Attached files
file | filename |
---|---|
EX-10.2 - EX-10.2 - ProText Mobility, Inc. | v202147_ex10-2.htm |
EX-31.2 - EX-31.2 - ProText Mobility, Inc. | v202147_ex31-2.htm |
EX-32.2 - EX-32.2 - ProText Mobility, Inc. | v202147_ex32-2.htm |
EX-31.1 - EX-31.1 - ProText Mobility, Inc. | v202147_ex31-1.htm |
EX-32.1 - EX-32.1 - ProText Mobility, Inc. | v202147_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED September 30, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _______________________ to _____________
Commission
file number 001-31590
EchoMetrix,
Inc.
(Exact
name of small business issuer as specified in its charter)
Delaware
|
11-3621755
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
6800 Jericho Turnpike, Suite
208E,
|
|
Syosset, New York
|
11791
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Issuer's
telephone number, including area code (516)
802-0223
N/A
(Former
name or former address, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer,” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
|
(Do
not check if a smaller
|
|||
reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchanges Act) Yes ¨ No x
State the
number of shares outstanding of each of the registrant's classes of common
equity, as of the latest practicable date.
The
outstanding number of the issuer's common stock, par value $.0001, as of
November 12, 2010 is 131,603,371 shares.
INDEX
Page
No.
|
|
Factors
Affecting Forward-Looking Statements
|
2
|
PART
I FINANCIAL INFORMATION
|
|
ITEM
1 – Financial Statements:
|
|
Consolidated
Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009
(Audited)
|
3–4
|
Consolidated
Statements of Operations For the Three and Nine Months ended September 30,
2010 (Unaudited) and 2009 (Unaudited)
|
5
|
Consolidated
Statements of Cash Flows For the Nine Months ended September 30, 2010
(Unaudited) and 2009 (Unaudited )
|
6-7
|
Notes
to Consolidated Financial Statements (Unaudited)
|
8
-16
|
ITEM
2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
17-20
|
ITEM
3 – Quantitative and Qualitative Disclosure about Market
Risk
|
20
|
ITEM
4 –Controls and Procedures
|
20
|
PART
II:
|
|
Item
1 – Legal Proceedings
|
21
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
21
|
Item
3 – Defaults upon Senior Securities
|
21
|
Item
4 – Removed and Reserved
|
21
|
Item
5 - Other Information
|
21
|
Item
6 – Exhibits
|
22
|
Signature
Page
|
23
|
1
This
quarterly report on Form 10-Q contains forward-looking
statements. These statements relate to future events or our future
financial performance. We have attempted to identify forward-looking statements
by terminology including “anticipate,” “believe,” “can,” “continue,” “could,”
“estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should”
or “will” or the negative of these terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, that may cause our or our industry’s actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking
statements.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We do not undertake any duty to update any of the
forward-looking statements after the date of this quarterly report on Form 10-Q
to conform these statements to actual results, unless required by
law.
2
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Current
assets:
|
||||||||
Cash
|
$ | 2,377 | $ | 37,890 | ||||
Accounts
receivable
|
545 | 238 | ||||||
Prepaid
expenses
|
12,181 | 12,671 | ||||||
Total
current assets
|
15,103 | 50,799 | ||||||
Property
and equipment - net
|
23,289 | 68,094 | ||||||
Other
assets:
|
||||||||
Capitalized
software costs, less accumulated amortization
|
||||||||
of
$211,936 and $82,120, respectively
|
286,527 | 252,001 | ||||||
Website
development costs, less accumulated
amortization of
|
||||||||
of
$16,250 and $5,000, respectively
|
28,750 | 40,000 | ||||||
Security
deposit
|
9,454 | 9,454 | ||||||
Total
other assets
|
324,731 | 301,455 | ||||||
Total
assets
|
$ | 363,123 | $ | 420,348 |
See notes
to consolidated unaudited financial statements
3
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Continued)
LIABILITIES AND
STOCKHOLDERS' DEFICIT
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Current
liabilities:
|
||||||||
Current
portion of long term debt and capital leases
|
$ | 10,813 | $ | 47,991 | ||||
Current
portion of 10% convertible notes payable
|
114,034 | 233,832 | ||||||
Convertible
short term bridge notes payable, net of
|
||||||||
discount
of $344,645 and $111,574 respectively
|
1,346,691 | 1,642,249 | ||||||
Non
convertible short term bridge notes payable
|
129,790 | 273,067 | ||||||
Due
to stockholders
|
221,567 | 307,838 | ||||||
Accounts
payable
|
415,817 | 295,771 | ||||||
Accrued
expenses
|
329,214 | 501,727 | ||||||
Total
current liabilities
|
2,567,926 | 3,302,475 | ||||||
Other
liabilities:
|
||||||||
Obligations
under capital lease, net of current portion
|
- | 5,735 | ||||||
Deferred
rent
|
4,772 | 7,541 | ||||||
Total
liabilities
|
2,572,698 | 3,315,751 | ||||||
Stockholders'
deficit
|
||||||||
Preferred
stock - $.0001 par value, authorized - 25,000,000
shares;
|
||||||||
Series
A Preferred stock - $.0001 par value, 1,526,718 designated; issued and
outstanding -
|
||||||||
901,237
repectively
|
90 | 90 | ||||||
Series
B Preferred stock - $.0001 par value, 550,055 designated; issued and
outstanding -
|
||||||||
434,543
and 220,022 respectively
|
43 | 22 | ||||||
Common
stock - $.0001 par value, authorized - 250,000,000
shares;
|
||||||||
issued
and outstanding -125,701,570, and 79,203,336 shares
respectively
|
12,571 | 7,921 | ||||||
Additional
paid-in capital
|
36,557,984 | 26,470,579 | ||||||
Accumulated
deficit
|
(38,780,263 | ) | (29,374,015 | ) | ||||
Total
stockholders' deficit
|
(2,209,575 | ) | (2,895,403 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 363,123 | $ | 420,348 |
See notes
to consolidated unaudited financial statements
4
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
For the Nine Months Ended September 30,
|
For the Three Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 24,757 | $ | 25,689 | $ | 8,338 | $ | 8,280 | ||||||||
Cost
of Sales
|
||||||||||||||||
Commissions
|
98 | 695 | 73 | 189 | ||||||||||||
Amortization
of Software Costs
|
107,772 | 57,120 | 40,300 | 23,755 | ||||||||||||
Cost
of Sales
|
107,870 | 57,815 | 40,373 | 23,944 | ||||||||||||
Gross
Loss
|
(83,113 | ) | (32,126 | ) | (32,035 | ) | (15,664 | ) | ||||||||
Operating
expenses:
|
||||||||||||||||
Selling
|
