and digital advertising company providing targeted and measurable online advertising campaigns and programs for a broad base of advertisers and advertising agency customers. The Company enables marketers to advertise and sell their products and services through major online marketing channels including display advertising and affiliate marketing networks.

The SkyMall Companies operate (i) SkyMall, a multi-channel, direct marketer offering a wide array of merchandise from numerous direct marketers and manufacturers through the SkyMall catalog and website, SkyMall.com; and (ii) SkyMall Ventures, a provider of merchandise, gift cards and experiential rewards reaching millions of loyalty program members in various corporate and other loyalty programs throughout the United States.

SkyMall’s loyalty business provides turnkey strategy, creative and fulfillment solutions for numerous customer programs operated by internationally-recognized brands such as Marriott Rewards, Caesar’s Entertainment and Capital One. SkyMall’s proprietary technology system allows SkyMall to precisely manage merchandise procurement across a vast network of vendors to ensure that the most current products are available for loyalty program members. In addition, SkyMall designs, develops and hosts the websites and manages the entire ecommerce transaction process from order placement to shipment and customer service. For example, some sites feature the ability to include: (i) mixed payment options (the ability to combine points and dollars); (ii) multiple currencies and languages; and (iii) auctions.

SkyMall’s loyalty merchandising solutions are co-branded or private-labeled and offer a full suite of services, including development of marketing plans and strategies, product assortment selection and sourcing, website design, development and hosting, customer service support and reporting and analysis. Most of the Company's consolidated revenues now come from the SkyMall Companies.

On July 31, 2013, Chris Richarde resigned from his positions as President and Chairman of the Company and from all positions held in the Company’s subsidiaries. On August 6, 2013, the Company, and certain of its subsidiaries, entered into a Mutual Release Agreement (the "Release Agreement") with Mr. Richarde. As a condition of the Release Agreement, Mr. Richarde sold 5,000,000 of his shares to a shareholder of the Company, 15,000,000 shares to X Shares, LLC (“X Shares”), an entity controlled by Jahm Najafi who is a member of the Company’s Board of Directors and the Company’s majority shareholder through beneficial ownership, and canceled 4,440,064 of his shares (Note 16). Upon completion of the sales and cancellation of the shares at closing, Mr. Richarde retained 20,000,000 shares of the Company’s common stock and was the Company’s second largest shareholder.

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Basis of Presentation and Principles of Consolidation

The condensed consolidated interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed interim financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report to the Securities and Exchange Commission for the fiscal year ended December 31, 2012, filed on Form 10-K on April 16, 2013.

The condensed consolidated financial statements include the accounts of Xhibit and its wholly-owned subsidiaries which include the accounts and transactions of SHC Parent Corp. and its subsidiaries from the May 16, 2013 merger date. All material intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, all adjustments necessary to summarize fairly the financial position and results of operations for such periods in accordance with accounting principles generally accepted in the United States of America have been recorded. All such adjustments are of a normal recurring nature. The results of operations for the most recent interim period are not necessarily indicative of the results to be expected for the full year.

Going Concern and Management Plans

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. The Company has incurred a loss from operations for the nine-month period ended September 30, 2013 of $12,279,119, has used $6,607,560 in cash for operating activities through this current nine-month period, and has a working capital deficit of $29,046,142 at September 30, 2013. As a result of these factors, a risk exists regarding the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.

A multi-step plan was adopted by management to enable the Company to continue to operate and begin to report operating profits. The highlights of that plan are:

·	Elimination of unprofitable business units and product offerings.

·	Integration of the heritage Xhibit and SkyMall operations to gain better efficiencies.

·	Aggressively seek new and additional sales opportunities.

·	Improve product gross margins through product sourcing efficiencies.

NOTE 2 - RESTATEMENT

As disclosed in a Current Report on Form 8-K the Company filed with the SEC on April 16, 2014, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) determined on April 11, 2014 that the Company’s previously filed financial statements for: (i) the three and six month periods ended June 30, 2013 included in the Form 10-Q filed with the SEC on August 19, 2013 and (ii) the three and nine month periods ended September 30, 2013 included in the Form 10-Q filed with the SEC on November 15, 2013 needed to be restated to correct the accounting for the merger with SkyMall (the “SkyMall Merger”) in such financial statements. The Audit Committee’s determination was based upon its analysis of issues raised in comment letters from the SEC related to the Company’s accounting for the SkyMall Merger.

When the Company originally recorded the SkyMall Merger, the Board of Directors did not believe the market price for Xhibit’s common stock on the merger date was reliable and/or representative of fair value. Accordingly, the Company valued the SkyMall Merger based on the fair value of the assets acquired and liabilities assumed. The Company has now performed a re-assessment of the SkyMall Merger fair value and has determined that an active market for Xhibit’s common stock existed and, accordingly, the fair value of the shares issued to former owners of SkyMall (the “Merger Shares”) should have been used to value the SkyMall Merger.

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Based on its reassessment of the SkyMall Merger fair value, the Company has recorded additional consideration of $125,596,000 for the SkyMall Merger. The Company engaged an independent valuation firm to assist with a purchase price allocation based on the revised valuation.

The following table shows the effects of the restatement on the Company’s purchase price allocation for the assets acquired and liabilities assumed in the SkyMall Merger as of May 17, 2013:

	As of May 17, 2013
	As Previously Recorded			As Restated			Variance
Current assets	$	27,297,780		$	27,297,780		$	-
Property and equipment		5,267,121			5,267,121			-
Amortizable intangible assets		19,780,000			19,430,000			(350,000	)
SkyMall tradename		7,170,000			7,170,000			-
Goodwill		15,622,726			141,568,726			125,946,000
Other assets		221,043			221,043			-
Liabilities assumed		(49,858,670	)		(49,858,670	)		-
	$	25,500,000		$	151,096,000		$	125,596,000

	As of September 30, 2013
	As Previously Recorded			As Restated			Variance
Total current assets	$	20,210,420		$	20,210,420		$	-
Total assets	$	68,455,317		$	194,051,317		$	125,596,000
Total current liabilities	$	49,256,562		$	49,256,562		$	-
Total liabilities	$	49,256,562		$	49,256,562		$	-
Additional paid-in capital	$	32,936,818		$	185,570,318		$	152,633,500
Accumulated deficit	$	(13,748,847	)	$	(40,786,347	)	$	(27,037,500	)
Total stockholders' equity	$	19,198,755		$	144,794,755		$	125,596,000

	Three Month Period Ended September 30, 2013
	As Previously Recorded			As Restated			Variance
Revenues	$	20,366,673		$	20,366,673		$	-
Gross profit	$	7,687,137		$	7,687,137		$	-
Total operating expenses	$	14,668,154		$	41,705,654		$	27,037,500
Loss from operations	$	(6,981,017	)	$	(34,018,517	)	$	(27,037,500	)
Net loss	$	(7,062,268	)	$	(34,099,768	)	$	(27,037,500	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.31	)	$	(0.25	)

	Nine Month Period Ended September 30, 2013
	As Previously Recorded			As Restated			Variance
Revenues	$	39,903,469		$	39,903,469		$	-
Gross profit	$	13,490,400		$	13,490,400		$	-
Total operating expenses	$	25,769,519		$	52,807,019		$	27,037,500
Loss from operations	$	(12,279,119	)	$	(39,316,619	)	$	(27,037,500	)
Net loss	$	(12,469,890	)	$	(39,507,390	)	$	(27,037,500	)
Basic and diluted net loss per share	$	(0.14	)	$	(0.43	)	$	(0.29	)

NOTE 3 -SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Xhibit Corp. and all of its subsidiaries. All significant intercompany accounts have been eliminated in consolidation.

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates utilized in the preparation of financial statements are prudent and reasonable. Actual results could differ from these estimates.

Accounts Receivable and Allowance for Doubtful Accounts

Receivables are recorded at the gross sales price of products sold to customers on trade credit terms. The Company estimates the allowance for doubtful accounts based on an analysis of specific customers, taking into consideration the age of past due accounts, historical trends and an assessment of the customer’s ability to pay. The adequacy of the allowance is evaluated each month as part of the month-end closing activities and all customer accounts are reviewed. Established guidelines as well as professional judgment are used in establishing the allowance. Receivables that prove to be uncollectible after prescribed collection efforts have been exhausted are written-off by a charge to the allowance for doubtful accounts. Recoveries of receivables previously written off are recorded when received. Interest is not charged on overdue receivables, nor is collateral obtained on any amounts due.

Inventories

The Company supplies and fulfills retail gift cards to third party loyalty programs that make the Company’s retail gift cards available to their members upon redemption of accumulated loyalty points or miles. The Company maintains a gift card inventory and assumes all risks associated with the inventory.

Paper inventory consists principally of paper held for future catalog editions, and is stated at lower of cost or market. Cost is determined using the first-in, first-out method. There is no paper inventory on hand that management believes to be obsolete or slow-moving.

