Xhibit Corp. - FORM 10-Q - October 14, 2014

Attached files

file	filename
EX-31.1 - CERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Xhibit Corp.	ex31-1.htm
EX-32.1 - CERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Xhibit Corp.	ex32-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Xhibit Corp.	Financial_Report.xls
EX-31.2 - CERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Xhibit Corp.	ex31-2.htm
EX-32.2 - CERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Xhibit Corp.	ex32-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 29, 2014

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

Commission file number: 000-52678

XHIBIT CORP.

(Exact name of registrant as specified in its charter)

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

1520 E. Pima Street

Phoenix, AZ 85034

(Address of principal executive offices)

(602) 254-9777

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer (Do not check if a smaller reporting company)	[ ]	Smaller reporting company	[X}

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 3, 2014 the Company had 108,232,935 shares of its $0.0001 par value common stock issued and outstanding.

EXPLANATORY NOTE

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

As a result of these restatements, the Company elected not to file this Quarterly Report on Form 10-Q until the Quarterly Reports on Form 10-Q/A for the quarterly periods ended June 30, 2013 and September 30, 2013 and the Annual Report on Form 10-K for the year ended December 31, 2013 had been filed with the SEC.

TABLE OF CONTENTS

		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 29, 2014 (Unaudited) and December 31, 2013	1
	Condensed Consolidated Statements of Operations for the Three Month Periods Ended June 29, 2014 and June 30, 2013 (Unaudited)	2
	Condensed Consolidated Statements of Operations for the Six Month Periods Ended June 29, 2014 and June 30, 2013 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 29, 2014 and June 30, 2013 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Under Senior Securities	31
Item 4	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32

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XHIBIT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 29, 2014 AND DECEMBER 31, 2013

	June 29,			December 31,
	2014			2013
	(Unaudited)
ASSETS
Current assets:
Cash	$	897,664		$	17,404,201
Accounts receivable, net		4,091,023			13,377,447
Inventories		36,074,307			20,007,110
Prepaid expenses		2,043,010			1,597,387
Total current assets		43,106,004			52,386,145

Property and equipment, net		6,121,892			5,837,806
Intangible assets, net		27,711,040			28,525,745
Deferred financing fees, net		273,581			225,872
Other assets		437,408			437,408

Total assets	$	77,649,925		$	87,412,976

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	16,085,125		$	26,007,807
Accrued expenses		1,371,018			2,179,307
Accrued payroll and related expenses		1,353,364			1,267,760
Accrued restructuring costs		42,222			148,939
Customer deposits		44,295,808			37,481,524
Related party debt		10,113,862			-
Notes payable, related parties		-			1,235,000
Deferred revenue		77,858			171,428
Total current liabilities		73,339,257			68,491,765

Non-current liabilities:
Revolving bank line of credit		-			3,669,095
Related party debt		-			5,000,000
Accrued restructuring costs, non-current portion		-			36,986
Total liabilities		73,339,257			77,197,846

Commitments and contingencies		-			-

Stockholders' equity:
Preferred stock, 80,000,000 shares authorized, $0.0001 par value, none issued or outstanding		-			-
Common stock, 480,000,000 shares authorized, $0.0001 par value, 108,232,935 and 107,839,234 shares issued and outstanding at June 29, 2014 and December 31, 2013, respectively		10,823			10,784
Additional paid-in-capital		186,083,018			185,345,544
Accumulated deficit		(181,783,173	)		(175,141,198	)
Total stockholders' equity		4,310,668			10,215,130

Total liabilities and stockholders' equity	$	77,649,925		$	87,412,976

See notes to condensed consolidated financial statements.

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XHIBIT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED JUNE 29, 2014 AND JUNE 30, 2013

(Unaudited)

	Three Months Ended June 29, 2014			Three Months Ended June 30, 2013
Revenues:
Internet marketing services	$	100,302		$	1,580,984
Net merchandise sales		9,470,479			6,091,367
Placement fees		2,069,421			1,691,636
Gift card and other sales		5,139,243			2,563,663
Total net revenues		16,779,445			11,927,650
Cost of revenues		10,666,644			7,506,622

Gross profit		6,112,801			4,421,028
Operating expenses:
Catalog		1,567,099			759,363
Sales and marketing		4,167,565			1,750,143
Customer service and fulfillment		647,146			314,241
General and administrative		3,384,627			5,536,227
Development		172,810			357,242
Total operating expenses		9,939,247			8,717,216

Loss from operations		(3,826,446	)		(4,296,188	)
Non-operating income (expenses):
Interest expense		(216,984	)		(32,901	)
Other		(40	)		4,780

Loss before income taxes		(4,043,470	)		(4,324,309	)
Income taxes		-			-

Loss from continuing operations		(4,043,470	)		(4,324,309	)
Income (loss) from discontinued operations, net of income taxes		7,340			(13,604	)

Net loss	$	(4,036,130	)	$	(4,337,913	)

Net loss per common share (basic and diluted):
Loss from continuing operations	$	(0.04	)	$	(0.05	)
Income (loss) from discontinued operations		-			-

Net loss	$	(0.04	)	$	(0.05	)

Weighted-average shares used to calculate net loss per common share:
Basic and diluted		108,232,935			90,608,624

See notes to condensed consolidated financial statements.

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XHIBIT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTH PERIODS ENDED JUNE 29, 2014 AND JUNE 30, 2013

(Unaudited)

	Six Months Ended June 29, 2014			Six Months Ended June 30, 2013
Revenues:
Internet marketing services	$	1,543,821		$	3,083,263
Net merchandise sales		18,766,159			6,091,367
Placement fees		4,562,934			1,691,636
Gift card and other sales		9,820,784			2,563,663
Total net revenues		34,693,698			13,429,929
Cost of revenues		21,927,165			7,693,429

Gross profit		12,766,533			5,736,500
Operating expenses:
Catalog		3,115,579			759,363
Sales and marketing		7,849,898			2,055,650
Customer service and fulfillment		1,319,213			314,241
General and administrative		6,543,906			6,806,303
Development		212,429			628,808
Total operating expenses		19,041,025			10,564,365

Loss from operations		(6,274,492	)		(4,827,865	)
Non-operating income (expenses):
Interest expense		(395,063	)		(41,096	)
Loss on debt conversion		-			(66,431	)
Other		(40	)		4,781

Loss before income taxes		(6,669,595	)		(4,930,611	)
Income taxes		-			-

Loss from continuing operations		(6,669,595	)		(4,930,611	)
Income (loss) from discontinued operations, net of income taxes		27,620			(477,011	)

Net loss	$	(6,641,975	)	$	(5,407,622	)

Net loss per common share (basic and diluted):
Loss from continuing operations	$	(0.06	)	$	(0.06	)
Income (loss) from discontinued operations		-			(0.01	)

Net loss	$	(0.06	)	$	(0.07	)

Weighted-average shares used to calculate net loss per common share:
Basic and diluted		108,167,318			79,456,896

See notes to condensed consolidated financial statements.

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XHIBIT CORP.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTH PERIODS ENDED JUNE 29, 2014 AND JUNE 30, 2013

	Six Months Ended June 29, 2014			Six Months Ended June 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(6,641,975	)	$	(5,407,622	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense		266,752			58,119
Depreciation & amortization		1,348,990			894,533
Non-cash stock-based compensation		237,513			2,006,597
Tenant improvement allowance		-			(61,602	)
Loss on debt conversion		-			66,431
Non-cash interest expense for amortization of deferred financing costs		259,416			-
Changes in operating assets & liabilities:
Accounts receivable		9,019,672			(1,328,968	)
Inventories		(16,067,197	)		3,667,011
Prepaid expenses		(453,957	)		(97,714	)
Other assets		-			(80,543	)
Accounts payable		(9,922,682	)		1,258,636
Accrued expenses		(808,289	)		646,225
Accrued payroll & related expenses		85,604			733,984
Accrued restructuring costs		(143,703	)		-
Customer deposits		6,814,284			(8,865,320	)
Deferred revenue		(93,570	)		77,390
Deferred rent liability		-			22,292
Net cash used in operating activities		(16,099,142	)		(6,410,551	)

CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired in SkyMall Merger		-			4,369,535
Purchases of property & equipment		(759,037	)		(490,489	)
Purchases of intangible assets		(51,000	)		-
Net cash provided by (used in) investing activities		(810,037	)		3,879,046

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving bank line of credit		15,357,400			2,900,000
Payments on revolving bank line of credit		(19,026,495	)		-
Borrowings on related party debt		12,929,053			-
Payments on related party debt		(7,315,191	)		-
Deferred financing fees paid		(307,125	)		-
Proceeds from notes payable, related parties		-			1,035,000
Payment on notes payable, related parties		(1,235,000	)		(40,000	)
Net cash provided by financing activities		402,642			3,895,000

Net change in cash		(16,506,537	)		1,363,495
Cash at beginning of period		17,404,201			363,172

Cash at end of period	$	897,664		$	1,726,667

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued related party note conversion	$	-		$	450,000
Common stock issued for SkyMall Merger	$	-		$	151,096,000
Common stock issued for conversion of related party debt	$	500,000		$	-

Cash paid for:
Interest	$	206,287		$	27,625
Income taxes	$	-		$	24,208

See notes to condensed consolidated financial statements.

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XHIBIT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTH PERIODS ENDED JUNE 29, 2014 AND JUNE 30, 2013

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

Organization

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

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

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

Nature of Operations

Through June 2014, Xhibit, through its subsidiaries other than the SkyMall Companies, operated an online lead generation and advertising business providing targeted and measurable online advertising campaigns and programs for a broad base of advertisers and advertising agency customers. This business enabled marketers to advertise and sell their products and services through affiliate marketing networks.