35,456 | 34,279 | 8,305 | 12,884 | ||||||||||||
Web
site costs
|
104,415 | 64,312 | 39,104 | 19,915 | ||||||||||||
General
and administrative
|
2,722,580 | 2,546,744 | 781,431 | 1,097,338 | ||||||||||||
Depreciation
and amortization
|
56,054 | 57,195 | 18,507 | 20,068 | ||||||||||||
Total
operating expenses
|
2,918,505 | 2,702,530 | 847,347 | 1,150,205 | ||||||||||||
Loss
from operations
|
(3,001,618 | ) | (2,734,656 | ) | (879,382 | ) | (1,165,869 | ) | ||||||||
Other
(income) expenses:
|
||||||||||||||||
Interest
|
167,381 | 331,198 | 47,561 | 188,594 | ||||||||||||
Interest
- related party
|
- | 1,008 | - | - | ||||||||||||
Gain
on extinguishment of liabilities
|
(3,500 | ) | (256,721 | ) | (34,763 | ) | (241,593 | ) | ||||||||
Debt
Conversion Expense
|
161,376 | - | 1,738 | - | ||||||||||||
Other
(income) expenses
|
- | (2,529 | ) | - | (2,530 | ) | ||||||||||
Amortization
of deferred financing costs
|
- | 10,000 | - | - | ||||||||||||
Amortization
of note discounts
|
459,701 | 457,903 | 272,037 | 273,903 | ||||||||||||
Total
other expenses :
|
784,958 | 540,859 | 286,573 | 218,374 | ||||||||||||
Net
loss
|
(3,786,576 | ) | (3,275,515 | ) | (1,165,955 | ) | (1,384,243 | ) | ||||||||
Common
stock dividends to be issued for Series B Preferred
Stock
|
(154,427 | ) | - | (63,997 | ) | - | ||||||||||
Deemed
preferred stock dividend related to warrant
modification
|
(2,023,804 | ) | - | - | - | |||||||||||
Deemed
preferred stock dividend related to issuance of warrants and common
stock
|
(3,441,441 | ) | (2,000,000 | ) | (488,260 | ) | (2,000,000 | ) | ||||||||
Net
loss applicable to common stockholders
|
$ | (9,406,248 | ) | $ | (5,275,515 | ) | $ | (1,718,212 | ) | $ | (3,384,243 | ) | ||||
Per
share data
|
||||||||||||||||
Loss
per share - basic and diluted
|
$ | (0.09 | ) | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.04 | ) | ||||
Weighted
average number of
|
||||||||||||||||
shares
outstanding- basic and diluted
|
103,763,858 | 73,913,381 | 118,796,137 | 77,558,174 |
See notes
to consolidated unaudited financial statements
5
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (3,786,576 | ) | $ | (3,275,515 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
used
in operating activities:
|
||||||||
Gain
on extinguishment of debt
|
(3,500 | ) | (256,721 | ) | ||||
Debt
modification expense
|
161,376 | - | ||||||
Bad
Debt
|
- | (250 | ) | |||||
Warrants/options
issued for consulting services
|
215,196 | 837,561 | ||||||
Common
stock issued for services
|
63,600 | 21,000 | ||||||
Common
stock issued for compensation
|
50,000 | 84,000 | ||||||
Stock
issued for interest
|
17,667 | 72,411 | ||||||
Compensatory
element of stock options
|
689,927 | 389,150 | ||||||
Depreciation
|
44,805 | 47,497 | ||||||
Amortization
of deferred financing costs
|
- | 10,000 | ||||||
Amortization
of software and website development costs
|
119,023 | 57,120 | ||||||
Amortization
of intangible assets
|
- | 9,657 | ||||||
Amortization
of discount related to debt
|
459,701 | 457,903 | ||||||
Interest
and Compensation expense as a result of modification
|
||||||||
of
warrant exercise price
|
- | 128,017 | ||||||
Increase
(decrease) in cash flows as a result of
|
||||||||
changes
in asset and liability account balances:
|
||||||||
Accounts
receivable
|
(306 | ) | 406 | |||||
Prepaid
expenses and other assets
|
490 | 6,854 | ||||||
Deferred
rent
|
(2,769 | ) | (1,468 | ) | ||||
Accounts
payable and accrued expenses
|
261,469 | (149,543 | ) | |||||
Total
adjustments
|
2,076,679 | 1,713,594 | ||||||
Net
cash used in operating activities
|
(1,709,897 | ) | (1,561,921 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Capitalized
software costs
|
(142,299 | ) | (187,575 | ) | ||||
Capitalized
website development costs
|
- | (30,000 | ) | |||||
Net
cash used in investing activities
|
(142,299 | ) | (217,575 | ) |
See notes
to consolidated unaudited financial statements
6
ECHOMETRIX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
For the Nine Months Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sale of Preferred B securities
|
1,950,000 | 2,000,000 | ||||||
Proceeds
from exercise of stock options
|
1,600 | - | ||||||
Payments
to stockholders
|
(86,271 | ) | (232,619 | ) | ||||
Proceeds
from bridge notes payable
|
200,000 | 1,600,000 | ||||||
Payments
of bridge notes payable
|
(210,000 | ) | (255,000 | ) | ||||
Payments
of note payable - equipment
|
(3,062 | ) | (4,237 | ) | ||||
Payments
of 10% investor notes payable
|
- | (150,000 | ) | |||||
Payments
of notes payable - bank
|
- | (49,007 | ) | |||||
Payments
under capital lease
|
(35,584 | ) | (65,769 | ) | ||||
Net
cash provided by financing activities
|
1,816,683 | 2,843,368 | ||||||
Net
(decrease) increase in cash
|
(35,513 | ) | 1,063,872 | |||||
Cash
at beginning of period
|
37,890 | 25,217 | ||||||
Cash
at end of period
|
$ | 2,377 | $ | 1,089,089 | ||||
Supplemental
Schedules of Noncash Investing
|
||||||||
and
Financing Activities:
|
||||||||
Common
stock issued in connection with settlement agreement
|
$ | 72,000 | $ | 45,000 | ||||
Common
stock issued in connection with extinguishment of payable
|
$ | 14,000 | $ | - | ||||
Common
stock issued as a result of debt conversion
|
$ | 315,563 | $ | 439,000 | ||||
Common
stock issued in lieu of accrued interest
|
$ | 228,750 | $ | - | ||||
Restricted
stock issued in connection with
|
||||||||
bridge
loans
|
$ | 188,112 | $ | 247,181 | ||||
Warrants
granted in connection with convertible bridge
loans
|
||||||||
issuance
|
$ | 34,719 | $ | 94,368 | ||||
Beneficial
conversion feature
|
||||||||
in
relation to convertible loans
|
$ | 469,894 | $ | 341,393 | ||||
Common stock dividends payable for Series | ||||||||
B
Preferred stock
|
$ | 63,997 | $ | - | ||||
Common
stock dividends issued for Series B Preferred Stock
|
$ | 90,430 | $ | - | ||||
Deemed
preferred stock dividend related to warrant modification
|
$ | 2,023,804 | $ | - | ||||
Deemed
preferred stock dividend related to issuance of warrants
and
|
||||||||
and
common stock
|
$ | 3,441,441 | $ | 2,000,000 |
See notes
to consolidated unaudited financial statements
7
NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September
30, 2010
NOTE
1 - BASIS OF
PRESENTATION
EchoMetrix,
Inc. is organized as a single reporting unit and believes that it operates as a
single business. References in this report to “EchoMetrix”, the “Company”, “we”,
“us” or “our” refers to EchoMetrix Inc. and its consolidated
subsidiaries.