Intangible Assets

Intangible assets consist primarily of the “SkyMall” tradename, the SkyMall loyalty program partner relationships, merchant relationships, customer relationships, purchased technology and non-compete agreements which are recorded at their estimated fair value at the date of acquisition. For intangible assets with finite lives, the pattern in which the economic benefit of the assets will be consumed is evaluated based on projected usage or production of revenues. The Company considers certain factors when assigning useful lives such as legal, regulatory and contractual provisions as well as management’s judgment, the effects of obsolescence, demand, competition and other economic factors. Intangible assets are amortized using the straight-line method over their estimated useful lives ranging from two to eight years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Refer to Notes 6 and 11 for further information related to the Company’s intangible assets.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment annually or whenever events or changes in circumstances indicate that an impairment may have occurred. The Company performs an annual impairment assessment, or whenever events or circumstances indicate impairment may have occurred. Effective January 1, 2013, the Company began operating two reporting segments (Internet Marketing and Nutraceutical Products) and upon consummation of the SkyMall Merger in May 2013, the Company began operating a third reporting unit (SkyMall). Beginning in 2013, the Company evaluates the need for an impairment charge for goodwill recorded in each reporting unit based on the fair value of the respective reporting unit. No impairment charge for goodwill was recorded during the three month period ended September 30, 2013 but goodwill was substantially impaired at December 31, 2013 (Note 19).

Revenue Recognition

The Company recognizes revenue when all of the following criteria have been met: 1) persuasive evidence of an arrangement exists, 2) no significant Company obligations remain, 3) delivery has occurred, 4) collection of the related receivable is reasonably assured, and 5) the fees are fixed or determinable.

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The Company evaluates the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is the primary obligor in a transaction, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded at the gross sales price. If the Company is not the primary obligor in the transaction or amounts earned are determined using a fixed percentage, revenue is recorded on a net basis.

Internet marketing revenue:

The Company recognizes revenue at the time services are performed and sales are generated on behalf of their customers. Revenue is presented on a gross basis, net of discounts and allowances.

Net nutraceutical sales:

Revenue from product sales and gross outbound shipping and handling charges, are recognized upon receipt of the product by the customer. Nutraceutical products are contract manufactured, packaged and stored by third parties. Finished product is invoiced to the Company at the time of direct shipment, by the third-party fulfillment center, to the customer. In accordance with the Company’s revenue recognition policy, the Company establishes a deferred revenue liability equal to five days which represents products that have shipped, but have not yet been received by the customers at the end of a given period. Sales for the last five days in September 2013 were immaterial and therefore the Company did not record deferred revenue at September 30, 2013.

The Company's sales terms allow customers certain limited rights of return for a period of 30 days. The Company recorded no reserve for returns at September 30, 2013.

Net merchandise sales:

The Company recognizes revenue from merchandise sales when acting as the primary obligor upon shipment of product to customers by participating merchants, net of estimated returns and allowance. Certain merchandise sales are reported on a net basis because the Company acts as an agent in the sale rather than as the primary obligor. Variable margin revenue is recognized as merchandise sales on a net basis at the time a customer places an order and is based on a percentage of the merchandise sales price.

Sales and use taxes charged to customers and incurred by the Company are shown net in the consolidated statements of income.

Gift card sales:

The Company has a gift card program which provides fulfillment of gift cards for large loyalty programs that offer gift card reward options in their program. The Company recognizes revenue from gift card sales when acting as the primary obligor upon shipment of product to customers, net of estimated returns and allowance. Under certain of its partner agreements, the Company earns a margin that is charged in addition to the cost of the gift card. For these sales, the Company records gift card revenue for only the margin amount.

Placement fees:

Placement fees include margin amounts paid to the Company by participating merchants for inclusion of their products in the Company's catalogs. Placement fees can be either fixed or combined with other variable arrangements depending on the agreement the Company has with the participating merchant. Placement fee revenue is recognized on a straight-line basis over the circulation period of the catalog, which is generally three months. Placement fees billed in advance of distribution of the related catalog are recorded as a contra receivable account.

Shipping and handling costs

Amounts billed to customers related to shipping and handling costs ($2,267,756 and zero for the nine months ended September 30, 2013 and 2012, respectively) are recorded as other revenues. Shipping and handling costs incurred by the Company are classified as cost of goods sold in the consolidated statements of operations.

Catalog expenses

Catalog production costs include expenses related to creating, printing and distributing the SkyMall in-flight catalog and various loyalty program catalogs. The Company expenses catalog production costs over the circulation period of the catalog, which is generally three months.

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Advertising

The Company expenses advertising costs when such costs are incurred.

Stock-based Compensation

The Company accounts for stock-based compensation by using the Black-Scholes-Merton option valuation model to estimate the fair value of stock options issued, estimating the expected forfeiture rate, and recognizing expense for the options expected to vest over the requisite service/vesting period. Refer to Note 15 for further information and required disclosures related to stock-based compensation.

Concentrations and Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and accounts receivable. All cash balances are maintained in two financial institutions that have been determined by management to maintain a high credit rating. From time to time, the Company’s cash balances may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As part of its cash management process, the Company performs periodic evaluations of these financial institutions. Regarding trade accounts receivable, the Company minimizes its credit risk by performing credit evaluations of its customers and /or limiting the amount of credit extended. Accounts receivable balances are carried net of any allowances for doubtful accounts.

Business Combination

The Company’s completion of its merger with the SkyMall Companies on May 16, 2013 has resulted in the recording of goodwill and identifiable definite-lived intangible assets. The Company recognizes all of the assets acquired and liabilities assumed at their fair values on the acquisition date. The Company has used significant estimates and assumptions, including fair value estimates, as of the merger date and may refine those estimates that are provisional, as necessary, during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which new information may be gathered about facts and circumstances that existed as of the acquisition date to adjust the provisional amounts recognized. Measurement period adjustments are applied retrospectively. All other adjustments are recorded to the consolidated statements of operations. The Company did not record any measurement period adjustments during the nine month period ended September 30, 2013. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred and are generally included in general and administrative expenses in the consolidated statements of operations. The Company determines the useful lives for definite-lived tangible and intangible assets and liabilities assumed using estimates and judgments.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. This method requires that the current or deferred tax consequences of all events recognized in the financial statements be measured by applying the provisions of enacted tax laws to determine the amounts of taxes payable or refundable currently, and the deferred tax assets and liabilities attributable to temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax assets are reviewed for recoverability and the Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that all or some portion of the deferred tax assets will not be recovered.

The Company recognizes and measures uncertain tax positions using a more-likely-than-not approach. The Company had no material uncertain tax positions at September 30, 2013 or December 31, 2012.

Comprehensive Income (Loss)

Components of comprehensive income or loss, including net income or loss, are reported in the financial statements in the period in which they are recognized. Comprehensive income or loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss) are reported net of any related tax effect to arrive at comprehensive income (loss). The Company did not have any items of comprehensive income (loss) for the nine month periods ended September 30, 2013 or 2012.

Reclassification

Certain amounts in the 2012 financial statements have been reclassified to conform to the 2013 financial presentation. Such reclassifications were not material individually or in the aggregate.

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Recent Accounting Pronouncements

With the exception of the below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2013, as compared to the recent accounting pronouncements described in Xhibit’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, that are of significance, or potential significance, to the Company’s condensed consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is permitted. ASU 2013-11 was early adopted by the Company effective April 1, 2013 and had no impact on the Company’s condensed consolidated financial statements.

NOTE 4 - ACCOUNTS RECEIVABLE

Accounts receivable consist of the following at September 30, 2013 and December 31, 2012:

	9/30/2013			12/31/2012
Trade receivables	$	10,154,468		$	699,207
Merchant bank receivables		313,676			-
Placement fees billed in advance of distribution		(5,950,636	)		-
Allowance for doubtful accounts		(1,654,016	)		-
	$	2,863,492		$	699,207

The Company had outstanding balances in accounts receivable from two customers representing 58% of trade receivables at September 30, 2013. Revenues from these two customers represented 40% and 32% of total revenues for the three and nine-month periods ended September 30, 2013, respectively. No other customers represented greater than 10% of net revenues in the three and nine-month periods ended September 30, 2013 or total trade receivables at September 30, 2013.

At December 31, 2012, trade receivables from two customers represented approximately 67% of the total trade receivable balance. During the three and nine-month periods ended September 30, 2012, the Company had three customers in each period that represented approximately 64% and 60% of revenues for the respective periods. No other customers represented greater than 10% of net revenues for the three and nine-month period ended September 30, 2012 or total trade accounts receivable at December 31, 2012.

NOTE 5 - INVENTORIES

Inventories consist of the following as of September 30, 2013:

Gift cards	$	4,950,248
Prepaid gift cards		3,753,085
Paper and other		500,870
	$	9,204,203

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Prior to its merger with SkyMall, the Company carried no inventory. At September 30, 2013, the Company does not hold any nutraceutical product inventory. Prepaid gift cards consist of gift cards which have been paid for but not yet received by the Company.

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of September 30, 2013 and December 31, 2012:

	9/30/2013			12/31/2012
Computers, office equipment and software	$	2,256,471		$	102,170
Furniture, fixtures and other		194,735			104,522
Buildings and improvements		3,971,880			-
Leasehold improvements		-			1,344,595
		6,423,086			1,551,287
Less accumulated depreciation		(365,255	)		(121,514	)
Construction in progress		52,413			-
	$	6,110,244		$	1,429,773

Depreciation expense was $294,052 and $50,852 for the three-month periods ended September 30, 2013 and 2012, respectively and $505,386 and $61,740 for the nine-month periods ended September 30, 2013 and 2012, respectively.

During September 2013, the Company relocated its corporate office. As part of this office relocation, leasehold improvements totaling $1,426,219 and related accumulated depreciation totaling $256,864 were written off (Note 13).