SkyMall operates a retail business as a multi-channel, direct marketer offering a wide array of merchandise from numerous direct marketers and manufacturers through the SkyMall catalog and website, SkyMall.com. SkyMall is best known as the exclusive provider of an in-flight shopping catalog carried on aircraft of large, U.S.-based airlines. SkyMall features over 25,000 products online with a subset of those being displayed in the in-flight catalog. Products are sourced directly from manufacturers, through distributors, or through other product aggregators that want to reach SkyMall’s large audience.

Until September 9, 2014, SkyMall operated a loyalty business as a provider of merchandise, gift cards and experiential rewards reaching millions of loyalty program members in various corporate and other loyalty programs throughout the United States. SkyMall’s loyalty business, operated through SkyMall Ventures, provided turnkey strategy, creative and fulfillment solutions for numerous customer programs operated by internationally-recognized brands. During 2014 to date, most of the Company's consolidated revenues were generated by the SkyMall Companies.

Between June 2013 and June 2014, the Company terminated or suspended all of the legacy Xhibit business operations and on September 9, 2014 the Company sold SkyMall Ventures, its loyalty business unit (Note 19). After September 9, 2014, all of our revenue will come from the SkyMall commerce business, which generated revenue of approximately $33.7 million in 2013 on a pro forma full year basis.

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Going Concern and Management’s Plans

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. The Company has incurred a loss from operations for the six month period ended June 29, 2014 and the year ended December 31, 2013 of $6,641,975 and $173,862,241, respectively. Additionally, the Company has a working capital deficit of $30,233,253 at June 29, 2014. As a result of these factors, a risk exists regarding the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.

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

●	Sale of SkyMall’s loyalty business unit in September 2014 (Note 19),

●	repayment and retirement of the Company’s revolving credit facility in September 2014 (Note 19),

●	sales of other assets or business units or other monetization of our assets,

●	elimination of unprofitable business units and product offerings,

●	aggressively seek new and additional sales opportunities, and

●	improve product gross margins through product sourcing efficiencies.

NOTE 2 – CHANGES IN SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), include the accounts of Xhibit and its wholly-owned subsidiaries which include the accounts and transactions of SHC Parent Corp. and its subsidiaries from the May 16, 2013 merger date. The Company does not have any subsidiaries in which it does not directly or indirectly own 100% of the outstanding stock. Intercompany transactions and balances have been eliminated in consolidation.

In February 2014, the Company changed its fiscal year end to the 52 or 53 week year that ends on the Sunday closest to December 31. For 2014, the Company’s fiscal second quarter ended on June 29, 2014 and its fiscal year end will be December 28, 2014.

Discontinued Operations

The financial statements separately report discontinued operations and the results of continuing operations (Note 15). The condensed consolidated financial statements for the three month period ended June 30, 2013 have been restated to present the operations of the Company’s Nutraceutical Products reporting segment as discontinued operations. Disclosures included herein pertain to the Company’s continuing operations unless noted otherwise.

Shipping and handling costs

Amounts billed to customers related to shipping and handling costs totaling $2,929,245 and $821,127 for the six month periods ended June 29, 2013 and June 30, 2012, respectively, are recorded as other revenues. Shipping and handling costs incurred by the Company are classified as cost of goods sold in the consolidated statements of operations.

Advertising

The Company expenses advertising costs when such costs are incurred. Advertising expenses were $247,233 and $99,845 during the six month periods ended June 29, 2014 and June 30, 2013, respectively.

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Net Loss per Common Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. During the three and six month periods ended June 29, 2014 and June 30, 2013, potentially dilutive securities were not considered in the calculation of dilutive loss per share as their impact would have been anti-dilutive. Accordingly, basic and diluted net loss per share were identical for the three and six month periods ended June 29, 2014 and June 30, 2013. Stock options and restricted stock awards outstanding as of June 29, 2014 totaling 285,000 and 1,242,004, respectively, were not included in the computation of diluted loss per share because they were anti-dilutive.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), which provides amended guidance on the presentation of financial statements and reporting discontinued operations and disclosures of disposals of components of an entity within property, plant and equipment. ASU 2014-08 amends the definition of a discontinued operation and requires entities to disclose additional information about disposal transactions that do not meet the discontinued operations criteria. The effective date of ASU No. 2014-08 is for disposals that occur in annual periods (and interim periods therein) beginning on or after December 15, 2014, with early adoption permitted. The Company is currently evaluating the impact, if any, that this amended guidance may have on its consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a single, comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. ASU No. 2014-09 is effective for annual periods (and interim periods therein) beginning on or after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact that this amended guidance will have on its condensed consolidated financial statements.

In June 2014, Financial Accounting Standards Board issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718), which clarifies accounting for share-based payments for which the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The updated guidance clarifies that such a term should be treated as a performance condition that affects vesting. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The guidance will be effective for the annual periods (and interim periods therein) ending after December 15, 2015. Early application is permitted. The Company does not anticipate that this guidance will materially impact its condensed consolidated financial statements.

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. The Company does not anticipate that this guidance will materially impact its condensed consolidated financial statements.

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NOTE 3 – BUSINESS COMBINATION

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

The following is unaudited proforma financial information of the combined entity for the six month period ended June 30, 2013 as though the business combination had been as of the beginning of the reporting period:

Proforma revenues	$	42,409,325
Proforma net loss	$	(8,407,357	)
Proforma loss per common share (basic and diluted)	$	(0.11	)

NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable consist of the following as of June 29, 2014 and December 31, 2013:

	June 29, 2014			December 31, 2013
Trade receivables	$	6,803,070		$	17,501,367
Merchant bank and other receivables		24,061			175,199
Placement fees billed in advance of distribution		(1,846,499	)		(2,528,911	)
Allowance for doubtful accounts		(889,609	)		(1,770,208	)
	$	4,091,023		$	13,377,447

The Company had outstanding balances in accounts receivable from three customers representing 73% of trade receivables at June 29, 2014 and 71% of trade receivables at December 31, 2013. Revenues from these three customers represented 62% and 49% of total revenues for the six month periods ended June 29, 2014 and June 30, 2013, respectively. No other customers represented greater than 10% of net revenues for the six month periods ended June 29, 2014 and June 30, 2013 or total trade receivables at June 29, 2014 and December 31, 2013.

NOTE 5 - INVENTORIES

Inventories consist of the following as of June 29, 2014 and December 31, 2013:

	June 29, 2014		December 31, 2013
Gift cards	$	25,396,461	$	18,417,078
Gift cards in transit		10,373,127		1,359,875
Paper and other		304,719		230,157
	$	36,074,307	$	20,007,110

Gift cards in transit consist of gift cards which have been paid for but not yet received by the Company.

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NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of June 29, 2014 and December 31, 2013:

	June 29, 2014			December 31, 2013
Computers, office equipment and software	$	2,434,219		$	2,223,196
Furniture, fixtures and other		188,478			188,478
Buildings and improvements		3,971,878			3,971,878
		6,594,575			6,383,552
Less accumulated depreciation		(1,117,237	)		(662,425	)
Construction in progress		644,554			116,679
	$	6,121,892		$	5,837,806

Depreciation expense was $474,951 and $176,276 for the six month periods ended June 29, 2014 and June 30, 2013, respectively.

NOTE 7 - INTANGIBLE ASSETS

Intangible assets consist of the following as of June 29, 2014 and December 31, 2013:

	Life	June 29, 2014			December 31, 2013
Amortizing intangible assets:
Loyalty partner relationships	7 years	$	7,193,871		$	7,193,871
Merchant relationships	4 years		3,396,258			3,396,258
Non-compete agreements			-			53,656
Internally developed software	4 years		550,000			550,000
Customer database	3 years		220,000			220,000
			11,360,129			11,413,785
Less accumulated amortization			(2,690,189	)		(1,878,140	)
			8,669,940			9,535,645
SkyMall tradename			7,010,000			7,010,000
Domain names			51,000			-
Goodwill			11,980,100			11,980,100
		$	27,711,040		$	28,525,745

Amortization expense was $865,705 and $718,257 for the six month periods ended June 29, 2014 and June 30, 2013, respectively. Future expected amortization expense for each of the five succeeding calendar years and thereafter is:

2014	$	887,582
2015		1,753,285
2016		1,753,285
2017		1,686,618
2018		863,057
Thereafter		1,726,113
	$	8,669,940

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NOTE 8 – REVOLVING BANK LINE OF CREDIT

On May 10, 2013, the SkyMall Companies entered into a $7,650,000 revolving line of credit note with JPMorgan Chase Bank, N.A. (the “Bank Line”) that refinanced an existing line of credit. Effective December 31, 2013, the Bank Line was amended. Based on the amendment terms, the Bank Line expires on June 30, 2015 and interest on outstanding borrowings is payable monthly at a rate of LIBOR plus 0.5%. The Bank Line is fully guaranteed by, and secured by all of the assets of, Xhibit and its subsidiaries, including the SkyMall Companies, pursuant to Continuing Guarantees and Continuing Security Agreements of Xhibit and each of its subsidiaries. In addition to the guaranties provided by the Company, the Credit Facility is also guaranteed by an affiliate company controlled by a member of the Company's Board of Directors who is also a majority shareholder through beneficial ownership. On April 29, 2014, the Bank Line was repaid and the facility was terminated (Note 9). At December 31, 2013, there was $3,669,095 outstanding under the Bank Line.

NOTE 9 – RELATED PARTY DEBT

On September 18, 2013, the Company borrowed $5,000,000 from an entity controlled by a member of the Company’s Board of Directors who is also a majority shareholder of the Company through beneficial ownership (the “Related Party Debt”). Effective December 31, 2013, the Related Party Debt was amended. Based on the amendment terms, the Related Party Debt matured on September 18, 2015 and interest was payable monthly at a rate of LIBOR plus 4.5%. The Company paid points totaling $96,975 to the lender related to refinancing, which are being amortized over the debt term. The Related Party Debt was junior to the Bank Line but was fully guaranteed by, and secured by all of the assets of, Xhibit and its subsidiaries, including the SkyMall Companies.