Echometrix,
Inc. is a software development company maintaining core technology that analyzes
digital data streams. Through FamilySafe, Inc., a wholly owned subsidiary, the
Company operates FamilySafe Parental Controls. Our software solutions are
intended to protect children from dangers on the Internet and within the world
of mobile texting. Our products have been specially engineered to monitor, block
and alert parents the moment a child encounters inappropriate material from any
Internet or mobile related source.
Management's
efforts have been directed towards the implementation of a plan to generate
sufficient revenues to cover all of its present and future costs and expenses.
This plan which was implemented in the fourth quarter of fiscal year 2009
includes a corporate restructuring, which repositions Echometrix as a
business-to-business (B2B) company. In line with accelerating growth
through this realignment, we are launching our new FamilySafe Mobile offering,
the first ever, multi-language parental text monitoring product which can be
used on any text-enabled mobile phone.
The
accompanying consolidated financial statements have been prepared, in accordance
with accounting principles generally accepted in the United States (“U.S. GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany transactions have been eliminated in
consolidation. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's Annual report, as
amended on Form 10-K/A filed on July 28, 2010. The results of the nine months
ended September 30, 2010 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2010.
NOTE
2 - GOING
CONCERN
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As reflected in the
financial statements, the Company incurred net losses of $3,786,576 and
$3,275,515 for the nine months ended September 30, 2010 and 2009,
respectively. In addition, the Company had negative working capital
of $2,552,823 and an accumulated deficit of $38,780,263 at September 30,
2010.
These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
If the
Company does not generate sufficient revenues from the sales of its products in
an amount necessary to meet its cash needs, the Company will need additional
financing to continue to operate. As the Company increases sales from its
products and services, the Company expects to increase cash flows from
operations. The Company has been successful in raising financing from equity and
debt transactions. During the nine months ended September 30, 2010, the Company
raised approximately $2,150,000 from the issuance of debt and preferred
stock.
8
NOTE 3
- SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING
POLICIES
(a)
Earnings Per Share :
The
Company utilizes the guidance per FASB Codification “ASC 260 "Earnings Per
Share". Basic earnings per share is calculated on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted earnings per share, which is calculated by dividing
net income available to common stockholders by the weighted average number of
common shares used in the basic earnings per share calculation, plus the number
of common shares that would be issued assuming conversion of all potentially
dilutive securities outstanding, is not presented separately as it is
anti-dilutive. Such securities, shown below, presented on a common share
equivalent basis and outstanding as of September 30, 2010 and 2009 have been
excluded from the per share computations:
For the Nine Months Ended
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
2004
Stock Plan Options
|
230,000 | 870,000 | ||||||
Non
ISO Stock Options
|
26,021,922 | 21,629,001 | ||||||
Convertible
Preferred Stock
|
52,466,715 | 31,014,570 | ||||||
Convertible
Notes Payable
|
15,132,104 | 21,853,856 | ||||||
Warrants
|
100,162,317 | 41,405,284 |
(b)
Software Development Costs:
Research
and development costs are expensed as incurred. No research and development
costs were incurred during the nine months ended September 30, 2010 and
2009.
In
accordance with the provisions of Accounting for the costs of computer software
to be sold or otherwise marketed, software development costs are subject to
capitalization beginning when a product's technological feasibility has been
established and ending when a product is available for release to customers. For
the nine months and the fiscal year ended September 30, 2010 and December 31,
2009, respectively, the Company capitalized $142,299 and $247,207, respectively
of software development costs. The software costs are amortized on a
straight line basis over the estimated useful life of three years. Amortization
expense for the nine months ended September 30, 2010 and 2009 was $107,772 and
$57,120 respectively.
(c)
Revenue Recognition:
The
Company recognizes revenues in accordance with authoritative guidance and when
there is persuasive evidence of an arrangement, delivery has occurred or
services have been rendered, the sales price is determinable and collectability
is reasonably assured. Software products revenue is derived from online Internet
sales and is recognized upon the settlement of credit card charges, typically
within three days of the sale.
(d) Use
of Estimates:
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
(e) Debt
Extinguishment
In May
2010, the Company offered certain of its existing note holders the opportunity
to exchange their principal and interest balances for common stock or for new
loans with different terms.
(f)
Recent Accounting Pronouncements:
In May of
2010, EchoMetrix applied the provisions of ASC 470-50 “Debtors Accounting for a
Modification or Exchange of Debt Instruments” when it modified the terms of its
10% and Bridge notes. The Company evaluated these transactions under ASC 470-50
to determine if the modification was substantial and if extinguishment
accounting should be applied. If the change in fair value of the conversion
option is less than 10% of the carrying value of the debt, (and the debt
modification was not determined to be substantial) then ASC 470-20 applies. The
Company evaluated the new debt instrument and applied debt conversion expense.
(Note 5 and 6)
9
The
Company evaluates the new accounting provisions for guidance applicable to
EchoMetrix, Inc. During the period, the Company does not believe
there are any new pronouncements that will materially impact the
Company.
NOTE 4
– STOCK COMPENSATION
The
Company’s 2004 Stock Plan (the “ 2004 Plan”), which is shareholder approved,
permits the grant of share options and shares to its employees for up to
1,500,000 shares of Common Stock as stock compensation. All stock
options under the 2004 Stock Plan are granted at the fair market value of the
Common Stock at the grant date. Employee stock options vest ratably over a
three-year period and generally expire 5 years from the grant date.
The
Company’s 2009 Incentive Stock Plan, (the “2009 Plan”), which is Board of
Director approved, permits the grant of share options and shares
to directors, executives and selected employees and consultants for
up to 25,000,000 shares of Common Stock as stock
compensation. The Company filed the 2009 Incentive Stock Plan
with the Securities and Exchange Commission on October 19,
2010. Subsequent to September 30 ,2010, 41,666 shares of common stock
have been issued to a consultant for services.
Accounting
for Employee Awards:
The
Company adheres to the provisions of Share Based Compensation as defined in the
FASB codification, topic ASC 718. The codification focuses primarily on
accounting for transactions in which an entity obtains employee services through
share-based payment transactions. This guidance requires an entity to
measure the cost of employee services received in exchange for the award of
equity instruments based on the fair value of the award at the date of
grant. The cost is recognized over the period during which an
employee is required to provide services in exchange for the award.
As a
result of the adoption of the provision of Share Based Compensation, the
Company's results for the nine months ended September 30, 2010 and 2009 include
share-based compensation expense for employees and board of directors totaled
approximately $740,193 and $760,000, respectively, which have been included in
the general and administrative expenses line item in the accompanying
consolidated statement of operations. No income tax benefit has been
recognized in the income statement for share-based compensation arrangements as
the Company has provided a 100% valuation allowance on its’ net deferred tax
asset. Stock option compensation expense is the estimated fair value of options
granted amortized on a straight-line basis over the requisite service period for
the entire portion of the award. The Company has not adjusted the expense by
estimated forfeitures, as required for employee options, since the forfeiture
rate based upon historical data was determined to be immaterial.