NOTE 7 - INTANGIBLE ASSETS

Intangible assets consist of the following at September 30, 2013 and December 31, 2012:

	Life	9/30/2013			12/31/2012
Amortizing intangible assets:
Loyalty partner relationships	8 years	$	13,800,000		$	-
Merchant relationships	5 years		4,570,000			-
Technology	3 years		-			1,666,399
Non-compete agreements	2 years		290,000			1,241,801
Internally developed software	4 years		550,000			-
Customer database	4 years		220,000			-
			19,430,000			2,908,200
Accumulated amortization			(1,125,264	)		(155,226
			18,304,736			2,752,974
SkyMall tradename			7,170,000			-
Goodwill			141,568,726			-
		$	167,043,462		$	2,752,974

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At September 30, 2013, the Company determined that the fair value of its TwitYap technology and non-compete agreement intangible assets was less than the carrying value and an impairment charge of $2,287,300 was recorded. See Note 11 for discussion of the facts and circumstances leading to the impairment charge and the method used for calculating fair value.

Amortization expense was $913,968 and $1,597,167 for the three and nine-month periods ended September 30, 2013, respectively. No amortization expense was recorded for the three and nine-month periods ended September 30, 2012.

Future expected amortization expense for each of the five succeeding calendar years and thereafter is:

2013	$	752,875
2014		3,011,500
2015		2,942,750
2016		2,901,500
2017		2,771,813
Thereafter		6,274,297
	$	18,654,735

NOTE 8 – REVOLVING LINE OF CREDIT

On May 10, 2013, the SkyMall Companies entered into a $7,650,000 revolving line of credit note with JPMorgan Chase Bank, N.A. (the “Bank Line”) that refinanced an existing line of credit. The Bank Line expires on June 30, 2014 and interest on outstanding borrowings is payable monthly at a rate of LIBOR plus 0.5%. The Bank Line is fully guaranteed by, and secured by all of the assets of, Xhibit and its subsidiaries, including the SkyMall Companies, pursuant to Continuing Guarantees and Continuing Security Agreements of Xhibit and each of its subsidiaries. In addition to the guaranties provided by the Company, the Credit Facility is also guaranteed by an affiliate company controlled by Mr. Najafi, a member of the Company's Board of Directors and the Company’s majority shareholder through beneficial ownership. At September 30, 2013, there was $7,650,000 outstanding under the Bank Line.

NOTE 9 – TERM DEBT - RELATED PARTY

On September 18, 2013, the Company borrowed $5,000,000 from an entity controlled by Mr. Najafi, a member of the Company’s Board of Directors and the Company’s majority shareholder through beneficial ownership (the “Term Debt”). The Term Debt matures on September 18, 2014 and interest is payable monthly at a rate of LIBOR plus 4.5%. The Term Debt is junior to the Bank Line but is fully guaranteed by, and secured by all of the assets of, Xhibit and its subsidiaries, including the SkyMall Companies pursuant to Continuing Guarantees and Continuing Security Agreements of each of Xhibit and its subsidiaries; a Leasehold Deed Of Trust, Assignment Of Rents And Leases, Security Agreement And Fixture Filing executed by SkyMall, LLC; a Trademark Collateral Agreement executed by SkyMall, LLC; and a Trademark And Copyright Collateral Agreement executed by the Company.

NOTE 10 - NOTES PAYABLE - RELATED PARTIES

On March 27, 2012, Interactive issued an unsecured promissory note in the amount of $500,000 to one of its members. The note had a maturity date, as amended, of December 31, 2012 and included interest at a simple rate of 10% per annum. On January 11, 2013 the note was cancelled. In exchange for the cancellation, the Company issued 71,429 shares of common stock to the note holder and issued a new note in the amount of $250,000, which bears interest at a 10% annual rate and has a maturity date of December 31, 2013. As a result, the Company recorded a loss on the conversion of debt in the amount of $32,145. Through September 30, 2013, the Company has made principal payments totaling $50,000. At September 30, 2013 the remaining outstanding balance due on the note is $200,000.

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On May 29, 2012, Interactive issued an unsecured promissory note in the amount of $200,000 to one of its members. The note had a maturity date, as amended, of December 31, 2012 and included interest at a simple rate of 10% per annum. On January 14, 2013 the note was cancelled. In exchange for the cancellation, the Company issued 57,143 shares of common stock to the note holder. As a result, the Company recorded a loss on the conversion of debt in the amount of $34,286.

On March 28, 2013, the Company issued an unsecured promissory note in the amount of $100,000 to one of its shareholders. The note bears interest at a simple rate of 10% per annum and is due and payable on March 28, 2014.

On April 15, 2013, the Company issued unsecured promissory notes in the aggregate principal amount of $375,000 to four of its shareholders. The notes bear interest at a fixed amount equal to 10% of the principal amount and are due and payable on March 31, 2014.

On April 30, 2013, the Company issued unsecured promissory notes in the aggregate principal amount of $210,000 to two of its shareholders. The notes bear interest at a fixed amount equal to 10% of the principal amount and are due and payable on March 31, 2014.

On May 29, 2013, the Company issued unsecured promissory notes in the aggregate principal amount of $350,000 to two of its shareholders. The notes bear interest at a fixed amount equal to 10% of the principal amount and are due and payable on May 31, 2014.

NOTE 11 – SHAREHOLDERS’ EQUITY

On February 14, 2012, the Company's Board of Directors approved an 8 for 1 forward stock split of its Common Stock with a record date of March 1, 2012. In connection with the stock split the Board of Directors also approved an increase in the Company’s authorized shares of Common Stock from 60,000,000 shares to 480,000,000 shares and Preferred Stock from 10,000,000 to 80,000,000 shares. Pursuant to Nevada Revised Statutes 78.207, a forward stock split that is conducted at the same time as a corresponding increase in the authorized shares of the Company’s capital stock does not require shareholder approval. The Company filed a Certificate of Change with the Nevada Secretary of State showing the changes to the Company's authorized capital stock on February 23, 2012, with an effective date of the close of business on February 29, 2012. The stock split has been retroactively reflected in these financial statements.

On July 31, 2013, Mr. Richarde resigned from his positions as President and Chairman of the Company and from all positions held in the Company’s subsidiaries. On August 6, 2013, the Company, and certain of its subsidiaries, entered into a Mutual Release Agreement with Mr. Richarde (the "Release Agreement"). Pursuant to the Release Agreement, as amended in September 2013, Mr. Richarde agreed to sell 20,000,000 of his shares to two individuals, one of whom is a member of the Xhibit Board of Directors, and cancel 4,440,064 of his shares. Upon completion of the sales and cancellation of the shares at closing, Mr. Richarde retained 20,000,000 shares of the Company’s common stock.

NOTE 12 – FAIR VALUE MEASUREMENTS

The carrying value of the Company’s financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and notes payable approximate fair value because of the short maturities of those instruments.

The Company has no assets or liabilities measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with GAAP (for example when there is evidence of impairment).

During September 2013, the Company elected to terminate all further TwitYap development work and is currently evaluating future uses of the social media applications. Based on this decision, the following impairment charge was recorded in September 2013 against the remaining TwitYap intangible asset values:

Technology	$	1,666,400
Non-compete agreements		620,900
	$	2,287,300

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NOTE 13 - COMMITMENTS AND CONTINGENCIES

On November 9, 2011, Interactive entered into a lease agreement for corporate office space in Tempe, Arizona. Under the terms of the agreement, the Company made a payment of $250,000 in 2011 for prepaid rent to be applied to the first nine months’ rent beginning with the commencement date of June 1, 2012. The lease has pre-established annual rent increases and the original lease term ends in December 2018. The lease has an option to extend for an additional five years. The Company was also granted a $790,550 tenant improvement allowance. This allowance was used for the leasehold improvements completed on August 1, 2012. Accordingly, the Company recorded the tenant improvement allowance as a deferred lease incentive, and began amortizing the costs on August 1, 2012. In connection with the Company's restructuring plan, the Company ceased the use of its Tempe office during September 2013; as a result, the deferred lease incentive was written off. Refer to Note 14 for further information related to the Company's restructuring plan.

In August 2012, the Company entered into a lease agreement with ABC Internet Media (“ABC”), owned by its Chief Technology Officer, to lease approximately 4,900 square feet of office space in Banja Luka, Bosnia and Herzegovina. The lease requires monthly payments of 13,500 denominated in the Bosnian Mark; however it is paid in United States dollars, and can fluctuate month to month depending on the exchange rate. This lease has a term of seven years and terminates on August 1, 2019.

The Company entered into a non-cancelable automobile lease in April 2012 for a car for an employee. The lease requires fixed monthly payments of $1,063 and expires in April 2015. The Company has the option to purchase the vehicle at the end of the lease.

The Company has a lease for land on which SkyMall’s offices are located. The Company has negotiated a renewal of its land lease in which the renewal term extends through 2015 for the entire leased property and through 2035 for the portion of the land currently used by the Company. The Company receives rents through a sublease on a portion of the leased land.