On January 31, 2014, the Company repaid $500,000 of principal on the Related Party Debt through issuance of 393,701 shares of Xhibit common stock (Note 12). In connection with this repayment, the borrowing capacity was permanently reduced to $4,500,000. The Company recorded non-cash stock-based compensation of $51,181 on this stock issuance (Note 14).

On April 29, 2014, the Related Party Debt was further amended. Among other changes, the amendment: 1) changed the term debt to a revolving credit facility; 2) increased the facility limit from $4,500,000 million to $17,150,000 million; 3) reduced the interest rate from LIBOR plus 4.5 percentage points to LIBOR plus 0.5 percentage point per annum and 4) accelerated the maturity date to January 15, 2015 from the prior maturity date of September 18, 2015. The covenants under the amended Related Party Debt, which were more restrictive than those previously included, provided additional security such as liens on gift card inventory, more stringent notice requirements, bank account control agreements, daily cash sweeps, and a prohibition on all equity capital raises, among other covenants set forth therein. The funds drawn on the Related Party Debt were applied to repay and retire the Bank Line (Note 8), which payment amount was $5,153,826, and provide for working capital. Immediately after the closing of the Related Party Debt amendment, and retirement of Bank Line, the Company borrowed $4,493,324 under the Related Party Debt, which represents an increase of $2,000,000 above the aggregate face amount of the previous outstanding balances on the Bank Line and Related Party Debt facility.

On September 9, 2014, the Related Party Debt was fully repaid and the facility was terminated (Note 19).

NOTE 10 - NOTES PAYABLE, RELATED PARTIES

In March 2012, the Company issued an unsecured promissory note in the amount of $500,000 to one of its members. The note had a maturity date, as amended, of December 31, 2012 and included interest at a simple rate of 10% per annum. In January 2013, the note was cancelled. In exchange for the cancellation, the Company issued 71,429 shares of common stock to the note holder and issued a new note in the amount of $250,000, which bears interest at a 10% annual rate and has a maturity date of December 31, 2013. As a result of the conversion, the Company recorded a $32,145 loss on the conversion of debt in 2013. During 2013, the Company made principal payments totaling $50,000 on the note payable. On January 6, 2014, the Company repaid the remaining $200,000 outstanding principal balance and all outstanding interest on the note payable. The note holder signed a waiver of default for the period between the time the note matured, December 31, 2013, and the date the note was repaid.

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

In March 2013, the Company issued an unsecured promissory note in the amount of $100,000 to one of its shareholders. The note bears interest at a simple rate of 10% per annum and was due and payable on March 28, 2014. On April 17, 2014, the Company amended the maturity date of promissory note due from March 28, 2014 to April 30, 2014 and on April 29, 2014, the Company repaid all principal and interest outstanding on the note. The note holder signed a waiver of default for the period between the time the note matured, March 28, 2014, and the date the note was repaid.

In April 2013, the Company issued unsecured promissory notes in the aggregate principal amount of $585,000 to six of its shareholders. The notes bear interest at a fixed amount equal to 10% of the principal amount. On March 31, 2014, the Company repaid all principal and interest outstanding on the notes.

In May 2013, the Company issued unsecured promissory notes in the aggregate principal amount of $350,000 to two of its shareholders. The notes bear interest at a fixed amount equal to 10% of the principal amount and are due and payable on May 31, 2014. On May 30, 2014, the Company repaid all principal and interest outstanding on the notes.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

In May 2014, the Company shut down the Bosnian Sub, its development subsidiary in Bosnia and Herzegovina. As part of this shut down, the Company terminated the employment of all employees, completely abandoned its social media applications and terminated the building lease with ABC. The Company did not incur any significant expenses in connection with shutting down the Bosnian Sub. The Company is in the process of liquidating the Bosnian Sub.

Leases

In November 2011, the Company entered into a lease agreement for corporate office space in Tempe, Arizona. Under the terms of the agreement, the Company made a payment of $250,000 in 2011 for prepaid rent to be applied to the first nine months’ rent beginning with the commencement date of June 1, 2012. The lease has pre-established annual rent increases and the original lease term ends in December 2018. The lease has an option to extend for an additional five years. The Company was also granted a $790,550 tenant improvement allowance. This allowance was used for the leasehold improvements completed on August 1, 2012. Accordingly, the Company recorded the tenant improvement allowance as a deferred lease incentive, and began amortizing the costs on August 1, 2012.

The Company ceased the use of its Tempe office space during September 2013 in connection with its restructuring plan (Note 13). Effective December 1, 2013, the Company entered into a sublease for the office space. Under the terms of the sublease agreement, the Company granted the sub lessee four months of free rent and commencing on April 1, 2014, the sub lessee will pay the Company an amount each month substantially equal to the rent amount due under the original lease.

In August 2012, the Company entered into a lease agreement with ABC Internet Media (“ABC”), which is owned by the Chief Technology Officer of the Bosnian Sub., to lease approximately 4,900 square feet of office space in Banja Luka, Bosnia and Herzegovina (Notes 17 and 19). The lease requires monthly payments of 13,500 Bosnian Marks; however it is paid in United States dollars, and can fluctuate month to month depending on the exchange rate. This lease was terminated in May 2014 in conjunction with the shutdown of the Bosnian Sub.

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

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

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

	Rental Payments		Sublease Receipts		Net Rental Payments
2014	$	279,016	$	193,827	$	85,189
2015		548,751		394,099		154,652
2016		475,250		413,721		61,529
2017		496,854		445,343		51,511
2018		528,476		476,965		51,511
Thereafter		875,686		-		875,686
	$	3,204,033	$	1,923,955	$	1,280,078

Rental expense was $185,985 and $221,715 for the six month periods ended June 29, 2014 and June 30, 2013, respectively.

Litigation

The Company is involved in various legal actions in the ordinary course of business. Although the outcomes of any such legal actions is uncertain, in the opinion of management, there is no legal proceeding pending or asserted against or involving the Company, the outcome of which is likely to have a material adverse effect upon the consolidated financial position or results of operations of the Company.

In February 2014, the Company received a Civil Investigative Demand (“CID”) from the U.S. Federal Trade Commission (“FTC”). In the CID, the FTC has requested information related to certain products marketed in the SkyMall in-flight catalog. The Company submitted the requested information to the FTC in late March 2014. In July 2014, the FTC informally advised the Company that it believes SkyMall lacked proper substantiation for claims made with respect to most of the products initially identified by the FTC. Accordingly, the FTC may pursue consumer redress for the identified items advertised in the SkyMall in-flight catalog. While the amount of the FTC’s potential demand for consumer redress is not known currently, the Company’s sales of the identified products during the relevant time period was approximately $823,000. The Company is currently not able to assess the likelihood of a loss related to this matter and accordingly, the Company has not accrued any liability for this matter.

Sales Tax

The Company collects and remits sales and use taxes in most states for both its in-flight and loyalty businesses. In the ordinary course of business, the Company is subject to audit by state and local tax authorities. At any given time, the Company typically has more than one ongoing audit. The Company records a contingency accrual for potential exposure related to sales tax audits. Sales tax contingency accruals included in accrued expenses in the consolidated balance sheet total $243,500 and $338,591 at June 29, 2014 and December 31, 2013, respectively.

NOTE 12 – SHAREHOLDERS’ EQUITY

Preferred stock

The Company has authorized 80,000,000 shares of preferred stock, par value $0.0001 per share, all of which are undesignated.

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Common stock

The Company has authorized 480,000,000 shares of common stock, par value $0.0001 per share. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to the prior rights of holders of all classes of preferred stock outstanding.

On January 31, 2014, the Company issued 393,701 shares of Xhibit Corp. common stock to repay $500,000 of principal on the Related Party Debt (Note 9).

NOTE 13 – RESTRUCTURING CHARGE

During September 2013, the Company implemented a restructuring plan to reduce operating costs. A restructuring charge of $852,859 comprised of severance benefits, outplacement services, and costs to consolidate the Company’s workforce into one location was recorded during September 2013. The Company ceased the use of its Tempe office space during September 2013 in connection with its restructuring plan (Note 11). As a result, the Company recorded a cease-use liability equal to the estimated fair value for the costs that will continue to be incurred under the lease contract without economic benefit. The fair value of the liability at the cease-use date was determined based on the remaining cash flows related to this lease, including future lease payments reduced by the estimated sublease rentals, discounted using a credit-adjusted risk-free rate. In connection with the lease abandonment, the associated net leasehold improvements, deferred lease incentive, and deferred rent balances were written off. Effective December 1, 2013, the Company entered into a sublease for the office space. Under the terms of the sublease agreement, the Company granted the sublessee four months of free rent and commencing on April 1, 2014, the sublessee will pay the Company an amount each month substantially equal to the rent amount due under the original lease. Consequently, at December 31, 2013, the Company adjusted the cease-use liability for the differences between the sublease income estimates and the actual sublease income per the sublease agreement using the original credit-adjusted risk-free rate. As a result of the lease abandonment, the Company recorded a total expense of $606,464 during 2013.

The activity in the accrued restructuring balance, which is included in accrued restructuring costs in the accompanying consolidated balance sheet for the six month period ended June 29, 2014, was as follows:

	Liability as of December 31, 2013		Cash Payments			Non-Cash Expenses			Liability as of June 29, 2014
Workforce reduction	$	44,963	$	(39,263	)	$	(5,700	)	$	-
Lease cease-use		140,962		(98,740	)		-			42,222
		185,925	$	(138,003	)	$	(5,700	)		42,222
Less non-current portion		36,986								-
Current portion	$	148,939							$	42,222

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NOTE 14 – NON-CASH STOCK-BASED COMPENSATION

For the six month periods ended June 29, 2014 and June 30, 2013, the Company recorded non-cash stock-based compensation as follows:

	Stock Option Plan			Restricted Stock Plan		Other Stock-Based Compensation		Total
Six month period ended June 29, 2014:
Sales and marketing expenses	$	(21,674	)	$	85,925	$	-	$	64,251
General and administrative expenses		63,400			144,120		51,181		258,701
Development expenses		(94,695	)		9,256		-		(85,439	)
	$	(52,969	)	$	239,301	$	51,181	$	237,513

Six month period ended June 30, 2013:
Sales and marketing expenses	$	272,495		$	-	$	-	$	272,495
General and administrative expenses		26,820			-		1,600,000		1,626,820
Development expenses		107,282			-		-		107,282
	$	406,597		$	-	$	1,600,000	$	2,006,597

The credits to expense under the stock option plan reflect the reversal of prior period compensation expenses for non-vested options which were forfeited during the six month period ended June 29, 2014.