During
the nine months ended September 30, 2010 the Company granted 2,500,000 fully
vested options to an employee with an exercise price of $0.10 and a five year
term. The Company granted its board of directors and advisory board
members an aggregate of 603,389 fully vested options with five year
terms and exercise prices between $0.08 and $0.17.
The fair
value of options at the date of grant is estimated using the Black-Scholes
option pricing model. During the nine months ended September 30, 2010 and 2009
the assumptions made in calculating the fair values of options are as
follows:
10
For the Nine Months Ended
|
||||||
September 30,
|
||||||
2010
|
2009
|
|||||
Expected
term (in years)
|
5
|
5
|
||||
Expected
volatility
|
100.31%-104.89%
|
99.09%-100.00%
|
||||
Expected
dividend yield
|
0
|
0
|
||||
Risk-free
interest rate
|
2.53%-4.01%
|
2.90%-3.71%
|
Accounting
for Non-employee Awards:
The
Company records its stock-based compensation expense in accordance with ASC
718-10, formerly SFAS 123R, “Share Based Payment” to its non-employee
consultants for stock granted.
Stock
compensation expense related to non-employee options was approximately $209,196
and $88,000 for nine months ended September 30, 2010 and 2009,
respectively. These amounts are included in the Consolidated Statements of
Operations within the general and administrative expenses line
item.
During
the nine months ended September 30, 2010, the Company granted 2,410,744 fully
vested options to non-employees. The options are exercisable at a range of
$0.07 to $0.18 and have a five year term.
The
following table represents our stock options granted, exercised, and forfeited
during the nine months ended September 30, 2010.
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|||||||
|
|
|
Average
|
|
|
Average
|
|
|
|
|||||||
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
||||||
|
Number
|
|
|
Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|||||
Stock Options
|
|
of Shares
|
|
|
per Share
|
|
|
Term
|
|
|
Value
|
|
||||
Outstanding
at January 1, 2010
|
25,069,001
|
$
|
0.18
|
3.3829
|
$
|
0
|
||||||||||
Granted
|
4,805,770
|
$
|
0.11
|
4.6070
|
0
|
|||||||||||
Exercised
|
(970,000)
|
$
|
0.09
|
|||||||||||||
Forfeited/expired
|
(2,652,849)
|
$
|
0.42
|
|||||||||||||
Outstanding
at September 30, 2010
|
26,251,922
|
$
|
0.14
|
3.2312
|
$
|
0
|
||||||||||
Exercisable
at September 30, 2010
|
24,521,922
|
$
|
0.14
|
3.1960
|
$
|
0
|
As of
September 30, 2010, there was $315,349 of unrecognized compensation cost,
related to nonvested stock options, which is expected to be recognized over a
weighted average period of approximately 2 years.
NOTE 5
- 10% CONVERTIBLE NOTES PAYABLE
In May of
2010, the Company sent each noteholder an inducement letter which (i) offered to
lower their conversion price from $0.40 to $0.14 per share or (ii) exchange
their existing note for a new note with the same principal and interest terms to
extend the maturity date by 9 months. In exchange for the new note, each
noteholder would receive one restricted share of the Company’s common stock and
one warrant (with a $0.35 exercise price and 1 year term) for each one dollar of
principal outstanding.
The
Company exchanged $41,596 of principal, issuing 41,596 of the Company’s
restricted common stock and 41,596 warrants (at an exercise price of $0.35 with
a one year term). The new note is a nine month note with interest calculated at
10% per annum paid in stock on a quarterly basis. The note is senior to any cash
distributions to the Company’s primary investor and has mandatory principal
repayment terms when and if options and warrants are exercised and the Company
receives the cash proceeds.
11
10%
Noteholders converted $119,799 of their principal balances and received common
stock. The Company applied the accounting per ASC 470-20, when conversion prices
are lowered to induce conversion and recorded debt conversion expense totaling
$63,616 as a result of the decrease in the conversion price from $0.40 to $0.14.
The offset of the conversion was to additional paid in capital.
As of
September 30, 2010 the remaining 10% convertible notes outstanding were in
default. The default provision requires an additional 2% interest per
annum until the loans are repaid or converted. The 2% default penalty totaled
approximately $3,007 and $8,800 for the nine months ended September 30,
2010 and 2009, respectively and is included in interest expense on the
consolidated statement of operations and in accrued expenses on the consolidated
balance sheet as of September 30, 2010 and December 31, 2009,
respectively.
As
reflected on the balance sheets, the value of the 10% convertible notes at
September 30, 2010 and December 31, 2009 amounted to $114,034 and $233,832,
respectively and are classified as current due to the fact that they are in
default for the non payment by the maturity date.
NOTE
6- BRIDGE NOTES PAYABLE
Convertible
Bridge Notes Payable:
In May of
2010, the Company sent each noteholder whose loan had expired an inducement
letter which (i) offered to lower their conversion price from $0.15 to
$0.14 per share of principal and to lower the accrued interest from $0.14 to
$0.12 or (ii) exchange their existing note for a new note with the same
principal and interest terms to extend the maturity date by 9 months. In
exchange for the new note, each noteholder would receive one restricted share of
the Company’s common stock and one warrant (with a $0.35 exercise price and 1
year term) for each one dollar of principal outstanding.
Convertible
note holders converted $195,765 of their principal balance into 1,398,319 shares
of the Company’s common stock. In accordance with ASC 470-20, the Company
applied the guidance for debt inducement, and recorded an expense for the debt
modification of $44,952 result of the decrease in the conversion price from
$0.15 to $0.14.
In
addition, the Company exchanged $1,066,366 of principal bridge notes payable
that had expired (which includes non convertible loans that exchanged their
loans for convertible loans ($112,512 of principal) and issued 1,066,366 of the
Company’s restricted common stock and 1,066,366 of warrants (at an exercise
price of $0.35) with a one year term. The new notes are for nine months
and interest is calculated at 10% per annum, payable quarterly in stock.
The notes are convertible at any time at $0.14 and carry mandatory principal
repayments when options or warrants are exercised and the company receives cash
proceeds.
The
Company evaluated the extension event under ASC 470-50 “Debtor’s Accounting for a
Modification or Exchange of Debt Instruments” to determine if the
modification was substantial. The
provisions of the new loan have been substantially the same as the previous
note, and therefore, in accordance with ASC 470, the expired loan was treated as
paid in full and the new loans and any additional restricted shares and warrants
granted were treated as a new transaction. As of September 30, 2010, a debt
discount and amortization expense of approximately $688,000 and $455,000
respectively has been recorded in connection with the Company’s bridge
loans.
As of
September 30, 2010, the Company’s convertible bridge loan payable principal
balance amounting to $625,000 was in default.