Future minimum payments, not including the lease extension discussed above, net of receipts due under related subleases are as follows:

2013	$	157,388
2014		641,198
2015		656,751
2016		583,250
2017		604,854
Thereafter		1,575,162
	$	4,218,603

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NOTE 14 – RESTRUCTURING CHARGE

During the third quarter of 2013, the Company implemented a restructuring plan to reduce operating costs. The Company incurred a restructuring charge of $876,924 comprised of severance benefits and lease exit costs to consolidate the Company’s workforce into one location. The activity in the accrued restructuring balance is included in accrued expenses in the accompanying condensed consolidated balance sheet for the three-month period ended September 30, 2013 was as follows:

	2013 Q3 Restructuring Charges		2013 Q3 Write-Offs			2013 Q3 Cash Payments			Accrual Balance at 9/30/13

Workforce reduction	$	251,568	$	-		$	(74,760	)	$	176,808
Lease exit costs		625,356		(285,359	)		-			339,997
Total	$	876,924	$	(285,359	)	$	(74,760	)	$	516,805

The lease exit cost write-offs in September 2013 consisted of the following assets and liabilities:

Leasehold improvements	$	1,426,219
Accumulated depreciation		(256,864	)
Security deposit		32,731
Deferred lease incentive		(646,814	)
Deferred rent liability		(269,913	)
	$	285,359

NOTE 15 - STOCK-BASED COMPENSATION

In conjunction with the SkyMall Merger, the Company issued 400,000 shares of its common stock on July 9, 2013 to an individual as consideration for consulting services provided to the Company in connection with the SkyMall Merger. The stock-based compensation expense of $1,600,000 (based upon the trading price of $4.00 per share on the OTCBB) was recorded in general and administrative expenses during June 2013.

On August 30, 2012, the Company’s Board of Directors adopted the Xhibit Corp. 2012 Stock Option Plan (the “Option Plan”). Under the Option Plan the Company may issue up to an aggregate total of 13,000,000 incentive or non-qualified options to purchase the Company’s common stock. On May 13, 2013, the Company’s Board of Directors authorized the grant of non-qualified stock options to certain of its employees and contractors to purchase 1,910,000 of its common shares under the Option Plan. A total of 1,895,000 options were granted with an exercise price of $4.02, which is equal to the closing price of the common stock on the OTCBB on the grant date, and a contractual term of ten years. The options vest and become exercisable ratably over a two year period on each anniversary of the grant date. At September 30, 2013, there were 11,105,000 options available for future grants under the Option Plan.

In order to estimate the fair value of stock options on the date of grant, the Company applied the Black-Scholes-Merton option valuation model. Inherent in the model are certain highly subjective assumptions related to the expected term of the options, the expected volatility of the Company’s stock price, expected dividends, and a risk-free interest rate. The fair value of the stock options granted was estimated to be $2.27, based upon the following assumptions:

Expected term	5.75 years
Expected stock price volatility		62.55	%
Dividends	None
Risk free interest rate		1.30	%

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These assumptions were determined based upon the following considerations:

■

The Company has no historical stock option experience that would serve as a basis to estimate expected term and the stock options granted have the “plain-vanilla” characteristics described in SEC Staff Accounting Bulletin No. 107 (SAB 107). Therefore, the simplified method described in SAB 107, which uses an average of the options’ contractual term and their weighted average vesting periods, has been used to calculate an estimated expected term.

■

The Company has a limited trading history for its common stock. Therefore, expected stock price volatility has been estimated based upon the historical stock price volatility of another public company that operates in its industry, using daily price observations over a period equivalent to the expected term of the Company’s stock options. This peer company is similar to the Company, but it is larger in size and has been publicly-traded for a longer period. Thus, it is anticipated that the historical period used to observe the peer company’s volatility will reasonably correspond with the Company’s life cycle stage during the expected term of the options.

■	As the Company has paid no dividends, and has no present plans to pay dividends in the future, no dividends were assumed for purposes of the fair value estimate.

■	The risk-free rate is based on the implied yield of 7-year U.S. Treasury notes as of the grant date, as this period would reasonably coincide with the expected term.

Stock-based compensation expense is recorded over the service/vesting period based on the estimated value of the options that are ultimately expected to vest. An initial estimated forfeiture rate of 3% has been assumed for this calculation, and stock-based compensation expense will be adjusted as necessary in subsequent periods to reflect actual forfeiture activity.

For the three and nine-month periods ended September 30, 2013, the Company recorded stock-based compensation expense for stock options, as follows:

	Three-Month Period Ended 9/30/2013		Nine-Month Period Ended 9/30/2013
Sales and marketing expenses	$	282,925	$	555,420
General and administrative expenses		67,680		94,500
Development expenses		270,556		377,838
	$	621,161	$	1,027,758

No stock-based compensation expense was recorded for any period prior to April 1, 2013.

The estimated unrecognized compensation cost related to non-vested stock option awards of $3,073,864 is expected to be recorded over the remaining weighted average vesting period of 1.24 years.

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Stock option activity for the nine-month period ended September 30, 2013 was as follows:

	Shares Under Option			Weighted Average Exercise Price
Outstanding at beginning of period		-		$	4.02
Granted		1,895,000		$	4.02
Forfeited		(535,000	)
Exercised		-
Outstanding at end of period		1,360,000		$	4.02
Remaining contractual life		9.62
Options exercisable at end of period		-

The estimated number of options outstanding as of September 30, 2013 and expected to vest was 1,299,412. The options had no aggregate intrinsic value at September 30, 2013 since the September 30, 2013 closing price for the Company’s stock was lower than the exercise price.

On September 26, 2013, the Company’s Board of Directors adopted the Xhibit Corp. 2013 Restricted Stock Plan (the “RS Plan”). Under the RS Plan, the Company may issue up to an aggregate total of 10,000,000 shares of the Company’s common stock. On September 30, 2013, the Company granted 1,587,753 restricted shares to certain of its employees under the RS Plan. These restricted shares vest on September 1, 2016 provided the employees are still employed by Xhibit on that date. No compensation expense was recorded for this grant during the three-month period ended September 30, 2013. At September 30, 2013, there were 8,412,247 shares available for future grants under the RS Plan.

NOTE 16 – STOCK-BASED COMPENSATION RESULTING FROM SALE OF STOCK BETWEEN AFFILIATE SHAREHOLDERS

As a condition to the Release Agreement, Mr. Richarde sold 15,000,000 shares to X Shares, an entity controlled by Mr. Najafi who is a member of the Company’s Board of Directors and the Company’s majority shareholder through beneficial ownership (Note 1). This sale was done partially for the benefit of both the Company and Mr. Richarde such that the Company would have a clear control shareholder who would be incentivized to, and could, assist in the future financing of the Company. Accordingly, the Company recorded a contribution to capital by Mr. Richarde and non-cash stock compensation to Mr. Najafi of $27,037,500 in September 2013, when the sale occurred, for the difference between the actual price paid ($0.025 per share) and fair value of the shares.

NOTE 17 – RETIREMENT PLAN

The SkyMall Companies have a retirement savings 401(k) plan (the “Plan”) covering all their employees with at least six months of service. Participants are eligible to defer the maximum allowable percentage of eligible compensation under the Internal Revenue Code.

The Company made no matching contributions to the Plan during the nine-month period ended September 30, 2013.

NOTE 18 – RELATED PARTY TRANSACTIONS

During the three and nine-month periods ended September 30, 2013, the Company paid ABC Internet Media, an entity owned by the Company’s Chief Technology Officer, approximately $27,000 and $81,000, respectively in lease payments for office space in Banja Luka, Bosnia-Herzegovina.

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During the six-month period ended June 30, 2013 the Company paid WAT Works, LLC, an entity 50% owned by one of the Company’s employees, $108,704 for reimbursement of certain expenses incurred on the Company’s behalf pursuant to a Marketing Services Agreement. The Marketing Services Agreement was terminated on June 30, 2013 at no cost to the Company.

NOTE 19 – BUSINESS COMBINATION

On May 16, 2013, the Company completed its acquisition of SHC Parent Corp. The Company issued 44,440,000 shares of its common stock in exchange for 100% of the outstanding shares of common stock of SHC Parent Corp. The Company valued the 44,440,000 shares issued in the SkyMall Merger at fair value. With the assumption of liabilities, the total purchase price for the assets was $200,954,670 as of May 16, 2013. As required by the terms of the acquisition, Mr. Richarde resigned as Chief Executive Officer and was replaced by Kevin Weiss who was later also appointed Chairman of the Xhibit Board of Directors.

The purchase price allocation, which was based on a qualified independent valuation as of the merger date, is as follows:

Cash	$	4,369,535
Accounts receivable		3,893,179
Inventories		17,385,846
Property and equipment		5,267,121
Prepaid expenses		1,649,220
Amortizing intangible assets		19,430,000
SkyMall tradename		7,170,000
Goodwill		141,568,726
Other assets		221,043
Liabilities assumed		(49,858,670	)
	$	151,096,000

The following is the unaudited proforma statement of operations data of the combined entity as though the business combination had been effected as of the beginning of the comparable annual reporting period for the nine-month periods ended September 30, 2013 and 2012.

	Three-Month Period Ended 9/30/13			Nine-Month Period Ended 9/30/12

Proforma revenues		70,497,878			$	69,499,128
Proforma net loss		(16,208,601	)			(6,558,533	)
Proforma net loss per share (basic and diluted)		(0.15	)			(0.11	)

The unaudited proforma data above excludes the stock-based compensation resulting from the sale of stock between affiliate shareholders recorded in September 2013 (Note 16).

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NOTE 20 – SEGMENT INFORMATION

In January 2013, the Company began operating in two reportable segments: Internet Marketing and Nutraceutical Products. Effective May 16, 2013, upon consummation of the merger with SHC Parent Corp. and its subsidiaries, referred to collectively as the “SkyMall Companies”, the Company began operating a third reportable segment, SkyMall Products. Each segment is managed separately and provides different products and services. During the 2013 third quarter, the Company ceased selling nutraceutical products.