Stock Option Plan

In August 2012, the Company’s Board of Directors adopted the Xhibit Corp. 2012 Stock Option Plan (the “Option Plan”). Under the Option Plan, the Company may issue up to an aggregate total of 13,000,000 incentive or non-qualified options to purchase the Company’s common stock. In May 2013, the Company’s Board of Directors authorized the grant of up to 1,900,000 non-qualified stock options to certain of its employees and contractors to purchase common shares under the Option Plan. A total of 1,895,000 options were granted with an exercise price of $4.02, which was equal to the closing price of the common stock on the OTCBB on the grant date, and a contractual term of ten years. The options vest and become exercisable ratably over a two year period with 50% of the options vesting on each anniversary of the grant date. At June 29, 2014, there were 12,715,000 options available for future grants under the Option Plan.

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

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

These assumptions were determined based upon the following considerations:

●

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

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●

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

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

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

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

Stock option plan award activity during the six month period ended June 29, 2014 was as follows:

	Number of Options			Average Exercise Price
Stock options outstanding at December 31, 2013		842,500		$	4.02
Granted		-
Exercised		-
Forfeited		(557,500	)	$	4.02
Stock options outstanding at June 29, 2014		285,000		$	4.02

At June 29, 2014, 142,500 employee stock options were exercisable. No employee stock options were exercisable at December 31, 2013. As of June 29, 2014, the Company estimates that 53,375 of the stock options outstanding will ultimately vest. The stock options had no aggregate intrinsic value at June 29, 2014 since the June 29, 2014 closing price for the Company’s stock was lower than the exercise price.

Restricted Stock Plan

In September 2013, the Company’s Board of Directors adopted the Xhibit Corp. 2013 Restricted Stock Plan (the “RS Plan”). Under the RS Plan, the Company may issue up to an aggregate total of 10,000,000 shares of the Company’s common stock. At June 29, 2014, there were 8,757,996 shares available for future grants under the RS Plan.

Stock-based compensation expense for employee restricted stock awards is recorded over the service/vesting period based on the estimated value of the awards that are ultimately expected to vest. An initial estimated forfeiture rate of 10% has been assumed for this calculation, and stock-based compensation expense will be adjusted as necessary in subsequent periods to reflect actual forfeiture activity.

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Restricted stock plan award activity during the six month period ended June 29, 2014 was as follows:

	Number of Shares			Average Grant Date Fair Value
Restricted shares outstanding at December 31, 2013		1,521,753		$	1.98
Granted		144,584		$	1.24
Exercised		-
Forfeited		(424,333	)	$	1.98
Restricted shares outstanding at June 29, 2014		1,242,004		$	1.89

As of June 29, 2014, the Company estimates that 795,560 of the restricted stock awards outstanding will ultimately vest.

Other Stock-Based Compensation

In connection with the Related Party Debt repayment in January 2014, the Company issued 393,701 shares of its common stock to the debt holder. Non-cash stock-based compensation of $51,181 was recorded in January 2014 for this transaction (Note 9).

In conjunction with the SkyMall Merger, the Company issued 400,000 shares of its common stock on July 9, 2013 to an individual as consideration for consulting services provided to the Company in connection with the SkyMall Merger. Non-cash stock-based compensation expense of $1,600,000 was recorded in June 2013 for this transaction.

NOTE 15 – DISCONTINUED OPERATIONS

The Company’s Nutraceutical Products business, which commenced operations in January 2013 and was shut down in October 2013, has been accounted for as discontinued operations. The operating results of the Company’s Nutraceutical Products business for the six month periods ended June 29, 2014 and June 30, 2013 are summarized below:

	2014		2013
Revenues	$	-	$	6,860,936

Income (loss) before income taxes	$	27,620	$	(477,011	)
Income taxes		-		-
Income (loss) from discontinued operations, net of taxes	$	27,620	$	(477,011	)

NOTE 16 – RETIREMENT PLAN

The SkyMall Companies have a retirement savings 401(k) plan (the “Plan”) covering all the Company’s employees with at least six months of service. Participants are eligible to defer the maximum allowable percentage of eligible compensation under the Internal Revenue Code. The Company made no matching contributions to the Plan during the six month periods ended June 29, 2014 and June 30, 2013.

NOTE 17 – RELATED PARTY TRANSACTIONS

As of December 31, 2013, interest payable to related parties totaling $70,940 was included in accrued expenses on the consolidated balance sheet. No interest payable was outstanding to related parties at June 29, 2014.

As of December 31, 2013, net accounts receivable from related parties totaling $14,000 were included in accounts receivable on the consolidated balance sheet.

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During the six month period ended June 30, 2013, the Company issued notes payable totaling $1,035,000 to certain of its shareholders (Note 10). No related party notes payable were issued during the six month period ended June 29, 2014.

The Company paid ABC, which is owned by the Chief Technology Officer of the Bosnian Sub, lease payments totaling $54,000 and $54,000 for the six month periods ended June 29, 2014 and June 30, 2014, respectively (Note 11).

During the six month period ended June 30, 2013, the Company paid WAT Works, LLC (“WAT Works”), an entity 50% owned by one of the Company’s employees, $108,704 for reimbursement of certain expenses incurred on the Company’s behalf pursuant to a Marketing Services Agreement. The Marketing Services Agreement was terminated on June 30, 2013 at no cost to the Company and accordingly, no amount was paid to WAT Works during the six month period ended June 29, 2014.

NOTE 18 – SEGMENT INFORMATION

Prior to January 1, 2013, the Company operated as a single reporting segment: Internet Marketing. In January 2013, the Company began operating a second reporting segment: Nutraceutical Products. Effective with the SkyMall Merger on May 16, 2013, the Company began operating a third reporting segment: SkyMall. In October 2013, the Company shut down its Nutraceutical Products reporting segment. The operating results of the Nutraceutical Products reporting segment have been recorded as discontinued operations in the accompanying condensed consolidated financial statements so the Nutraceutical Products reporting segment is no longer shown as a reporting segment during 2013. Subsequent to October 2013, the Company operates two reporting segments: SkyMall and Internet Marketing. Each segment is managed separately and provides different products and services.

The accounting policies of the segments are the same as described above, but research and development costs and certain selling, general and administrative costs have not been allocated to the segments. As a result, the segment information presented below is reflective of the manner in which management evaluates profitability for the segments.

The following table presents information by reporting segment for the six month periods ended June 29, 2014 and June 30, 2013:

	Six Month Period Ended June 29, 2014
	Internet Marketing			SkyMall			Corporate			Consolidated
Revenues	$	1,543,821		$	33,149,877		$	-		$	34,693,698
Cost of revenues		300,216			21,626,949			-			21,927,165
Gross profit		1,243,605			11,522,928			-			12,766,533
Operating expenses		687,862			17,443,534			909,629			19,041,025
Segment operating income (loss)		555,743			(5,920,606	)		(909,629	)		(6,274,492	)
Non-operating expenses and income taxes		-			-			(395,103	)		(395,103	)
Income (loss) from continuing operations	$	555,743		$	(5,920,606	)	$	(1,304,732	)	$	(6,669,595	)

Depreciation and amortization	$	33,347		$	1,315,643		$	-		$	1,348,990

Purchases of property and equipment	$	-		$	759,037		$	-		$	759,037

Gross assets at June 29, 2014	$	266,752		$	77,383,173		$	-		$	77,649,925

	Six Month Period Ended June 30, 2013
	Internet Marketing			SkyMall			Corporate			Consolidated
Revenues	$	3,083,263		$	10,346,666		$	-		$	13,429,929
Cost of revenues		1,107,327			6,586,102			-			7,693,429
Gross profit		1,975,936			3,760,564			-			5,736,500
Operating expenses		3,071,502			6,304,718			1,188,145			10,564,365
Segment operating income (loss)		(1,095,566	)		(2,544,154	)		(1,188,145	)		(4,827,865	)
Non-operating expenses and income taxes		-			-			(102,746	)		(102,746	)
Income (loss) from continuing operations	$	(1,095,566	)	$	(2,544,154	)	$	(1,290,891	)	$	(4,930,611	)

Depreciation and amortization	$	151,126		$	743,407		$	-		$	894,533

Purchases of property and equipment	$	181,213		$	309,276		$	-		$	490,489

Gross assets at June 30, 2013	$	5,763,296		$	194,920,432		$	-		$	200,683,728

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NOTE 19 – SUBSEQUENT EVENTS

The Company filed its Annual Report on Form 10-K for the year ended December 31, 2013 on September 10, 2014 which was after the extended due date of April 1, 2014. This failure to timely file the Annual Report on Form 10-K constituted a breach of certain covenants resulting in defaults under the Company’s Bank Line and Related Party Debt (Notes 8 and 9). The Company obtained written waivers of default, dated April 2, 2014, for the Bank Line and Related Party Debt. Both waivers of default provided for a forbearance period through April 30, 2014. Prior to the expiration of the waiver period, the Related Party Debt was amended and restated, and the Bank Line was repaid and retired. Also as a result of the Company’s failure to timely file its Annual Report on Form 10-K and subsequent Quarterly Report on Form 10-Q, broker-dealers are prevented from making a market in the Company’s common stock or disseminating quotations to the public on the OTC Bulletin Board.