Non
Convertible Bridge Notes Payable:
On
October 4, 2007, the Company issued a short term promissory note in the
principal amount of $150,000. This note was payable on September 30, 2008 and
bears an interest rate equal to the prime rate plus three percent, 6.25% per
annum and is payable at the end of the term. As of September 30, 2010 and
December 31, 2009 the total of $124,790 of principal and accrued interest of
$32,411 and $27,481, respectively is outstanding and currently in default for
non payment of principal on maturity date.
12
As of
September 30, 2010, the Company’s non-convertible bridge loan payable principal
balance amounting to $129,790 was in default.
NOTE 7
- DUE TO STOCKHOLDERS
At
September 30, 2010 and December 31, 2009, the Company was indebted to its former
CEO, William Bozsnyak, in the amounts of $54,583 and $63,718, respectively, for
working capital advances made to the Company. For the nine months ended
September 30, 2009, interest expense was $1,008, which was calculated at
5.5%. At September 30, 2010 and December 31, 2009, $164,100 in accrued
interest was due to Mr. Bozsnyak.
At
September 30, 2010 and as of December 31, 2009, $2,884 and $80,019,
respectively, was owed for unpaid salaries and accrued
vacation.
NOTE 8
- EQUITY TRANSACTIONS
Common
Stock:
Payment of
Interest
For the
nine months ended September 30, 2010, the Company issued 159,208 shares (valued
at $17,667) of the Company’s common stock as payment for interest due on the
Company’s 10% convertible notes.
Senior Secured Bridge Notes
Issued
During
the nine months ended September 30, 2010, the Company issued 445,000 shares
(valued at $46,559) of the Company’s restricted common stock in connection with
the issuance of promissory notes amounting to $200,000.
Services
Rendered
The
Company issued 655,385 shares (valued at $63,600) for the nine months ended
September 30, 2010 of the Company’s restricted common stock as payment for
compensation to consultants. The Company issued 483,977 shares (valued at
$50,000) for the nine months ended September 30, 2010 of the Company’s
restricted common stock as payment for services to the Board of
Directors.
Legal
Settlements
In
February of 2010, the Company issued a $5,000 cash payment and 800,000 shares of
the Company’s common stock valued at $72,000 to a former consulting company
under the terms of a settlement agreement.
Extinguishment of Accounts
Payable
During
the nine months ended September 30, 2010 the Company issued 100,000 shares
(valued at $14,000) of its common stock in lieu of an account payable of
$17,500. The resulting gain of $3,500 is included within the gain on
extinguishment of liabilities line item in the accompanying consolidated
statement of operations.
Option and Warrant
Exercises
During
the nine months ended September 30, 2010 the Company issued 1,921,615 shares of
common stock as a result of cashless exercises of 970,000 options and 1,941,667
warrants.
Debt Conversion of
Interest
In the
nine months ended September 30, 2010, the Company issued 1,906,152 shares of its
common stock as a result of converting $228,750 of accrued interest (which was
accrued through May 31, 2010) on the bridge note holders and recorded debt
conversion expense of $52,808 which is included in the debt conversion expense
line item in the accompanying statement of operations.
13
Debt
Conversion
In
connection with the inducement letter issued to noteholders in May of 2010,
during the nine months ended September 30, 2010, the Company issued 855,703 and
1,398,319 shares of its common stock for $119,798 and $195,765 of the 10% and
Bridge notes, respectively and recorded debt conversion expense of $108,568
which is included in the debt conversion expense line item in the accompanying
statement of operations.
Debt
Exchange
Due to
the exchange of debt instruments in the nine months ending September 30, 2010,
the Company issued 1,107,935 shares of its restricted common stock to the 10%
and Bridge note holders..
Issuance of Common Stock as
a Result of Sale of Securities
In
the nine months ended September 30, 2010 the Company issued 1,114,940
shares of common stock as a dividend payable on Preferred Stock B for the
quarters ended December 31, 2009, March 31, 2010 and June 30, 2010. In
connection with Amendment No. 2 to the Series B Convertible Preferred Stock
effective March 4, 2010 the Company issued the pro rata portion of common stock
amounting to 35,550,000 shares.
Warrants
:
Effective
June 9, 2009, the Company filed a Post Effective Amendment No. 4 to its
Registration Statement on Form S-1 (“Post Effective Amendment” to extend the
terms to exercise the Class A Warrant from June 30, 2009 to June 30, 2010 and to
extend the term of the Class B Warrant from December 31, 2009 to June 30,
2010. On October 20, 2010 (the date the SEC deemed Amendment No. 5 to the
S-1 effective), these warrants were extended to June 30, 2011.
For the
nine months ended September 30, 2010, in connection with Amendment No. 2 to the
Series B Convertible Preferred Stock agreement, the Company cancelled warrants
issued in the fiscal year 2009 of 22,002.200 with an exercise price of
$0.15. Pursuant to Amendment No. 2 which was effective June 4, 2010, the
Company issued 25,300,000 cashless warrants with an exercise price of $0.03 and
term of five years, and 25,300,000 non cashless warrants with an exercise price
of $0.06 and a five year term. As a result of this modification, the
Company recorded $2,023,805 of a deemed dividend which is included in the
accompanying consolidated statement of operations.
Pursuant
to Amendment No. 2 to the Series B Convertible Preferred Stock agreement, when
proceeds were received in the period ended September 30, 2010, the Company
issued 14,200,000 of cashless warrants with an exercise price of $0.03 and term
of five years, and 14,200,000 non cashless warrants with an exercise price of
$0.06 and a five year term.
Pursuant
to Amendment No. 5 to the Series B Convertible Preferred Stock agreement
effective October 19, 2010 (Note 8), all warrants were changed to $0.01
cashless. Subsequent to the fiscal quarter ended September 30, 2010,
the Company cancelled 33,000,000 of cashless warrants with an exercise price of
$0.03 and 33,000,000 of non cashless warrants with an exercise price of $0.06
and issued 79,000,000 cashless warrants with an exercise price of
$0.01
During
the nine months ended September 30, 2010, the Company issued 1,107,935 warrants
at an exercise price of $0.35 and a one year term in connection with the debt
exchange (Note 4 and 5).
During
the nine months ended September 30, 2010, 1,941,667 warrants were exercised on a
net cashless basis.
14
NOTE 9
- PREFERRED B
On July
29, 2009, the Company and Rock Island Capital, LLC (“Rock Island”) entered
into a Series B Convertible Preferred Stock Purchase Agreement, as amended on
September 9, 2009 (the “Agreement”). Pursuant to the Agreement, the
Company has sold to assignees of Rock Island an initial tranche of $2,000,000 of
its Series B Convertible Preferred Stock (220,022 shares), in the aggregate, at
a purchase price per share of $9.09, and has issued to such assignees Warrants
to purchase 22,002,200 shares of the Company’s Common Stock, in the aggregate,
at an exercise price of $0.15 per share. Each share of Series B
Convertible Preferred Stock is convertible into 100 shares of the Company’s
Common Stock at the sole discretion of the holder. Pursuant to the
Agreement, Rock Island may designate one member for service on the Company’s
board of directors. Under the terms of the Agreement, Rock Island and its
assignees could, at their discretion, purchase additional shares of Series B
Convertible Preferred Stock and Warrants in two additional tranches of
$2,000,000 and $1,000,000 payable on or before December 2, 2009, and January 8,
2010, respectively.