The accounting policies of the segments are the same as described above, but research and development costs and certain selling, general and administrative costs have not been allocated to the segments. As a result, the segment information presented below is reflective of the manner in which management evaluates profitability for the segments. Further, the Company manages its working capital on a consolidated basis and does not allocate long-lived assets to the segments. Accordingly, total assets by segment have not been disclosed.

The following table presents information by segment for the three and nine-month periods ended September 30, 2013:

	For the three-month period ended September 30, 2013
	Internet Marketing			Nutraceutical Products		SkyMall			Corporate			Consolidated
Revenues	$	2,084,876		$	233,200	$	18,048,597		$	-		$	20,366,673
Cost of revenues		970,102			209,337		11,500,097			-			12,679,536
Gross profit		1,114,774			23,863		6,548,500			-			7,687,137
Development expenses		-			-		-			482,299			482,299
Selling, general and administrative		1,753,919			-		8,749,538			3,682,398			14,185,855
Non-cash stock-based compensation resulting from sale of stock between affiliate shareholders		-			-		-			27,037,500			27,037,500
Segment operating income (loss)		(639,145	)		23,863		(2,201,038	)		(31,202,197	)		(34,018,517	)
Interest and other expense		2,882			-		40,761			37,608			81,251
Net income (loss)	$	(642,027	)	$	23,863	$	(2,241,799	)	$	(31,239,805	)	$	(34,099,768	)

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	For the nine-month period ended September 30, 2013
	Internet Marketing		Nutraceutical Products			SkyMall			Corporate			Consolidated
Revenues	$	5,168,138	$	7,094,136		$	27,641,195		$	-		$	39,903,469
Cost of revenues		2,077,428		6,737,697			17,597,944			-			26,413,069
Gross profit		3,090,710		356,439			10,043,251			-			13,490,400
Development expenses		-		-			-			1,127,780			1,127,780
Selling, general and administrative		2,658,914		809,587			13,216,629			7,956,609			24,641,739
Non-cash stock-based compensation resulting from sale of stock between affiliate shareholders		-		-			-			27,037,500			27,037,500
Segment operating income (loss)		431,796		(453,148	)		(3,173,378	)		(36,121,889	)		(39,316,619	)
Interest and other expense		5,511		-			56,130			129,130			190,771
Net income (loss)	$	426,285	$	(453,148	)	$	(3,229,508	)	$	(36,251,019	)	$	(39,507,390	)

	September 30,
	2013		2012
Property and equipment, net
SkyMall	$	5,892,101	$	-
Internet marketing		44,396		-
Nutraceutical products		4,460		-
Corporate		169,287		1,379,400
	$	6,110,244	$	1,379,400

	Nine-Month Periods Ended September 30,
	2013		2012
Additions to property and equipment
SkyMall	$	903,067	$	-
Internet marketing		24,576		-
Nutraceutical products		-		-
Corporate		155,666		619,554
	$	1,083,309	$	619,544

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NOTE 21 – SUBSEQUENT EVENT

In accordance with the Company’s accounting policy, an impairment review was undertaken of goodwill and intangible assets during the 2013 year-end financial statement closing process. The Company determined that a review of the qualitative factors of its recorded goodwill as described in ASC 350-20-35-3 was not going to benefit its analysis since the acquisition had occurred so recently. However, the Company determined that the following conditions surrounding the fair value of the SkyMall reporting unit raised concerns that the fair value of the SkyMall reporting unit could be less than the carrying value, including goodwill:

·	From the SkyMall Merger closing to December 31, 2013, the Xhibit market share price had decreased by 63% (from $4.00 to $1.50 per share), despite significant increases in all major market indexes during this same period.

·	Revenue growth in both SkyMall’s Commerce and Loyalty business units did not occur as anticipated during the latter part of 2013.

·	SkyMall executed a reduction in force in the third quarter of 2013 in which 13 corporate positions, including SkyMall’s President, who had served in that role since 2003, were eliminated. These position eliminations represented 14% of SkyMall’s corporate staff.

Based on the factors noted above, the Company believed an impairment test was required. The Company engaged an independent valuation firm to assist the Company in conducting the impairment test. A quantitative Step 1 test was first performed by comparing the fair value of the SkyMall reporting unit at December 31, 2013 to the related carrying value, including goodwill. This Step 1 test showed that the carrying value of the SkyMall reporting unit did exceed fair value and accordingly, an impairment analysis of the implied fair value of the SkyMall reporting unit’s goodwill and other intangible assets using customary valuation methodologies, including income (i.e., discounted cash flow) and market analyses was performed. Based on the results of the impairment analysis, the Company determined that an impairment had occurred in the SkyMall reporting unit with respect to the restated goodwill and certain other intangible assets. An impairment charge of $137,734,842 for goodwill and certain other intangible assets was recorded at December 31, 2013.

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Item 2 - MANAGEMENT’S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As disclosed in a Current Report on Form 8-K the Company filed with the SEC on April 16, 2014, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) determined on April 11, 2014 that the Company’s previously filed financial statements for: (i) the three and six month periods ended June 30, 2013 included in the Form 10-Q filed with the SEC on August 19, 2013 and (ii) the three and nine month periods ended September 30, 2013 included in the Form 10-Q filed with the SEC on November 15, 2013 needed to be restated to correct the accounting for the SkyMall merger in such financial statements. The Audit Committee’s determination was based upon analysis of the issues raised in comment letters from the SEC related to the Company’s accounting for the SkyMall Merger. Please refer to Note 2, “Restatement” to the Notes to the Company’s Condensed Consolidated Financial Statements for more information on the restatement.

The following tables show the effects of the restatement on the Company's condensed consolidated balance sheet as of September 30, 2013 and statements of operations for the three and nine month periods ended September 30, 2013:

	As of September 30, 2013
	As Previously Recorded			As Restated			Variance
Total current assets	$	20,210,420		$	20,210,420		$	-
Total assets	$	68,455,317		$	194,051,317		$	125,596,000
Total current liabilities	$	49,256,562		$	49,256,562		$	-
Total liabilities	$	49,256,562		$	49,256,562		$	-
Additional paid-in capital	$	32,936,818		$	185,570,318		$	152,633,500
Accumulated deficit	$	(13,748,847	)	$	(40,786,347	)	$	(27,037,500	)
Total stockholders' equity	$	19,198,755		$	144,794,755		$	125,596,000

	Three-Month Period Ended September 30, 2013
	As Previously Recorded			As Restated			Variance
Revenues	$	20,366,673		$	20,366,673		$	-
Gross profit	$	7,687,137		$	7,687,137		$	-
Total operating expenses	$	14,668,154		$	41,705,654		$	27,037,500
Loss from operations	$	(6,981,017	)	$	(34,018,517	)	$	(27,037,500	)
Net loss	$	(7,062,268	)	$	(34,099,768	)	$	(27,037,500	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.31	)	$	(0.25	)

	Nine-Month Period Ended September 30, 2013
	As Previously Recorded			As Restated			Variance
Revenues	$	39,903,469		$	39,903,469		$	-
Gross profit	$	13,490,400		$	13,490,400		$	-
Total operating expenses	$	25,769,519		$	52,807,019		$	27,037,500
Loss from operations	$	(12,279,119	)	$	(39,316,619	)	$	(27,037,500	)
Net loss	$	(12,469,890	)	$	(39,507,390	)	$	(27,037,500	)
Basic and diluted net loss per share	$	(0.14	)	$	(0.44	)	$	(0.30	)

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Cautionary Note Regarding Forward-Looking Statements

Statements contained in this report include "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Such forward-looking statements generally are based on our best estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of the companies involved and their respective industries. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "can," "will," "could," "should," "project," "expect," "plan," "predict," "believe," "estimate," "aim," "anticipate," "intend," "continue," "potential," "opportunity" or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions.

Readers are urged to carefully review and consider the various disclosures made by us in this Quarterly Report on Form 10-Q and our Form 10-K for the fiscal year ended December 31, 2012. These reports and filings attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Form 10-Q speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Overview

Xhibit Interactive, LLC ("Interactive") was organized on July 18, 2011 as a Nevada limited liability company. On August 9, 2011, Interactive entered into a unit exchange agreement whereby the members of SpyFire Interactive, LLC doing business as Lead Revolution (“Lead Revolution”) and Stacked Digital, LLC (“Stacked”) exchanged 100% of their membership units for 18,292,319 of Interactive’s units. Concurrent with this transaction, Lead Revolution and Stacked became wholly-owned subsidiaries of Interactive.

On January 20, 2012, Interactive formed a subsidiary domiciled in Bosnia called Bosnia Xhibit d.o.o. (“Bosnian Sub”). The Bosnian Sub had no operations or activities until July 2012 when it hired five software programmers and developers from ABC Internet Media, a company formed and controlled by Dzenis Softic, Interactive's Chief Technology Officer, who was serving as a consultant at the time. Interactive believes the Bosnian sub provides it with the best opportunity for a more economical solution to have an “in-house” product development team.

On May 24, 2012, Interactive acquired Social Bounce LLC ("Bounce"), a social media and online game development company founded on August 2, 2011 and majority owned by Interactive’s former President, as its third operating subsidiary. Bounce was acquired to obtain domain names and social media/online gaming properties to consolidate with the operations of the other subsidiaries of Interactive. Bounce had nominal assets and no operations prior to May 24, 2012. On August 30, 2012, Bounce was merged into Interactive and Bounce ceased to exist.