On August 29, 2014, the Company received notice from Delta Air Lines, Inc. that Delta was exercising its right to terminate its contract with SkyMall effective November 30, 2014. As a result of this contract termination, the SkyMall catalog will not be available on Delta flights after November 30, 2014.

On September 9, 2014, SkyMall LLC sold 100% of the outstanding membership interests of SkyMall Ventures to Connexions Loyalty, Inc. (“Connexions”) pursuant to a Membership Interest Purchase Agreement dated as of the same date (the “MIPA”), for a cash purchase price of $24,000,000,of which $1,800,000 was placed into escrow to fund potential indemnity claims (the “SkyMall Ventures Sale”). SkyMall LLC is also entitled to receive a future payment of up to $3,900,000 in cash based upon a formula related to the operating profit of SkyMall Ventures during the 12 months following the closing. The MIPA contains customary representations, warranties and indemnities. In connection with the sale, SkyMall LLC also entered into a Transition Services Agreement with Connexions, pursuant to which SkyMall LLC will provide a broad range of services to SkyMall Ventures in support of its operations, including gift card fulfillment, contact center support, telecommunications, information technology, marketing and catalog creation, facilities and accounting and finance. The Transition Services Agreement provides for a term of up to 18 months, in exchange for which Connexions will pay a fee equal to SkyMall LLC's cost of providing such services, which is initially estimated to be approximately $415,000 per month. In addition, Xhibit Corp. entered into a Limited Guarantee guaranteeing the indemnity obligations of SkyMall LLC under the MIPA. As a result of the SkyMall Ventures Sale, the Company will not generate any revenues or operating profits from its loyalty business unit after September 9, 2014. During 2013, SkyMall Ventures recorded merchandise, gift card and other revenue totaling $45,002,007 for sales to loyalty programs operated by its customers.

In conjunction with the SkyMall Ventures Sale, the Company repaid the $15,206,112 outstanding balance on the Related Party Debt facility on September 9, 2014. The Related Party Debt facility was terminated immediately after the payoff.

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Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Readers are urged to carefully review and consider the various disclosures made by us in this Quarterly Report on Form 10-Q and our Form 10-K for the fiscal year ended December 31, 2013. These reports and filings attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Form 10-Q speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

EXPLANATORY NOTES

Unless otherwise indicated or the context otherwise requires, all references below in this report on Form 10-Q to "we," "us" and the "Company" are to Xhibit Corp., a Nevada corporation, and all its subsidiaries, including the SkyMall Companies. All references to “Xhibit” are to Xhibit Corp. and all of its subsidiaries other than the SkyMall Companies. All references to “SkyMall” are to the SkyMall Companies.

OVERVIEW

During 2014 to date, substantially all of the Company’s consolidated revenues were generated by the SkyMall Companies. Since its founding in 1989, SkyMall has developed a retail business as a multi-channel, direct marketer offering a wide array of merchandise from numerous direct marketers and manufacturers through the SkyMall catalog and website, SkyMall.com. SkyMall is best known as the exclusive provider of an in-flight shopping catalog carried on the aircraft of large U.S.-based airlines. SkyMall features over 25,000 products online with a subset of those being displayed in the in-flight catalog. SkyMall does not maintain material amounts of product inventory but, instead, principally serves as a distribution channel for manufacturers, distributors and other product aggregators that want to reach SkyMall’s large audience.

Until September 9, 2014, SkyMall operated a loyalty business as a provider of merchandise, gift cards and experiential rewards reaching millions of loyalty program members in various corporate and other loyalty programs throughout the United States. SkyMall’s loyalty business, which was operated through SkyMall Ventures, provided turnkey strategy, creative and fulfillment solutions for numerous customer programs operated by internationally-recognized brands.

Through June 2014 when we suspended the operations, Xhibit operated an online lead generation and advertising business providing targeted and measurable online advertising campaigns and programs for a broad base of advertisers and advertising agency customers. This business enabled marketers to advertise and sell their products and services through affiliate marketing networks.

Between June 2013 and June 2014, we terminated or suspended all of the legacy Xhibit business operations and on September 9, 2014 we sold our Loyalty business unit, SkyMall Ventures. After September 9, 2014, all of our revenue will be generated by the SkyMall commerce business, which generated revenue of approximately $33.7 million in 2013 on a pro forma full year basis.

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KEY TRENDS, DEVELOPMENTS AND CHALLENGES

The following developments and trends present opportunities, challenges and risks for our business:

●

Evolving Business Model. We are in the process of changing the business model for our SkyMall commerce business. Historically, a significant portion of our commerce business revenue was derived from placement fees paid by merchandisers for featuring their products in our catalog and we have not sold material amounts of product for our own account. Due to significant changes in the retail industry and air traveler practices and preferences, as discussed below, we are now focused on moving away from our historic placement fee model and instead moving to a model where we charge a margin percentage on product sales. In addition, we have begun offering products for our own account and branded products. In some cases we will assume the inventory risk for unsold products. This business model is a material departure from our historic commerce business model and there is no assurance that we can successfully transform our business to adapt to the changing market conditions.

●

Rapidly Evolving and Highly Competitive Retail Industry. The direct marketing retail industry is crowded, rapidly evolving and intensely competitive. Because we historically have not narrowly tailored our product offerings, we face well-established competitors in every market vertical, as well as competition from significant, broad-based ecommerce providers, such as Amazon and eBay. Barriers to entry are minimal, and current and new competitors can launch new websites quickly and at a relatively low cost. Many of our current and potential competitors have greater, or vastly greater, resources, longer histories, more customers, and higher brand recognition. These competitors may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing.

●

Technology Changes on Planes. With the increased use of electronic devices on planes, there is the risk that fewer people will pick up and browse the SkyMall in-flight catalog. Historically, we provided the sole in-flight option for potential purchasers of products to review while traveling. The substantial increase in the number of air carriers which provide internet access and the U.S. Federal Aviation Administration’s recent decision to allow the use of electronic devices during take-off and landing have resulted in additional competition from ecommerce retailers and additional competition for the attention of passengers, all of which we believe has negatively impacted our catalog sales.

●

Information Technology. We are upgrading a substantial portion of our key IT systems, including our back-end and accounting systems. We believe that these new systems will improve the productivity, scalability, reliability and sustainability of our IT infrastructure. However, the transition from our legacy systems entails increased costs and risk of unanticipated disruption, including disruptions in our core business functions that could adversely impact our business.

●

Product Price. Demand for products offered in our catalog is generally highly sensitive to price. Our pricing strategies have had, and may continue to have, a significant impact on our net sales and net income. We often offer discounted prices as a means of attracting customers and encouraging repeat purchases. Such offers and discounts reduce our margins. In addition, our competitors’ pricing and marketing strategies are beyond our control and can significantly impact the results of our pricing strategies. If we fail to meet our customers’ price expectations, or if we are unable to compete effectively with our competitors when they engage in aggressive pricing strategies or other competitive activities, our business may suffer.

●

Termination of Credit Facility. As discussed below, we repaid then terminated our principal credit facility on September 10, 2014. We believe we have sufficient liquidity and capital resources to operate our business through December 2014, but if our capital needs increase, or our business transformation does not proceed as anticipated, we may need to seek additional capital. We believe that currently we have only limited access to traditional commercial debt financing and therefore we would have to seek additional capital through the issuance of new equity, equity-linked instruments and/or debt, which may not be available on terms acceptable to us, or at all, and may result in dilution to our existing shareholders.

●

Intellectual Property Claims. From time to time, we face, and we expect to face in the future, allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors or non-practicing entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain products or services, purchase licenses or modify our products and services while we develop non-infringing substitutes or may result in significant settlement costs.

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FISCAL YEAR 2014 SIGNIFICANT EVENTS

In addition to the items mentioned above, we have experienced the following significant events in 2014 to date:

●	Sale of SkyMall Ventures. On September 9, 2014, we sold 100% of the outstanding membership interests of SkyMall Ventures to Connexions Loyalty, Inc. pursuant to a Membership Interest Purchase Agreement. Refer to Note 19, Subsequent Events, in Item 1, Financial Statements, for more information.

●	Amendments, Repayments and Terminations to Debt Facilities.

On January 31, 2014, but effective as of December 31, 2013, we amended our bank line of credit and related party debt facility. Refer to Note 8, Revolving Line of Credit, and Note 9, Related Party Debt, in Item 1, Financial Statements, for more information.

On April 29, 2014, we amended and restated our related party debt facility. Refer to Note 8, Revolving Line of Credit, and Note 9, Related Party Debt, in Item 1, Financial Statements, for more information.

During 2014, we repaid all outstanding principal and interest on related party notes payable that were outstanding as of December 31, 2013. Refer to Note 10, Notes Payable, Related Parties, and Note 19, Subsequent Events, in Item 1, Financial Statements, for more information.

In conjunction with the SkyMall Ventures Sale on September 9, 2014, we repaid the $15,206,391 outstanding balance on our related party debt facility, which we terminated immediately after the repayment. Refer to Note 19, Subsequent Events, in Item 1, Financial Statements, for more information.

●	Fiscal Year End Change. In February 2014, we changed the Company’s fiscal year end to the 52 or 53 week year that ends on the Sunday closest to December 31. For fiscal 2014, our fiscal year end will be December 28, 2014.

●	Shut Down of Development Subsidiary. In May 2014, we shut down our development subsidiary in Bosnia and Herzegovina. As part of this shut down, we terminated the employment of all employees, completely abandoned our social media applications and terminated the building lease.

●	Suspended Operations of Internet Marketing Business. In June 2014, we suspended operations of our lead generation and advertising business. We are currently evaluating strategies for re-launching this business.