The
Company recorded the beneficial conversion feature and the warrant associated
with such investment as a deemed preferred dividend of $2,000,000 with a
corresponding credit to additional paid in capital. In connection with the
Stock Purchase Agreement and Certificate of Designation, the Preferred B
stockholders were entitled to a quarterly dividend paid in common stock.
In accordance with the agreement, dividends totaling 1,114,490 were issued in
the nine months ended September 30, 2010.
On March
4, 2010, Echo Metrix, Inc. (the “Company”) entered into Amendment No. 2
(“Amendment No. 2”) to the Series B Convertible Preferred Stock Purchase
Agreement, dated July 29, 2009, as amended by Amendment No. 1 to the Series B
Convertible Preferred Stock Purchase Agreement, with Rock Island Capital, LLC
(the “Purchaser”), dated September 4, 2009 (as amended, the “Purchase
Agreement”).
Pursuant
to the Purchase Agreement, the Company agreed to sell to the Purchaser, in
tranches (with the last tranche to occur within approximately 60 days from
execution of Amendment No. 2), an aggregate of 550,055 shares of Series B
Preferred Stock (of which 220,022 shares were sold prior to execution of
Amendment No.2) for an aggregate purchase price of $5,000,000 (of which
$2,000,000 was sold prior to execution of Amendment No. 2). In addition, the
Company agreed to issue to the Purchaser five-year warrants to purchase
50,000,000 shares at an exercise price of $0.03, exercisable on a cashless
basis, and 50,000,000 shares at an exercise price of $0.06, not exercisable on a
cashless basis, in tranches pro rata with the sale of the Series B Preferred
Stock. The exercise price of the warrants not exercisable on a cashless basis
shall be reduced to $0.03 if the closing price of the Company’s common stock has
a volume weighted average price of less than $0.06 for a thirty day period
during the term of such warrants. The Company also agreed to issue to the
Purchaser 45,000,000 shares of common stock (the “Additional Shares”), in
tranches pro rata with the sale of the Series B Preferred Stock. As amended by
Amendment No. 3, the Purchaser may terminate the Purchase Agreement upon 10
days’ written notice, in which event the Purchaser shall not be obligated to
make any additional purchases under the Purchase Agreement.
In
connection with the Purchase Agreement, the Company filed an Amended and
Restated Certificate of Designation of Series B Preferred Stock (the
“Certificate of Designation”) filed with the State of Delaware on June 5,
2010.
On July
29, 2010 the Company entered into Amendment No. 4 to the Stock Purchase
Agreement of its Series B Convertible Preferred Stock with Rock Island Capital
LLC whereby it amended the termination clause to remove the penalties and the
termination payment fee.
On
October 19, 2010, the Company entered into Amendment No. 5 to the Purchase
Agreement (as amended, the “Purchase Agreement”), with Rock Island Capital, LLC
(the “Purchaser”).
Pursuant
to Amendment No. 5:
●
|
The
Purchaser agreed to purchase from the Company, and the Company agreed to
sell to the Purchaser, up to 192,500 units, with each unit consisting of
(i) one share of Series B Preferred Stock, (ii) 81.818181 shares of the
Company’s common stock and (iii) five-year warrants to purchase 181.818181
shares of the Company’s common stock at an exercise price of $0.01 (which
may be exercised on a cashless basis), for a purchase price of $9.0909 per
unit. The units will be sold in installments of at least $100,000 each on
before the 30th
day following the prior payment, with the first installment due on or
before the thirtieth day following the final payment of the aggregate
purchase price under the Agreement. In the event that the Purchaser shall
fail to timely pay any installment and does not notify the Company in
writing at least five days prior to such installment due date (upon which
notice the Purchaser shall be granted a 7-day extension), the Company may,
from and after the expiration of any and all applicable cure periods,
terminate the Agreement, and the Company shall have no right to pursue any
other remedy against Purchaser.
|
●
|
The
warrants issued or issuable under the Agreement shall be exercisable on a
cashless basis.
|
●
|
On
October 20, 2010, the Company filed an Amended and Restated Certificate of
Designation of Series B Preferred Stock, pursuant to
which:
|
|
●
|
Pursuant
to the commitment of the additional financing of $1,750,000, the number of
shares of authorized Series B Preferred Stock was increased from 550,055
to 1,000,000;
|
●
|
Pursuant
to the commitment of the additional financing of $1,750,000, the “Special
Dividend Amount” payable to the holders of Series B Preferred Stock was
increased from $2,500,000 to
$3,375,000;and
|
●
|
The
holders of Series B Preferred Stock shall be entitled to cumulative
dividends at a rate of 10% per annum, compounded annually and payable in
cash upon conversion of the Series B Preferred Stock into shares of common
stock or upon such other date as determined by the Board of Directors of
the Company.
|
15
In the
nine months ended September 30, 2010, the Company received $1,950,000 from the
sale of Series B Convertible Preferred Stock, and issued an additional 214,521
preferred B shares.
NOTE 10
- COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
On
October 20, 2010, the Company reached a settlement with the plaintiff resulting
in an additional 527,175 shares for interest accrued from October 23, 2008 until
settlement date. On or about November 2008, the plaintiffs, Freifelds brought an
action against the Company seeking summary judgment in lieu of complaint on two
debt conversions. The plaintiffs converted their notes and received the
Company’s stock certificates in November 2008. Subsequently, the plaintiffs
brought suit, requesting repayment of their converted notes.
Attorney General
Inquiry
As
disclosed in the Company’s 8-K filed on September 17, 2010, the Company entered
into an Assurance of Discontinuance Pursuant to Executive Law §63(15) (the
“Assurance”) with the Office of the Attorney General of the State of New York
(the “OAG”). The Company neither admits nor denies the findings of the OAG, made
in connection with the OAG’s inquiry relating to the Company’s discontinued
“PULSE” project. Pursuant to the Assurance of Discontinuance, (i) the Company is
permanently enjoined from using or selling the PULSE product. (The Company had
voluntarily ceased marketing the PULSE product shortly after the commencement of
the OAG’s inquiry; (ii) the Company will pay $100,000 to the OAG in
disgorgement, penalties, and costs; and (iii) the OAG will discontinue its
investigation of the “PULSE” project. The Company paid $50,000
in September of 2010, and the remaining $50,000 is due in December of
2010.
Federal Trade Commission
Civil Investigative Demand
On or
about December 16, 2009, the Company received a Civil Investigative Inquiry from
the Federal Trade Commission (“FTC”) related to PULSE. The Company has
been cooperating with the FTC’s investigation, and while prepared to vigorously
defend itself, the Company is in discussions for a settlement with the FTC in
order to amicably resolve the investigation. As of the date of this filing, no
value or estimate has been assessed to a settlement.