On September 4, 2012, Xhibit Corp., f/k/a NB Manufacturing, Inc., a Nevada corporation ("Xhibit" or the “Company”), NB Manufacturing Subsidiary, LLC, a Nevada limited liability company (the "Merger Sub"), and Interactive consummated a merger (the “Merger”) whereby Interactive became a wholly owned subsidiary of Xhibit.

Xhibit was incorporated on September 19, 2001 in the State of Nevada pursuant to a U.S. Bankruptcy Court Chapter 11 Reorganization Plan for New Bridge Products, Inc., confirmed on September 17, 2002 (CASE NO. 00-13546-ECF-RIN). It had been a shell corporation since inception until the Merger. Immediately prior to the completion of the Merger, Xhibit did not conduct any business operations and had minimal assets and liabilities.

Pursuant to the Merger, Xhibit issued 55,383,452 shares of its common stock to Interactive unit holders at a rate of 1.2641737582 shares of Xhibit's common stock for each Interactive unit. Immediately following the Merger, Xhibit had 66,583,676 shares of common stock outstanding and no warrants or options outstanding. The former members of Interactive owned 83.2% of Xhibit's outstanding securities, and Xhibit's shareholders owned 16.8% of Xhibit's outstanding securities.

On September 29, 2012, Xhibit formed a new subsidiary, FlyReply Corp. (“FlyReply”) which began development of a product which provides turn-key cloud based marketing CRM solutions on a subscription basis to customers. The product was discontinued in September 2013.

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On September 24, 2012, Xhibit acquired various intellectual property assets owned by several individuals and private companies giving it the right to the source code, software, database, websites and domain names previously owned or operated by Radio Connect, LLC, TwitYap, LLC and Star Connect, LLC which the Company now refers to as its TwitYap social media properties. The Company obtained these assets for a total issuance of approximately 700,000 shares of common stock. In September 2013, the Company recorded an impairment charge of $2.3 million against the remaining TwitYap intangible asset value. During September 2013, the Company elected to terminate all further TwitYap development work and is currently evaluating future uses of the social media applications.

On December 1, 2012, the Company entered into a Marketing Services Agreement with WAT Works, LLC, a Utah limited liability company ("WAT Works"). The Company also hired five employees (including a 50% equity holder in WAT Works) at salaries ranging from $7,500 to $11,000 per month plus a bonus pool of five percent (5%) of EBITDA generated by these five at will employees in the consumer nutraceutical products industry. Our agreement with WAT Works engaged it to select products developed by third party formulators and manufacturers and assist us in marketing this line of health and wellness related consumer products and services. The Company agreed to pay WAT Works its direct costs in delivering these services, which included reimbursement for rent (as they operate out of an office in Salt Lake City, Utah), reimbursement for manufacturing and formulation costs paid to a third party, and payment of a contractor for sales tracking software development. This Marketing Services Agreement was terminated on June 30, 2013 at no cost to the Company. During the first nine months of 2013, a majority of Interactive's revenues have been generated by these five employees from the sales of a weight loss product, colon cleanser and green coffee supplement. Sales have been made in the United States, Australia and South Africa. During the quarter ended June 30, 2013, the Company discontinued all sales of nutraceutical products but continued to conduct internet marketing and advertising campaigns for customers which sell their own nutraceutical products through October 31, 2013 when all third party sales of nutraceutical products were discontinued as well.

On May 16, 2013, the Company entered into an Agreement and Plan of Merger (the “SkyMall Merger Agreement”), among Xhibit, Project SMI Corp., a Delaware corporation and wholly-owned subsidiary of Xhibit (“SMI Merger Sub”), SHC Parent Corp., a Delaware corporation (“SHC”), and TNC Group, Inc., an Arizona corporation and Stockholder Representative for the SHC stockholders. Pursuant to the terms of the Merger Agreement, on May 16, 2013, SMI Merger Sub merged with and into SHC (the “SkyMall Merger”), with SHC surviving the SkyMall Merger as a wholly-owned subsidiary of Xhibit. SHC is the parent corporation of SkyMall Interests, LLC, a Delaware limited liability company (“Interests”), SkyMall, LLC, a Delaware limited liability company (“SkyMall, LLC”), and SkyMall Ventures, LLC, a Delaware limited liability company (“Ventures,” and, collectively with SHC, Interests and SkyMall, LLC, the “SkyMall Companies” or "SkyMall"). The former shareholders of SHC became shareholders of Xhibit, receiving 44,440,000 shares of Xhibit common stock as part of the SkyMall Merger.

The Company, through its subsidiaries other than the SkyMall Companies, is an online marketing and digital advertising company providing targeted and measurable online advertising campaigns and programs for a broad base of advertisers and advertising agency customers. The Company enables marketers to advertise and sell their products and services through major online marketing channels including display advertising and affiliate marketing networks.

SkyMall Ventures provides turnkey strategy, creative and fulfillment solutions for numerous customer programs operated by internationally-recognized brands such as Marriott Rewards, Caesar’s Entertainment and Capital One. SkyMall’s proprietary technology system allows SkyMall to precisely manage merchandise procurement across a vast network of vendors to ensure that the most current products are available for loyalty program members. In addition, SkyMall designs, develops and hosts the websites and manages the entire ecommerce transaction process from order placement to shipment and customer service. For example, some sites feature the ability to include: (i) mixed payment options (the ability to combine points and dollars); (ii) multiple currencies and languages; and (iii) auctions.

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Explanatory Note

Unless otherwise indicated or the context otherwise requires, all references below in this report on Form 10-Q to "we," "us" and the "Company" are to Xhibit Corp., a Nevada corporation, and its subsidiaries, the SkyMall Companies, FlyReply Corp., a Nevada corporation, and Xhibit Interactive, LLC, a Nevada limited liability company, and Xhibit Interactive's subsidiaries SpyFire Interactive, LLC, Stacked Digital, LLC and Xhibit Bosnia d.o.o.

Application of Critical Accounting Policies

The Company has identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section when such policies affect our reported or expected financial results.

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. The Company bases our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Xhibit and all of its subsidiaries. Iintercompany accounts have been eliminated in consolidation.

Use of Estimates

Accounts Receivable and Allowance for Doubtful Accounts

The Company carries its accounts receivable at the gross sales price of products sold less an allowance for doubtful accounts. The adequacy of the allowance is evaluated each month as part of the month-end closing activities and all customer accounts are reviewed. Recoveries of receivables previously written off are recorded when received. Interest is not charged on overdue receivables, nor is collateral obtained on any amounts due.

Inventories

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Intangible Assets

Intangible assets consist primarily of the “SkyMall” tradename, the SkyMall loyalty program partner relationships, merchant relationships, customer relationships, purchased technology and non-compete agreements which are recorded at their estimated fair value at the date of acquisition. For intangible assets with finite lives, the pattern in which the economic benefit of the assets will be consumed is evaluated based on projected usage or production of revenues. The Company considers certain factors when assigning useful lives such as legal, regulatory and contractual provisions as well as management’s judgment, the effects of obsolescence, demand, competition and other economic factors. Intangible assets are amortized using the straight-line method over their estimated useful lives ranging from two to eight years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. During the three-month period ended September 30, 2013, the Company elected to terminate all further TwitYap development work and is currently evaluating future uses of social media applications. Based on this decision, a $2.3 million impairment charge was recorded in September 2013 against the remaining TwitYap intangible asset values.

Revenue Recognition

Internet marketing revenue:

The Company recognizes revenue at the time services are performed and sales are generated on behalf of its customers. Revenue is presented on a gross basis, net of discounts and allowances.

Net nutraceutical sales:

Revenue from product sales and gross outbound shipping and handling charges are recognized upon receipt of the product by the customer. Nutraceutical products are contract manufactured, packaged and stored by third parties. Finished product is invoiced to the Company at the time of direct shipment, by the third-party fulfillment center, to the customer. In accordance with the Company’s revenue recognition policy, the Company establishes a deferred revenue liability equal to five days which represents products that have shipped, but have not yet been received by the customers at the end of a given period. The Company’s sales terms allow customers certain limited rights of return for a period of 30-days.

Net merchandise sales:

Sales and use taxes charged to customers and incurred by the Company are shown net in the consolidated statements of income.

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Gift card sales:

Placement fees:

Shipping and handling costs

Catalog expenses

Advertising

The Company expenses advertising costs when such costs are incurred.

Stock-based Compensation

The Company accounts for stock-based compensation by using the Black-Scholes-Merton option valuation model to estimate the fair value of stock options issued, estimating the expected forfeiture rate, and recognizing expense for the options expected to vest over the requisite service/vesting period. Refer to Note 15 in the included financial statements for further information and required disclosures related to stock-based compensation.

Concentrations and Credit Risk

Business Combination

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Income Taxes

The Company recognizes and measures uncertain tax positions using a more-likely-than-not approach. The Company had no material uncertain tax positions at September 30, 2013 or December 31, 2012.