●

Termination of Delta Airlines Contract. On August 29, 2014, we received notice from Delta Air Lines, Inc. that it was exercising its right to terminate its contract with SkyMall effective November 30, 2014. As a result of this contract termination, the SkyMall catalog will not be available on Delta flights after November 30, 2014.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Refer to our 2013 Annual Report on Form 10-K for our critical accounting policies and estimates and to Note 2, Changes in Significant Accounting Policies, in Item 1, Financial Statements, for changes to our critical accounting policies during 2014.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements, refer to Note 2, Changes in Significant Accounting Policies, in Item 1, Financial Statements.

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SEGMENT REPORTING

Prior to January 1, 2013, the Company operated as a single reporting segment: Internet Marketing. In January 2013, the Company began operating a second reporting segment: Nutraceutical Products. Effective with the SkyMall Merger on May 16, 2013, the Company began operating a third reporting segment: SkyMall. In October 2013, the Company shut down its Nutraceutical Products reporting segment. The operating results of the Nutraceutical Products reporting segment have been recorded as discontinued operations in the accompanying condensed consolidated financial statements so Nutraceutical Products reporting segment is no longer shown as a reporting segment during 2013. Subsequent to October 2013, the Company operated two reporting segments: SkyMall and Internet Marketing. Each segment was managed separately and provided different products and services.

The following table presents information by segment for the three month periods ended June 29, 2014 and June 30, 2013 (in thousands):

Three month period ended June 29, 2014:	Internet Marketing			SkyMall			Corporate			Consolidated
Revenues	$	100		$	16,679		$	-		$	16,779
Cost of revenues		80			10,586			-			10,666
Gross profit		20			6,093			-			6,113
Operating expenses		236			9,151			552			9,939
Segment operating income (loss)		(216	)		(3,058	)		(552	)		(3,826	)
Non-operating expenses and income taxes		-			-			(217	)		(217	)
Income (loss) from continuing operations	$	(216	)	$	(3,058	)	$	(769	)	$	(4,043	)

Three month period ended June 30, 2013:
Revenues	$	1,581		$	10,347		$	-		$	11,928
Cost of revenues		921			6,586			-			7,507
Gross profit		660			3,761			-			4,421
Operating expenses		2,405			5,623			689			8,717
Segment operating income (loss)		(1,745	)		(1,862	)		(689	)		(4,296	)
Non-operating expenses and income taxes		-			-			(28	)		(28	)
Income (loss) from continuing operations	$	(1,745	)	$	(1,862	)	$	(717	)	$	(4,324	)

The following table presents information by segment for the six month periods ended June 29, 2014 and June 30, 2013 (in thousands):

Six month period ended June 29, 2014:	Internet Marketing			SkyMall			Corporate			Consolidated
Revenues	$	1,544		$	33,150		$	-		$	34,694
Cost of revenues		300			21,627			-			21,927
Gross profit		1,244			11,523			-			12,767
Operating expenses		688			17,444			910			19,042
Segment operating income (loss)		556			(5,921	)		(910	)		(6,275	)
Non-operating expenses and income taxes		-			-			(395	)		(395	)
Income (loss) from continuing operations	$	556		$	(5,921	)	$	(1,305	)	$	(6,670	)

Six month period ended June 30, 2013:
Revenues	$	3,083		$	10,347		$	-		$	13,430
Cost of revenues		1,107			6,586			-			7,693
Gross profit		1,976			3,761			-			5,737
Operating expenses		3,072			6,305			1,188			10,565
Segment operating income (loss)		(1,096	)		(2,544	)		(1,188	)		(4,828	)
Non-operating expenses and income taxes		-			-			(103	)		(103	)
Income (loss) from continuing operations	$	(1,096	)	$	(2,544	)	$	(1,291	)	$	(4,931	)

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Results of Operations

The following sets forth a discussion and analysis of the Company's financial condition and results of operations for the six month periods ended June 29, 2014 and June 30, 2013. This discussion and analysis should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013 and the condensed consolidated financial statements for the six month periods ended June 29, 2014 and June 30, 2013 included in this Quarterly Report on Form 10-Q.

The SkyMall Merger was completed on May 16, 2013. Accordingly, the results of operations prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the three and six month periods ended June 30, 2013 do not include the operating results of SkyMall for periods prior to May 16, 2013.

Non-GAAP Financial Measures – The Company has presented pro forma, EBITDA and Adjusted EBITDA amounts, which are measures used by management to evaluate the Company’s year-over-year performance and as a general indicator of the Company’s operating profitability. Pro forma amounts include the SkyMall operating results as though the SkyMall merger had been completed as of the beginning of 2013.

A reconciliation of the GAAP statements of operations to the pro forma statements of operation for the three month period ended June 30, 2013 is presented below (in thousands):

	Three Month Period Ended			Three Month Period Ended June 30, 2013
	June 29, 2014			GAAP			Adjustments			Pro forma
Revenues	$	16,779		$	11,928			9,605		$	21,533
Cost of reveues		10,666			7,507			6,240			13,747

Gross profit		6,113			4,421			3,365			7,786
Operating expenses		9,939			8,717			3,844			12,561

Loss from operations		(3,826	)		(4,296	)		(479	)		(4,775	)
Non-operating income (expense)		(217	)		(28	)		(5	)		(33	)
Income tax benefit (expense)		-			-			(12	)		(12	)

Loss from continuing operations		(4,043	)		(4,324	)		(496	)		(4,820	)
Income (loss) from discontinued operations		7			(14	)		-			(14	)

Net loss	$	(4,036	)	$	(4,338	)	$	(496	)	$	(4,834	)

A reconciliation of the GAAP statements of operations to the pro forma statements of operation for the six month period ended June 30, 2013 is presented below (in thousands):

	Six Month Period Ended			Six Month Period Ended June 30, 2013
	June 29, 2014			GAAP			Adjustments			Pro forma
Revenues	$	34,694		$	13,430			29,661		$	43,091
Cost of reveues		21,927			7,693			19,219			26,912

Gross profit		12,767			5,737			10,442			16,179
Operating expenses		19,042			10,565			13,401			23,966

Loss from operations		(6,275	)		(4,828	)		(2,959	)		(7,787	)
Non-operating income (expense)		(395	)		(103	)		(28	)		(131	)
Income tax benefit (expense)		-			-			(12	)		(12	)

Loss from continuing operations		(6,670	)		(4,931	)		(2,999	)		(7,970	)
Income (loss) from discontinued operations		28			(477	)		-			(477	)

Net loss	$	(6,642	)	$	(5,408	)	$	(2,999	)	$	(8,407	)

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The Company defines EBITDA as net income, adjusted to exclude interest expense, income taxes, and depreciation and amortization. The Company’s definition of Adjusted EBITDA is comprised of EBITDA adjusted to exclude stock-based compensation and non-recurring gains and losses. Management believes EBITDA and Adjusted EBITDA are useful to investors because they are frequently used by securities analysts, investors and other interested parties in the comparative evaluation of companies. Because not all companies use identical calculations, the Company's presentation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to either net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use as it does not reflect certain cash requirements such as interest payments, tax payments and debt service requirements. As noted above, the Company excludes certain non-cash and non-recurring items from Adjusted EBITDA to provide an enhanced indicator of operating profitability and cash flow.

A reconciliation of GAAP net income (loss) to EBITDA and Adjusted EBITDA for the three month periods ended June 29, 2014 and June 30, 2013 is presented below (in thousands):

	Three Month Period Ended June 29, 2014			Three Month Period Ended June 30, 2013
				GAAP			Pro forma
Net loss	$	(4,036	)	$	(4,338	)	$	(4,834	)
Depreciation and amortization		683			669			794
Interest expense		217			33			38
Income tax benefit (expense)		-			-			12

EBITDA		(3,136	)		(3,636	)		(3,990	)

Loss (gain) from discontinued operations		(7	)		14			14
Non-cash stock-based compensation		191			2,006			2,006
Loss on debt conversion		-			-			-

Adjusted EBITDA	$	(2,952	)	$	(1,616	)	$	(1,970	)

A reconciliation of GAAP net income (loss) to EBITDA and Adjusted EBITDA for the six month periods ended June 29, 2014 and June 30, 2013 is presented below (in thousands):

	Six Month Period Ended June 29, 2014			Six Month Period Ended June 30, 2013
				GAAP			Pro forma
Net loss	$	(6,642	)	$	(5,408	)	$	(8,407	)
Depreciation and amortization		1,349			893			1,579
Interest expense		395			41			69
Income tax benefit (expense)		-			-			12

EBITDA		(4,898	)		(4,474	)		(6,747	)

Loss (gain) from discontinued operations		(28	)		477			477
Non-cash stock-based compensation		238			2,006			2,006
Loss on debt conversion		-			67			67

Adjusted EBITDA	$	(4,688	)	$	(1,924	)	$	(4,197	)

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THREE MONTH PERIOD ENDED JUNE 29, 2014 COMPARED TO THREE MONTH PERIOD ENDED JUNE 30, 2013

Revenues. Revenue for the three month period ended June 29, 2014 was $16,779,445 ($100,302 from the legacy Xhibit businesses and $16,679,143 from SkyMall) compared to $11,927,650 for the three month period ended June 30, 2013. The increase of $4,851,795 was attributable to SkyMall ($6,332,477) partially offset by a decrease for the legacy Xhibit businesses ($1,480,682). The legacy Xhibit business unit revenue primarily consisted of lead generation and advertising services from the Internet Marketing segment. Internet Marketing revenues for the three month period ended June 29, 2014 were negatively impacted by our primary service provider’s decision to discontinue servicing our type of email marketing activity in February 2014 and the temporary shutdown of the business in June 2014.

During the three month period ended June 29, 2014, the Company had a high concentration of revenue and credit risk as its three largest customers, each of which was a SkyMall Loyalty channel customer, accounted for 62% of its total 2014 second quarter revenues.