Almut Von
Biedermann
On May
10, 2010, the Company was served with an action from Ms. Von Biederman for
breach of contract seeking damages in excess of $75,000. The Company intends to
vigorously defend the action, and has accrued $20,000 of prior consulting fees
due to Ms. Von Biedermann.
16
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The
following is a discussion of our results of operations and current financial
position. This discussion should be read in conjunction with our unaudited
consolidated financial statements and related notes included elsewhere in this
report, as well as our audited consolidated financial statements and related
notes included in our Annual Report on Form 10-K/A for the year ended December
31, 2009.
As used
in this quarterly report on Form 10-Q, references to the “Company,” “we,” “us,”
“our” or similar terms include EchoMetrix, Inc. and its consolidated
subsidiaries.
Forward
Looking Statements
Except
for the historical information contained herein, the matters discussed below or
elsewhere in this quarterly report may contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those contemplated by the forward-looking statements.
Forward-looking statements reflect the Company's views and assumptions based on
information currently available to management. Such views and assumptions are
based on, among other things, the Company's operating and financial performance
over recent years and its expectations about its business for the current and
future fiscal years. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Such statements
are subject to certain risks, uncertainties and assumptions, including, but not
limited to, (a) the Company's ability to secure necessary capital in order to
continue to operate (b) the Company's ability to complete and sell its products
and services, (c) the Company's ability to achieve levels of sales sufficient to
cover operating expenses, (d) prevailing economic conditions which may
significantly deteriorate, thereby reducing the demand for the Company's
products and services, (e) regulatory or legal changes affecting the Company's
business and (f) the effectiveness of the Company's relationships in the
parental control and monitoring software and services, and imaging products
business.
General
Echometrix,
Inc is a software development company that maintains core technology that
analyzes digital data streams. Through FamilySafe, Inc., a wholly owned
subsidiary, the Company operates FamilySafe Parental Controls. Our software
solutions are intended to protect children from dangers on the Internet and
within the world of mobile texting. Our products have been specially engineered
to monitor, block and alert parents the moment a child encounters inappropriate
material from any Internet or mobile related source.
Management's
efforts have been directed towards the implementation of a plan to generate
sufficient revenues to cover all of its present and future costs and
expenses. This plan which was implemented in the fourth quarter of fiscal
year 2009 includes a corporate restructuring, which repositions Echometrix as a
business-to-business (B2B) company. In line with accelerating growth
through this realignment, we are launching our new FamilySafe Mobile offering,
the first ever, multi-language parental text monitoring product which can be
used on any text-enabled mobile phone. Millions of teens now use mobile phones
as their primary communication device and parents are increasingly concerned
about new dangers such as sexting and cyber-bullying.
Key
Feature Highlights of the FamilySafe Mobile Parental Management
Solution;
•
Network-based Technology – ensures reliability and delivery of
messages
• White
Label Offering – turn-key carrier solution with significant revenue
opportunity
•
Powerful Cause Marketing – association with AmberWatch Foundation co-branding
and family focus
•
SmartText Technology – complete auto-analysis of text conversations
•
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The
Company plans to market its mobile solution through mobile carrier network
channels. Echometrix has been in discussion with numerous distribution channels
in the United States, Europe and South America. The Company's new solution will
provide parents with increased access to FamilySafe's comprehensive child
protection solution across all device platforms, including computers and mobile
phones.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Management's efforts have been directed towards the development and
implementation of a plan to generate sufficient revenues to cover all of its
present and future costs and expenses. The plan includes, among other
things, implementing numerous online sales campaigns of parental control
software, and leveraging the Company’s core competencies.
If the
Company does not generate sufficient revenues from the sales of its products in
an amount necessary to meet its cash needs, the Company will need additional
financing to continue to operate. As the Company increases sales from its
products and services, the Company expects to increase cash flows from
operations.
17
Results
of Operations
Comparison
of the Results for the Nine Months Ended September 30, 2010 and September 30,
2009
Revenue
for the nine months ended September 30, 2010 and 2009 was $24,757 and
$25,689, respectively, a slight decrease of $932. Gross loss increased to
$83,113 from $32,126 due to the increased amortization of software costs in the
current period ended September 30, 2010 compared to the same period in the prior
year.
Operating
costs totaled $2,918,505 for the nine months ended September 30, 2010 compared
to $2,702,530 for the prior nine month period ending September 30, 2009.
This increase of $215,975 is due primarily to the increase of $175,836 in
general and administrative expenses and $40,103 in website costs. Included
in general and administrative costs are salaries and employee benefits including
stock based compensation, professional fees (including legal accounting and
consulting fees) rent and general insurance. There was a decrease of
approximately $223,000 in salaries and stock compensation (including employee
benefits) for the nine months ended September 30, 2010 compared to the prior
comparative period primarily due to fewer amount of stock and stock options
granted in the current period. Offsetting this decrease was an
increase in professional fees by approximately $360,000 compared to the nine
months ended September 30, 2009, which was primarily due to increased legal fees
and consulting.
Gain on
extinguishment of debt for the nine months ended September 30, 2010 consisted of
a gain of $3,500 for an extinguishment of accounts payable. The prior
comparative period ended September 30, 2009 consisted of a gain of $256,721
related to extinguishment of liabilities, including 10% note holder settlement,
accounts payable, and a pay off of a capital lease.
During
the nine months ended September 30, 2010 the Company recorded debt conversion
expense totaling $161,376 compared to zero for the same comparative prior
period.
Comparison
of the Results for the Three Months Ended September 30, 2010 and September 30,
2009
Revenue
for the three months ended September 30, 2010 and 2009 was $8,338 and $8,280,
respectively, a slight increase of $58. Gross loss increased to $32,035 from
$15,664 due to the increased amortization of software costs in the three months
ended September 30, 2010 compared to the same period in the prior
year.
Operating
costs totaled $847,347 for the three months ended September 30, 2010 compared to
$1,150,205 for the prior three month period ended September 30, 2009. The
decrease of $302,858 is due to the decrease of $315,907 in general and
administrative expenses. Included in general and administrative costs are
salaries and employee benefits including stock based compensation, professional
fees (including legal accounting and consulting fees) rent and general
insurance. Salaries, employee benefits and stock based compensation
decreased by approximately $456,464. Offsetting the decrease in compensation
expenses, professional fees increased by approximately $171,604 compared to the
three months ended September 30, 2009.
Gain on
extinguishment of debt for the three months ended September 30, 2009 consisted
of a gain of $241,593 for settlements of 10% note holders, and accounts
payable.
18
Liquidity
and Capital Resources
The
Company's liquidity and capital needs relate primarily to working capital and
other general corporate requirements. To date, the Company has funded its
operations with stockholder loans, by issuing notes and by the sale of common
and preferred stock. Since inception, the Company has not generated any
significant cash flows from operations. At September 30, 2010, the Company
had cash and cash equivalents of $2,377 and a working capital deficiency of
$2,552,823. If the Company does not generate sufficient revenues from the
sales of its products in an amount necessary to meet its cash needs, the Company
would need additional financing to continue to operate. As the Company
increases sales from its products and services, the Company expects to increase
cash flows from operations.