Segment Reporting

The following table presents information by segment for the nine and three months ended September 30, 2013:

	For the three-month period ended September 30, 2013
	Internet Marketing			Nutraceutical Products		SkyMall			Corporate			Consolidated
Revenues	$	2,084,876		$	233,200	$	18,048,597		$	-		$	20,366,673
Cost of revenues		970,102			209,337		11,500,097			-			12,679,536
Gross profit		1,114,774			23,863		6,548,500			-			7,687,137
Development expenses		-			-		-			482,299			482,299
Non-cash stock-base compensation resulting from sale of stock between affiliate shareholders		-			-		-			27,037,500			27,037,500
Selling, general and administrative		1,753,919			-		8,749,538			3,682,398			14,185,855
Segment operating income (loss)		(639,145	)		23,863		(2,201,038	)		(31,202,197	)		(34,018,517	)
Interest and other expense		2,882			-		40,761			37,608			81,251
Net income (loss)	$	(642,027	)	$	23,863	$	(2,241,799	)	$	(31,239,805	)	$	(34,099,768	)

	For the nine-month period ended September 30, 2013
	Internet Marketing		Nutraceutical Products			SkyMall			Corporate			Consolidated
Revenues	$	5,168,138	$	7,094,136		$	27,641,195		$	-		$	39,903,469
Cost of revenues		2,077,428		6,737,697			17,597,944			-			26,413,069
Gross profit		3,090,710		356,439			10,043,251			-			13,490,400
Development expenses		-		-			-			1,127,780			1,127,780
Non-cash stock-base compensation resulting from sale of stock between affiliate shareholders		-		-			-			27,037,500			27,037,500
Selling, general and administrative		2,658,914		809,587			13,216,629			7,956,609			24,641,739
Segment operating income (loss)		431,796		(453,148	)		(3,173,378	)		(36,121,889	)		(39,316,619	)
Interest and other expense		5,511		-			56,130			129,130			190,771
Net income (loss)	$	426,285	$	(453,148	)	$	(3,229,508	)	$	(36,251,019	)	$	(39,507,390	)

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	September 30,
	2013		2012
Property and equipment, net
SkyMall	$	5,892,101	$	-
Internet marketing		44,396		-
Nutraceutical products		4,460		-
Corporate		169,287		1,379,400
	$	6,110,244	$	1,379,400

	Nine-Month Periods Ended September 30,
	2013		2012
Additions to property and equipment
SkyMall	$	903,067	$	-
Internet marketing		24,576		-
Nutraceutical products		-		-
Corporate		155,666		619,554
	$	1,083,309	$	619,554

Results of Operations (Note: dollar amounts are rounded to the nearest one-tenth of a million, percentages are actual)

The SkyMall Merger was completed on May 16, 2013. Accordingly, the results of operations for the three-month period ended September 30, 2013 include the operating results of SkyMall for the entire time period whereas the results of operations for the nine-month period ended September 30, 2013 include the operating results of SkyMall only from the May 16, 2013 merger date. The results of operations for the three and nine-month periods ended September 30, 2012 do not include the operating results of SkyMall.

Three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012

Revenues. Revenue for the three-month period ended September 30, 2013 was $20.4 million compared to $2.9 million for the three-month period ended September 30, 2012, an increase of $17.5 million (600%).

Of the $17.5 million increase, $18.1 million came from revenues generated by SkyMall, which was offset by a decrease in revenue in our other business segments of $0.6 million (21%). The decrease relates primarily to the Company’s internet marketing segment where sales to existing customers declined as management focused on higher margin accounts and determined to no longer pursue high volume, lower margin clients.

During the three-month period ended September 30, 2013, the Company had a high concentration of revenue and credit risk as its two largest customers accounted for 40% of its total revenues, each of which was a SkyMall loyalty customer.

Cost of revenues. Cost of revenues was $12.7 million for the three-month period ended September 30, 2013 compared to $1.3 million for the three-month period ended September 30, 2012, an increase of $11.4 million (873%).

Of the $11.4 million increase, $11.5 million was attributable to SkyMall. Excluding the SkyMall costs, cost of revenue decreased by $0.1 million (10%) primarily due to the decrease in internet marketing revenue. The Company’s gross profit rate, excluding SkyMall, was 50% for the three-month period ended September 30, 2013 compared to 55% for the comparable period in 2012.

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Catalog expenses. Catalog expenses were $1.7 million for the three-month period ended September 30, 2013 compared to zero for the three-month period ended September 30, 2012. The entire increase is attributable to SkyMall. Prior to the SkyMall Merger, the Company incurred no catalog expenses.

Sales and marketing expenses. Sales and marketing expenses were $4.4 million for the three-month period ended September 30, 2013 compared to $0.3 million for the three-month period ended September 30, 2012, an increase of $4.1 million.

Of the $4.1 million increase, $3.4 million was attributable to SkyMall operating activity. The remaining $0.7 million increase was primarily the result of stock-based compensation of $0.3 million for the three-month period ended September 30, 2013 and a higher number of employees in 2013.

Customer service and fulfillment expenses. Customer service and fulfillment expense was $0.6 million for the three-month period ended September 30, 2013 compared to zero for the three-month period ended September 30, 2012. Customer service and fulfillment expenses consist of wages and other costs associated with the SkyMall’s customer care center. Prior to the SkyMall Merger, the Company incurred no customer service and fulfillments expenses.

General and administrative expenses. General and administrative expenses were $4.3 million for the three-month period ended September 30, 2013 compared to $0.9 million for the three-month period ended September 30, 2012, an increase of $3.4 million.

Of the $3.4 million increase, $2.8 million was attributable to SkyMall operating activity. The remaining $0.6 million (61%) increase is the result of a number of factors including a $0.7 million bad debt expense charge for certain aged nutraceutical receivables.

Non-cash stock-based compensation resulting from sale of stock between affiliate shareholders. In September 2013, Mr. Richarde sold 15,000,000 shares to X Shares, an entity controlled by Mr. Najafi who is a member of the Company’s Board of Directors and a the Company’s majority shareholder through beneficial ownership. This sale was done partially for the benefit of the Company and Mr. Richarde such that the Company would have a clear control shareholder who would be incentivized to, and could, assist in the future financing of the Company. Accordingly, the Company recorded a contribution to capital by Mr. Richarde and non-cash stock compensation to Mr. Najafi of $27,037 in September 2013, when the sale occurred, for the difference between the actual price paid ($0.025 per share) and fair value of the shares (See Note 16 to the Condensed Consolidated Financial Statements). No similar charge was recorded during the year ended December 31, 2012.

Impairment charge. As a result of the Company’s decision to terminate all further TwitYap development work and uncertainty around the application’s future use, a $2.3 million impairment charge was recorded against the remaining TwitYap technology and non-compete agreement intangible assets values in September 2013. No impairment charge was recorded during the three-month period ended September 30, 2012.

Restructuring charge. During September 2013, the Company implemented a restructuring plan to reduce operating costs and as a result, the Company recorded a $0.9 million restructuring charge for severance benefits and lease exit costs to consolidate the Company’s workforce into one location. No restructuring charge was recorded during the three-month period ended September 30, 2012.

Development expenses. Development expenses were $0.5 million for the three-month period ended September 30, 2013 compared to $0.1 million for the three-month period ended September 30, 2012, an increase of $0.3 million (228%). The increase is primarily due to stock-based compensation of $0.3 million in 2013 for which no similar amount was recorded in 2012.

Loss from operations. The Company recorded a loss from operations of $34.0 million for the three-month period ended September 30, 2013 compared to an operating income of $0.2 million for the three-month period ended September 30, 2012, an increase in loss of $34.2 million.

Of the $34.2 million increase in operating loss, $2.2 million was attributable to SkyMall and $27.0 million was attributable to the September Stock Sale. The remaining $5.0 million increase in loss is primarily due to the following factors: the $2.3 million impairment charge on the write off of intangible assets; the $0.9 million restructuring charge; stock-based compensation totaling $0.6 million; and $0.5 million less gross profit as a result of lower sales levels.

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Nine-month period ended September 30, 2013 compared to the nine-month period ended September 30, 2012

Revenues. Revenue for the nine-month period ended September 30, 2013 was $39.9 million compared to $7.4 million for the nine-month period ended September 30, 2012, an increase of $32.5 million (438%).

Of the $39.9 million increase, $27.7 million came from revenues generated by SkyMall. The remaining $4.8 million (65%) increase was primarily the result of $7.1 million in nutraceutical sales generated during the nine-month period ended September 30, 2013 that did not exist during the same prior year period. This increase was partially offset by a $2.3 million reduction in internet marketing revenue in 2013.

During the nine-month period ended September 30, 2013, the Company had a high concentration of revenue and credit risk as its two largest customers accounted for 32% of its total revenues, each of which was a SkyMall loyalty customer.

Cost of revenues. Cost of revenues was $26.4 million for the nine-month period ended September 30, 2013 compared to $4.1 million for the nine months ended September 30, 2012, an increase of $22.3 million (538%).

Of the $22.3 million increase, $17.6 million was attributable to SkyMall. The remaining $4.7 million (113%) increase was primarily due to costs attributable to nutraceutical products incurred during the current the nine months ended September 30, 2013 whereas no comparable costs were incurred in the same prior year period. The increase in nutraceutical cost of sales were partially offset by an approximate $0.8 million reduction in ESP servicing expense, $0.9 million reduction in publisher payments associated with revenues from the largest customer of Interactive, AdCafe, as well as an additional $1.0 million in reduced ad network related publisher payments.

Catalog expenses. Catalog expense was $2.4 million for the nine-month period ended September 30, 2013 compared to zero for the nine-month period ended September 30, 2012. The entire increase is attributable to SkyMall. Prior to the SkyMall Merger, the Company incurred no catalog expenses.

