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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.

 
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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
 
• Comprehensive Dictionary – including extensive library of words, phrases and slang
 
• Full Text History – provides unlimited access to SMS content
 
• Fully Compatible – all handsets, devices and tablets
 
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. 

 
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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.

 
(b)
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.
 
 
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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.

 
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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.

 
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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.

EchoMetrix, Inc.
(Registrant)
   
By:
/s/ Erica Zalbert
 
Erica Zalbert, Principal Financial Officer
   
Date: November 5, 2010
 
 
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