Net cash
used in operating activities for the nine months ended September 30, 2010 and
2009 was $1,709,897 and $1,561,921, respectively. The current period
net cash used in operating activities relates to the net loss of $3,786,576
offset by adjustments totaling $2,076,679, which primarily relates to $1,036,390
of non cash stock compensation expense, debt modification expense of $161,376
and depreciation and amortization of $623,529. The prior comparative
period’s net cash used in operating was due to a net loss of $3,275,515 offset
by non cash stock compensation of $1,404,122 and $582,177 of depreciation and
amortization.
Net cash
used in investing activities for the nine months ended September 30, 2010 and
2009 was $142,299 and $217,575 and are attributable to the additions of software
costs. The Company has spent the nine months ended September 30, 2010 in
developing the parental control product for the mobile market.
Net cash
provided by financing activities was $1,816,683and $2,843,368 for the nine
months ended September 30, 2010 and 2009, respectively. The decrease was a
result of the proceeds from the sale of the Company’s Preferred B Stock totaling
$1,950,000 in the current period compared to net proceeds from Series B
Preferred Stock and bridge note holders in the prior comparable nine months
totaling $3,195,000.
While the
Company has raised capital from equity and debt transactions as mentioned above,
we are dependent on improved operating results and raising additional funds over
the next twelve month period. There are no assurances that we will be able to
secure additional funding. In the event that we are unable to generate
sufficient cash flow or receive proceeds from offerings of debt or equity
securities, the Company may be forced to curtail or cease its
activities.
Research
and Development
Research
and development costs are generally expensed as incurred. In accordance with the
provisions of FASB Codification Topic ACS 985-20, "Costs of Software to be Sold,
Leased, or Marketed,” software development costs are subject to capitalization
beginning when a product's technological feasibility has been established and
ending when a product is available for release to customers. For the nine months
ended September 30, 2010, and 2009 the Company capitalized $142,299 and $217,575
of software and website development costs, respectively. The software and
website costs are amortized on a straight line basis over the estimated useful
life of three years. Amortization expense for the nine month period ended
September 30, 2010 and 2009 was $119,023 and $57,120 respectively.
In
accordance with FASB Codification Topic ASC 360-10-15, Impairment or Disposal of
Long-Lived Assets, we review long-lived assets for impairment whenever
circumstances and situations change such that there is an indication that the
carrying amounts may not be recovered. In such circumstances, we will
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. Future cash flows are the future cash inflows
expected to be generated by an asset less the future outflows expected to be
necessary to obtain those inflows. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, we will recognize an impairment loss to adjust to the fair
value of the asset. There have been no impairments for the nine month
period ended September 30, 2010.
19
The
Company continually strives to enhance and improve the functionality of its
software products. As such all new programming must be tested, even if it
is only a small component of a larger existing element of the software, before
being released to the public. Testing is an ongoing process and generally occurs
in three areas. First, upgrades and enhancements are done on a continual basis
to prolong the lifecycle of the products and as new enhancements and upgrades
are completed, each item must be tested for performance and function. Testing is
also performed to assure that new components do not adversely affect existing
software. Finally, as with all software, testing must assure compatibility with
all third party software, new operating systems and new hardware
platforms.
Critical
Accounting Policies:
Refer to
the Annual Report on Form 10-K/A for the year ended December 31, 2009 filed with
SEC for a listing of all such accounting principles.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Not
Applicable
Item 4. Controls and
Procedures.
Internal
Controls
|
(a)
|
Evaluation of Disclosure Controls
and Procedures. The Company maintains controls and procedures designed to
ensure that information required to be disclosed in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended
(“Exchange Act”), is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission. The Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of
September 30, 2010 and have concluded that, as of such date, our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed,
summarized and reported with the time periods specified in the
Commission's rules and
forms.
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|
(b)
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Changes in Internal
Controls. There were no changes in our internal controls over
financial reporting that occurred during the three month period ended
September 30, 2010 that have materially affected, or are reasonably like
to materially affect, our internal controls over financial
reporting.
|
The
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, does not expect that the Company's disclosure controls or the
Company's internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, have been detected. Because of the inherent limitations in a
cost effective control system, misstatements due to error or fraud may occur and
may not be detected. We will conduct periodic evaluations of our internal
controls to enhance, where necessary, our procedures and controls.
20
PART
II
Item
1. Legal Proceedings.
Freifeld
On
October 20, 2010, the Company reached a settlement with the plaintiff resulting
in an additional 527,175 shares for interest accrued from October 23, 2008 until
settlement date. On or about November 2008, the plaintiffs, Freifelds brought an
action against the Company seeking summary judgment in lieu of complaint on two
debt conversions. The plaintiffs converted their notes and received the
Company’s stock certificates in November 2008. Subsequently, the plaintiffs
brought suit, requesting repayment of their converted notes.
Attorney General
Inquiry
As
disclosed in the Company’s 8-K filed on September 17, 2010, the Company entered
into an Assurance of Discontinuance Pursuant to Executive Law §63(15) (the
“Assurance”) with the Office of the Attorney General of the State of New York
(the “OAG”). The Company neither admits nor denies the findings of the OAG, made
in connection with the OAG’s inquiry relating to the Company’s discontinued
“PULSE” project. Pursuant to the Assurance of Discontinuance, (i) the Company is
permanently enjoined from using or selling the PULSE product. (The Company had
voluntarily ceased marketing the PULSE product shortly after the commencement of
the OAG’s inquiry; (ii) the Company will pay $100,000 to the OAG in
disgorgement, penalties, and costs; and (iii) the OAG will discontinue its
investigation of the “PULSE” project. The Company paid $50,000
in September of 2010, and the remaining $50,000 is due in December of
2010.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Pursuant
to the purchase agreement with Rock Island Capital LLC, as amended, the Company
issued 5,850,000 shares of Common Stock, 71,507 shares of its Preferred B Stock,
and 13,000,000 of the one cents cashless warrants for proceeds received
from July 1, 2010 through September 30, 2010.
The above
securities were issued pursuant to the exemption from registration under Section
4(2) of the Securities Act for transactions not involving a public
offering.
Item
3. Defaults upon Senior Securities.
The
Company is currently in default on the 10% convertible notes totaling $114,034
of principal as of September 30, 2010. In addition, the Company is in
default on the principal of short term bridge notes payable totaling $625,000 as
of September 30, 2010.
Item
4. Removed and Reserved.
Item
5. Other Information.
None.
21
Item
6. Exhibits.
(a) Exhibits
10.2
Amendment No. 5 to the Series B Convertible Preferred Stock Purchase Agreement,
dated October 19, 2010.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of Sarbanes-Oxley Act.
22
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EchoMetrix, Inc.
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(Registrant)
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By:
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/s/ Erica Zalbert
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Erica
Zalbert, Principal Financial Officer
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Date:
November 5, 2010
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23