Sales and marketing expenses. Sales and marketing expenses were $8.0 million for the nine-month period ended September 30, 2013 compared to $.8 million for the nine-month period ended September 30, 2012, an increase of $7.2 million (958%).

Of the $7.2 million increase, $5.5 million was attributable to SkyMall operating activity. The remaining $1.8 million (235%) increase consists primarily of stock-based compensation of $0.6 million in 2013 which did not exist in 2012, higher payroll costs of $0.8 million as a result of increase sales personnel, and $0.3 million of third party call center services to promote and support the sale of nutraceutical products.

Customer service and fulfillment expenses. Customer service and fulfillment expense was $1.0 million for the nine-month period ended September 30, 2013 compared to zero for the nine-month period ended September 30, 2012. Customer service and fulfillment expenses consist of wages and other costs associated with the SkyMall’s customer care center. Prior to the SkyMall Merger, the Company incurred no customer service and fulfillment expenses.

General and administrative expenses. General and administrative expenses were $10.1 million for the nine-month period ended September 30, 2013 compared to $2.4 million for the nine-month period ended September 30, 2012, an increase of $7.7 million.

Of the $7.7 million increase, $4.2 million was attributable to SkyMall operating activity. The remaining $3.4 million, or 143% increase, is primarily the result of a number of factors including: non-cash stock-based compensation of $1.7 million ($1.6 million for consulting services in connection with the SkyMall Merger and $0.1 million to employees), $0.7 million increase in bad debt expense, $0.6 million increase in depreciation and amortization, $0.3 million increase in legal, accounting fees and professional fees, $0.2 million in salaries, wages and contract labor. The increases in depreciation and amortization expense and salaries and wages were the result of the acquisition of the Twit Yap social media intangible assets and related salaries. The increase in legal fees was a result of legal fees related to potential acquisitions and the SkyMall merger.

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Impairment charge. As a result of the Company’s decision to terminate all further TwitYap development work and uncertainty around the application’s future use, a $2.3 million impairment charge was recorded against the remaining TwitYap technology and non-compete agreement intangible asset values in September 2013. No impairment charge was recorded during the three-month period ended September 30, 2012.

Development expenses. Development expenses were $1.1 million for the nine-month period ended September 30, 2013 compared to $0.3 million for the nine-month period ended September 30, 2012, an increase of $0.8 million (235%). The increase consists primarily of non-cash stock-based compensation of $0.4 million and increased payroll costs for the Company’s development team in Bosnia to support the Company’s continued focus on developing new web and mobile based products, services and technologies in support of its growth strategies.

Loss from operations. The Company recorded a loss from operations of $39.3 million for the nine-month period ended September 30, 2013 compared to an operating loss of $0.2 million for the three-month period ended September 30, 2012, an increase in loss of $39.1 million. Of the $39.1 million increase in operating loss, $3.2 million was attributable to SkyMall and $27.0 million was attributable to the September Stock Sale.

The remaining $8.8 million increase in loss is primarily due to the $2.3 million impairment charge, the $0.9 million restructuring charge, stock-based compensation totaling $2.6 million ($1.6 million for consulting services in connection with the SkyMall Merger and $1.0 million to employees), and losses totaling $1.5 million in our Nutraceutical Products segment.

Off-Balance Sheet Items

The Company had no off-balance sheet items as of September 30, 2013.

Liquidity and Capital Resources

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. The Company has incurred a loss from operations for the nine-month period ended September 30, 2013 of $12.3 million, has used $6.6 million in cash for operating activities through this current nine-month period, and has a working capital deficit of $29.0 million at September 30, 2013. As a result of these factors, a risk exists regarding the Company’s ability to continue as a going concern. The financial statements included in this quarterly report do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.

A multi-step plan was adopted by management to enable the Company to continue to operate and begin to report operating profits. The highlights of that plan are:

·	Elimination of unprofitable business units and product offerings.

·	Integration of the heritage Xhibit and SkyMall operations to gain better efficiencies.

·	Aggressively seek new and additional sales opportunities.

·	Improve product gross margins through product sourcing efficiencies.

At September 30, 2013, cash totaled $5.6 million compared to $0.4 million at December 31, 2012.

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As of November 11, 2013, management believes that the Company's monthly required fixed cash operating expenditures are approximately $1.5 million. Additionally, we anticipate spending minimal amounts during the remainder of 2013 for capital expenditures. While the Company has sufficient cash and debt financing to operate and pursue its business objectives, it does not have sufficient cash for the next 12 months to repay existing indebtedness unless it reaches its profitability, extends repayment of its credit facility and/or term debt due in June 2014 and September 2014 respectively, obtains additional financing or any combination thereof. Failure to reach profitability, extend the due date of its debt facilities, obtain financing, or a combination thereof, could result in the need to significantly restructure operations.

The Company owes $200,000 to a shareholder which is due on December 31, 2013 pursuant to a short term unsecured promissory note.

Due to the substantial delay in obtaining access to its reserves for its growing nutraceutical sales, the Company needed to raise short term capital to fund working capital and between March 28, 2013 and May 29, 2013 raised over $1 million from employees and shareholders through one year notes which pay interest at 10% on the principal amount regardless of when they are repaid and are due in late March and May 2014. As the Company discontinued sales of nutraceutical products during the second quarter of 2013, it no longer needs the merchant accounts to finance the purchase of its products by consumers over the internet. Management believes all of these merchant accounts receivable balances will be collected, but there is no assurance this will occur.

On May 10, 2013, the SkyMall Companies entered into a $7.65 million credit agreement (collectively, the “Credit Facility”) with JPMorgan Chase Bank, N.A. (the “Lender”). The Credit Facility is fully guaranteed by, and secured by all of the assets of, Xhibit and its subsidiaries, including the SkyMall Companies, pursuant to Continuing Guarantees and Continuing Security Agreements of each of Xhibit and its subsidiaries. All $7.65 million had been drawn down as of September 30, 2013.

The Credit Facility bears interest at the rate of 50 basis points above the LIBOR rate payable monthly, and is due and payable in full on July 1, 2014. Upon an event of default under the Credit Agreement, the interest rate increases automatically by 3% per annum. The Credit Facility, the Continuing Guarantees and the Continuing Security Agreements contain customary representations and warranties, events of default, affirmative covenants and negative covenants. The covenants in the Credit Facility, among other things, require the SkyMall Companies to continue to operate in their respective ordinary courses of business, maintain certain banking relationships and control accounts with the Lender. They also impose restrictions and limitations on, among other things, investments, dividends, acquisitions, asset sales, and the ability of the SkyMall Companies to incur or guarantee additional debt and additional liens. The Credit Facility is also guaranteed by an affiliate company controlled by Jahm Najafi, a member of the Company's Board of Directors and a majority shareholder of the Company through beneficial ownership.

The SkyMall Companies have an ongoing relationship with the Lender for which it has received customary fees and expenses. The Lender provides commercial banking services, including custody and cash management services, to the SkyMall Companies pursuant to Continuing Guarantees and Continuing Security Agreements of each of Xhibit and its subsidiaries; a Leasehold Deed Of Trust, Assignment Of Rents And Leases, Security Agreement And Fixture Filing executed by SkyMall, LLC; a Trademark Collateral Agreement executed by SkyMall, LLC; and a Trademark And Copyright Collateral Agreement executed by the Company.

On September 18, 2013, the Company borrowed $5.0 million from an entity which is an affiliate of and controlled by Jahm Najafi, a member of the Company’s Board of Directors and a majority shareholder of the Company through beneficial ownership (the “Term Debt”). The Term Debt matures on September 18, 2014 and interest is payable monthly at a rate of LIBOR plus 4.5%. The Term Debt is junior to the Bank Line but is fully guaranteed by, and secured by all of the assets of, Xhibit and its subsidiaries, including the SkyMall Companies.

Operating activities. Net cash used in operating activities during the nine-month period ended September 30, 2013 was $6.6 million compared to $0.2 million of net cash provided by operating activities for the nine-month period ended September 30, 2012. Cash used in operating activities during the nine-month period ended September 30, 2013 consisted primarily of the cash losses from operations (net income adjusted for non-cash charges) of $3.9 million and the negative impact of net working capital changes of $2.8 million. The negative impact of working capital changes is primarily due to the net paydown of accounts payable exceeding the net collection of accounts receivable.

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Investing activities. Net cash provided by investing activities for the nine-month period ended September 30, 2013 was $3.3 million compared to cash used in investing activities of $0.6 million for the nine-month period ended September 30, 2012. The cash provided from investing activities in 2013 consisted of the $4.4 million cash acquired with the SkyMall merger partially offset by $1.1 million in purchases of property and equipment. Capital additions in 2013 consist primarily of SkyMall’s new e.Commerce platform which launched in August 2013.

Financing activities. Net cash provided by financing activities for the nine-month period ended September 30, 2013 was $8.6 million as compared to $.4 million for the nine-month period ended September 30, 2012. Net cash provided by financing activities during 2013 consisted of a $2.9 million draw down on the Company’s bank line of credit, term debt borrowings of $5.0 million, net of deferred financing fees paid of $0.3 million and proceeds received from the issuance of $1.0 million in unsecured promissory notes to related parties. At September 30, 2013, there was $12.6 outstanding under the Company’s term debt and bank line of credit.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 10, 2014.

	XHIBIT CORP. (Registrant)

	By:	/s/ Scott Wiley
		Scott Wiley
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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