Pro forma Results

Revenue in the three month period ended June 29, 2014 was $16,779,445 compared to pro forma revenue of $21,533,144 in 2013, a decrease of $4,753,699 (22.1%). The decrease was attributable to SkyMall ($3,273,017 and 16.4%) and the legacy Xhibit businesses ($1,480,682 and 93.7%). Pro forma revenue from the SkyMall business unit decreased in 2013 primarily due to a mix shift of revenues in our Loyalty channel from merchandise sales (which are recorded on a gross basis) to gift card sales (which are generally recorded on a net basis). Additionally, merchandise sales were negatively impacted by a point pricing change implemented by one of our Loyalty channel partners in early 2013. Lastly, 2014 placement fees were lower than the 2013 pro forma amount primarily due to the loss of certain large suppliers of product for our in-flight catalog suppliers that had previously paid placement fees.

Cost of revenues. Cost of revenues for the three month period ended June 29, 2014 was $10,666,644 ($80,827 from the legacy Xhibit businesses and $10,585,817 from SkyMall) compared to $7,506,622 for the three month period ended June 30, 2013. The increase of $3,160,022 was attributable to SkyMall ($3,999,715) partially offset by a decrease from the legacy Xhibit businesses ($839,693). Cost of revenues as a percentage of revenues for the legacy Xhibit business units was 80.6% for the three month period ended June 29, 2014 compared to 58.2% for the comparable period in 2013. The increase in cost of revenues as a percentage of revenues for the legacy Xhibit business units was primarily due to costs incurred during the temporary shutdown of the internet marketing business in June 2014.

Pro forma Results

Cost of revenues was $10,666,644 for the three month period ended June 29, 2014 compared to pro forma cost of revenue of $13,746,957 for the three month period ended June 30, 2013, a decrease of $3,080,313 (22.4%). The decrease was attributable to SkyMall ($2,240,620 and 17.5%) and the legacy Xhibit businesses ($839,693). The SkyMall decrease was primarily due to lower sales volumes as cost of revenues as a percentage of revenue was reasonably consistent between periods (63.5% for the 2014 second quarter vs. 64.3% for the 2013 second quarter).

Catalog expenses. Catalog expenses, which represent production costs for creating, printing and distributing the SkyMall in-flight catalog and various loyalty program catalogs, were $1,567,099 for the three month period ended June 29, 2014 compared to $759,363 for the three month period ended June 30, 2013. The increase of $807,736 was due to inclusion of the SkyMall operations for the full quarter in 2014 compared only a portion of the quarter in 2013.

Pro forma Results

Catalog expenses were $1,567,099 for the three month period ended June 29, 2014 compared to pro forma expenses of $1,545,926 for the three month period ended June 30, 2013. The increase of $21,173 (1.4%) was primarily due to increased circulation of our mail to home catalog in 2014.

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Sales and marketing expenses. Sales and marketing expenses, which consist primarily of personnel costs for our sales and marketing staff, third party ecommerce marketing expenses, and commissions and fuel reimbursements paid to our airline partners, were $4,167,565 for the three month period ended June 29, 2014 compared to $1,750,143 for the three month period ended June 30, 2013. The increase of $2,417,422 was attributable to SkyMall ($2,477,369) partially offset by a decrease from the legacy Xhibit businesses ($59,947). The Xhibit decrease is primarily due to the termination of Xhibit’s interactive development operations in December 2013.

Pro forma Results

Sales and marketing expenses were $4,167,565 for the three month period ended June 29, 2014 compared to $3,585,825 for the three month period ended June 30, 2013, an increase of $581,740 (16.2%). This increase was primarily due to SkyMall ($641,687 and 19.3%) partially offset by a decrease from the legacy Xhibit businesses ($59,947). The SkyMall pro forma increase was primarily due to an increase in ecommerce marketing expenses.

Customer service and fulfillment expenses. Customer service and fulfillment expenses, which consist of wages and other costs associated with the SkyMall’s customer care center, were $647,146 for the three month period ended June 29, 2014 compared to $314,214 for the three month period ended June 30, 2013. The increase of $332,905 was due to inclusion of the SkyMall operations for the full quarter in 2014 compared only a portion of the quarter in 2013.

Pro forma Results

Customer service and fulfillment expense was $647,146 for the three month period ended June 29, 2014 compared to a pro forma amount of $642,121 for the three month period ended June 30, 2013. The year-over-year increase of $5,025 (0.8%) was primarily due incremental costs incurred to service a new partner partially offset by cost reductions as a result of headcount and other costs implemented in 2013.

General and administrative expenses. General and administrative expenses for the three month period ended June 29, 2014 was $3,384,627 compared to $5,536,228 for the three month period ended June 30, 2013. The decrease of $2,151,601 was attributable to the legacy Xhibit businesses ($2,109,832) and SkyMall ($89,953) partially offset by an increase in corporate costs ($48,184). Included in the Xhibit general and administrative expenses for the three month period ended June 30, 2013 was $1,600,000 of non-cash stock-based compensation related to the SkyMall Merger. Excluding this amount, 2014 second quarter general and administrative expenses for the legacy Xhibit business units were $509,832 (94.7%) lower than the 2013 second quarter amount. This decrease is primarily due to reduced operations of the Xhibit internet marketing business in 2014. The decrease in the SkyMall amount is due to lower amortization expense in 2014 as a result of the intangible asset impairment charge recorded in December 2013.

Pro forma Results

General and administrative expenses were $3,384,627 for the three month period ended June 29, 2014 compared to the pro forma amount of $6,430,160 for the three month period ended June 30, 2013, a decrease of $3,045,533 (47.4%). The decrease was attributable to the legacy Xhibit businesses ($2,109,832) and SkyMall ($983,885) partially offset by an increase in corporate costs ($48,184). The decrease in the SkyMall amount is due to lower amortization expense in 2014 as a result of the intangible asset impairment charge recorded in December 2013.

Development expenses. Development expenses, which consist primarily of costs for our development team in Bosnia and Herzegovina, were $172,810 for the three month period ended June 29, 2014 compared to $357,242 for the three month period ended June 30, 2013, a decrease of $184,432 (51.6%). The decrease is primarily due to the termination of Xhibit’s interactive development operations in December 2013 and the shutdown of the development operations in Bosnia and Herzegovina in May 2014.

Non-operating expenses. Non-operating expenses were $217,024 for the three month period ended June 29, 2014 compared to $28,120 for the three month period ended June 30, 2013, an increase of $188,904. The increase was primarily due to higher interest expense ($216,984 in 2014 compared to $32,901 in 2013) as a result of debt incurred after the SkyMall Acquisition in May 2013.

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Loss from continuing operations. The Company recorded a loss from continuing operations of $4,043,470 for the three month period ended June 29, 2014 compared to a loss from continuing operations of $4,324,309 for the three month period ended June 30, 2013.

Pro forma Results

The Company’s loss from continuing operations of $4,043,470 for the three month period ended June 29, 2014 was $777,224 lower than the pro forma loss from continuing operations of $4,820,694 for the three month period ended June 30, 2013. This decrease was primarily due to cost reductions implemented during 2013.

Income (loss) from discontinued operations. The Company’s Nutraceutical Products business, which commenced operations in January 2013 and was shut down in October 2013 has been accounted for as discontinued operations. During the three month period ended June 29, 2014, the Company recorded income totaling $7,340 from this discontinued business compared to a loss from the Nutraceutical Products business of $13,604 during the three month period ended June 30, 2013.

Adjusted EBITDA.

Adjusted EBITDA. The Company’s Adjusted EBITDA, which is a non-GAAP measure of profitability, was a loss of $2,952,775 for the three month period ended June 29, 2014 compared to a loss of $1,616,433 for the three month period ended June 30, 2013.

Pro forma Results

The Company’s Adjusted EBITDA loss of $2,952,775 for the three month period ended June 29, 2014 compared to a pro forma Adjusted EBITDA loss of $1,969,554 for the three month period ended June 30, 2013.

SIX MONTH PERIOD ENDED JUNE 29, 2014 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2013

Revenues. Revenue for the six month period ended June 29, 2014 was $34,693,698 ($1,543,821 from the legacy Xhibit businesses and $33,149,877 from SkyMall) compared to $13,429,929 ($3,083,263 from the legacy Xhibit businesses and $10,346,666 from SkyMall) for the six month period ended June 30, 2013. The increase of $21,263,769 was attributable to SkyMall ($22,803,211) partially offset by a decrease for the legacy Xhibit businesses ($1,539,442 and 49.9%). The legacy Xhibit business unit revenue primarily consisted of lead generation and advertising services from the Internet Marketing segment. Internet Marketing revenues for the six month period ended June 29, 2014 were negatively impacted by our primary service provider’s decision to discontinue servicing our type of email marketing activity in February 2014.

During the six month period ended June 29, 2014, the Company had a high concentration of revenue and credit risk as its three largest customers, each of which was a SkyMall Loyalty channel customer, accounted for 62% of its total 2014 revenues.

Pro forma Results

Revenue in the six month period ended June 29, 2014 was $34,693,698 compared to pro forma revenue of $43,090,899 in 2013, a decrease of $8,397,201 (19.5%). The decrease was attributable to SkyMall ($6,857,759 and 17.1%) and the legacy Xhibit businesses ($1,539,442 and 49.9%). Pro forma revenue from the SkyMall business unit decreased in 2013 primarily due to a mix shift of revenues in our Loyalty channel from merchandise sales (which are recorded on a gross basis) to gift card sales (which are generally recorded on a net basis). Additionally, merchandise sales were negatively impacted by a point pricing change implemented by one of our Loyalty channel partners in early 2013. Lastly, 2013 placement fees were lower than the 2012 amount primarily due to the loss of six large suppliers of product for our in-flight catalog suppliers that had previously paid placement fees.

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Cost of revenues. Cost of revenues for the six month period ended June 29, 2014 was $21,927,165 ($300,216 from the legacy Xhibit businesses and $21,626,949 from SkyMall) compared to $7,693,429 for the six month period ended June 30, 2013. The increase of $14,233,736 was attributable to SkyMall ($15,040,847) partially offset by a decrease from the legacy Xhibit businesses ($807,111 and 72.9%). Cost of revenues as a percentage of revenues for the legacy Xhibit business units was 19.4% for the six month period ended June 29, 2014 compared to 35.9% for the comparable period in 2013. The decrease in cost of revenues as a percentage of revenues for the legacy Xhibit business units was primarily due to reduced costs in 2014 as the business was wound down.

Pro forma Results

Cost of revenues was $21,927,165 for the six month period ended June 29, 2014 compared to pro forma cost of revenue of $26,912,180 for the six month period ended June 30, 2013, a decrease of $4,985,015 (18.5%). The decrease was attributable to SkyMall ($4,177,904 and 16.2%) and the legacy Xhibit businesses ($807,111 and 72.9%). The SkyMall decrease was primarily due to lower sales volumes.

Pro forma Results

Catalog expenses were $3,115,579 for the six month period ended June 29, 2014 compared to pro forma expenses of $3,464,108 for the six month period ended June 30, 2013. The decrease of $348,529 (10.1%) was primarily due to SkyMall printing a smaller catalog in the first quarter of 2014 (76 pages) compared to the first quarter of 2013 (100 pages) and printing fewer in-flight catalogs in 2014 in an effort to reduce the number of unused catalogs at the end of each quarter.

Sales and marketing expenses. Sales and marketing expenses, which consist primarily of personnel costs for our sales and marketing staff, third party ecommerce marketing expenses, and commissions and fuel reimbursements paid to our airline partners, for the six month period ended June 29, 2014 was $7,849,898 compared to $2,055,650 for the six month period ended June 30, 2013. The increase of $5,794,248 was attributable to SkyMall ($5,696,021) and the legacy Xhibit businesses ($98,227 and 32.7%).

Pro forma Results

Sales and marketing expenses were $7,849,898 for the six month period ended June 29, 2014 compared to $8,312,953 for the six month period ended June 30, 2013, a decrease of $463,055 (5.6%). This decrease was primarily due to lower fuel reimbursements paid to our airline partners and salary related expenses partially offset by higher ecommerce marketing expenses.

Pro forma Results

Customer service and fulfillment expense was $1,319,213 for the six month period ended June 29, 2014 compared to a pro forma amount of $1,390,520 for the six month period ended June 30, 2013. The year-over-year decrease of $71,307 (5.1%) was primarily due to headcount and other cost reductions implemented in 2013.

General and administrative expenses. General and administrative expenses for the six month period ended June 29, 2014 was $6,543,906 compared to $6,806,303 for the six month period ended June 30, 2013. The decrease of $262,397 was attributable to the legacy Xhibit businesses ($2,481,867) partially offset by increases for SkyMall ($2,081,607) and corporate ($137,863). Included in the Xhibit general and administrative expenses for the three month period ended June 30, 2013 was $1,600,000 of non-cash stock-based compensation related to the SkyMall Merger. Excluding this amount, 2014 year-to-date general and administrative expenses for the legacy Xhibit business units were $881,867 (75.3%) lower than the 2013 year-to-date amount. This decrease is primarily due to reduced operations of the Xhibit internet marketing business in 2014.

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Pro forma Results

General and administrative expenses were $6,543,906 for the six month period ended June 29, 2014 compared to the pro forma amount of $10,169,351 for the six month period ended June 30, 2013, a decrease of $3,625,445 (35.7%). The decrease was attributable to the legacy Xhibit businesses ($2,481,867) and SkyMall ($1,281,441) partially offset by higher corporate general and administrative expenses ($137,863). The SkyMall decrease was primarily due to a lower costs as a result of headcount and other cost reductions implemented in 2013.

Development expenses. Development expenses, which consist primarily of costs for our development team in Bosnia and Herzegovina, were $212,429 for the six month period ended June 29, 2014 compared to $628,808 for the six month period ended June 30, 2013, a decrease of $416,379 (66.2%). The decrease was primarily due to the termination of Xhibit’s interactive development operations in December 2013 and shutdown of the Bosnia and Herzegovina development team in May 2014.

Non-operating expenses. Non-operating expenses were $395,103 for the six month period ended June 29, 2014 compared to $102,746 for the six month period ended June 30, 2013, an increase of $292,357. The increase was primarily due to higher interest expense ($395,063 in 2014 compared to $41,096 in 2013) as a result of debit incurred after the SkyMall Acquisition in May 2013.

Loss from continuing operations. The Company recorded a loss from continuing operations of $6,669,595 for the six month period ended June 29, 2014 compared to a loss from continuing operations of $4,930,611 for the six month period ended June 30, 2013.

Pro forma Results

The Company’s loss from continuing operations of $6,669,595 for the six month period ended June 29, 2014 was $1,260,751 lower than the pro forma loss from continuing operations of $7,930,346 for the six month period ended June 30, 2013. This decrease was primarily due to cost reductions implemented during 2013.

Income (loss) from discontinued operations. The Company’s Nutraceutical Products business, which commenced operations in January 2013 and was shut down in October 2013 has been accounted for as discontinued operations. During the six month period ended June 29, 2014, the Company recorded income totaling $27,620 from this discontinued business compared to a loss from the Nutraceutical Products business of $477,011 during the six month period ended June 30, 2013.

Adjusted EBITDA.

Adjusted EBITDA. The Company’s Adjusted EBITDA, which is a non-GAAP measure of profitability, was a loss of $4,688,029 for the six month period ended June 29, 2014 compared to a loss of $1,924,139 for the six month period ended June 30, 2013.

Pro forma Results

The Company’s Adjusted EBITDA loss of $4,688,029 for the six month period ended June 29, 2014 compared to a pro forma Adjusted EBITDA loss of $4,196,352 for the six month period ended June 30, 2013. The $491,677 change was primarily due to lower gross profit during 2014 ($3,412,186) partially offset by lower operating expenses as a result of cost reductions implemented in 2013.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations through working capital generated from operations and borrowings from various sources. During the three month period ended March 30, 2014, the Company used working capital generated from operations, existing cash reserves and cash received through borrowings from a bank line of credit to fund its operations and capital expenditures. At August 31, 2014, the Company’s cash balance was $1,238,777.

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After deducting amounts held in escrow to fund potential indemnity claims, the Company received net proceeds totaling $20,800,000 from the SkyMall Ventures Sale on September 9, 2014. Of this amount, $15,206,391 was used to repay and retire Company’s revolving credit facility with SMXE Lending, LLC and the balance of $5,593,609 is available for general working capital purposes. Management estimates that the Company’s 2014 monthly required fixed cash operating expenses are approximately $3,150,000. Management believes that its existing cash balance, including the net proceeds from the SkyMall Ventures Sale as well as cash expected to be generated during the remainder of 2014 will be sufficient to cover any potential income tax due on the gain from the SkyMall Ventures Sale and our operating expenses and working capital needs through December 2014.

A risk exists regarding our ability to continue as a going concern beyond December 31, 2014. See Note 1 to our consolidated financial statements for more information on this risk and management’s plans to enable the Company to continue to operate and begin to report operating profits. If we are unable to restructure our operations to generate operating profits and positive cash from operations, we will need to seek additional capital through the offering of equity or debt securities or the sale of additional assets and/or business operations, any of which could materially adversely impact our business or materially dilute the interests of our existing shareholders. We are exploring a number of alternatives to address this need for capital, but there is no assurance that we will be successful in arranging for any necessary additional capital.

Operating activities. Net cash used in operating activities during the six month period ended June 29, 2014 was $16,099,142 compared to $6,410,551 for the six month period ended June 30, 2013. Cash used in operating activities during the six month period ended June 29, 2014 consisted primarily of the cash losses from operations (net loss adjusted for non-cash charges) of $4,529,304 and the negative impact of net working capital changes of $11,569,838. The negative impact of working capital changes is primarily due to the net repayment of customer deposits in 2014 for the sale of gift card inventories.

Investing activities. Net cash used in investing activities for the six month period ended June 29, 2014 was $810,037 compared to cash provided by investing activities of $3,879,046 for the six month period ended June 30, 2013. The cash used in investing activities in 2014 consisted of $759,037 in purchases of property and equipment and internet domain name purchases totaling $51,000. The net cash provided by investing activities for the six month period ended June 30, 2013 included $4,369,535 acquired in the SkyMall Merger.

Financing activities. Net cash provided by financing activities for the six month period ended June 29, 2014 was $402,642 compared to $3,895,000 for the six month period ended June 30, 2013. Net cash provided by financing activities during 2014 consisted of net borrowing on the Company’s bank and related party lines of credit totaling $1,944,767 partially offset by deferred financing fees paid ($307,125) and repayments on related party notes payable ($1,235,000).

On September 9, 2014, we repaid the $15,206,391 balance outstanding on our related party credit facility. In connection with this repayment, the credit facility was terminated. The Company currently does not have any debt outstanding.

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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Item 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that (i) due to the Company's small size and limited resources it lacks adequate segregation of duties and current training in SEC disclosures and as a result, the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and (ii) a material weakness existed with respect to the Company’s reporting of complex, non-routine transactions (the SkyMall Merger) during 2013.

However, management has reviewed the financial statements contained in this report and believes they fairly present, in all material respects, the Company’s financial condition and results of operations.

Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

Refer to Note 11, Commitments and Contingencies, in Item 1, Financial Statements, for changes to our legal proceedings during 2014, which is incorporated herein by this reference.

Item 1A – RISK FACTORS

There have been no material changes to the risk factors contained in the Company’s Annual Report on Form 10-K filed on September 10, 2014.

Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3 – DEFAULTS UPON SENIOR SECURITIES

None.

Item 4 – MINE SAFETY DISCLOSURES

None.

Item 5 – OTHER INFORMATION

None.

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Item 6 – EXHIBITS

Exhibit No.	Description
31.1	Certification of the Company's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Company's Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 14, 2014.

XHIBIT CORP. (Registrant)
By:	/s/ Scott Wiley
	Scott Wiley
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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