Notes to Consolidated Financial Statements
Note 1 - Background and Nature of Operations
X-Factor Communications Holdings, Inc., a Delaware corporation (formerly, Organic Spice Imports, Inc.) (“Holdings” or the “Company”, “we”, “us” or “our”), through its wholly-owned subsidiary X-Factor Communications, LLC, a New York limited liability company (“X-Factor”), located in South Hackensack, New Jersey, provides interactive digital media network software and services. References herein to: the “Company”, “we”, “us” or “our”, refer to X-Factor Communications Holdings, Inc. and X-Factor. The X-Factor Digital Media Network Platform, our cloud-based Digital Media, web and mobile solution, is delivered as a software-as-a-service and under a software license model, enabling our customers to build simple yet scalable advertising and corporate digital media networks. The Company’s webcasting solution, a live and on-demand multimedia distribution product, delivers rich media content, desktop signage and emergency messaging to mobile and Web devices. The Company’s solutions address the rapidly expanding digital media needs of its corporate, public venue, education and government sector customers. The Company markets its software and services throughout the United States. The Company operates in one segment and therefore segment information is not presented.
May 15, 2012 Merger
On May 15, 2012, pursuant to the terms and conditions of an Agreement and Plan of Merger, dated March 5, 2012 (the "Merger Agreement"), X-Factor Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Holdings merged with and into X-Factor (the "Merger"). X-Factor survived the Merger and became a wholly-owned subsidiary of Holdings. On May 16, 2012, X-Factor Communications Holdings, Inc., a Delaware corporation and wholly owned subsidiary of the Company, formed solely for the purpose of changing the Company's name, was merged with and into the Company upon the filing of a Certificate of Ownership and Merger with the Secretary of State of Delaware and the Company adopted the name of this subsidiary thereby, changing its name from "Organic Spice Imports, Inc." to "X-Factor Communications Holdings, Inc." References herein to “Organic Spice” refer to the registrant prior to its name change.
Upon the closing of the Merger, in connection with the terms and conditions of a private placement offering issued then (the “May 2012 Offering”) (when combined with sales of securities in beginning in December 2012 (the “December 2012 Offering” and June 2013 (the “June 2013 Offering”) collectively referred to as the "Offerings") the Company issued and sold an aggregate of 3,953,870 shares of common stock at prices of $0.56 to $0.80 per share, for gross proceeds of $2,922,500.
The consummation of the Merger (the "Effective Time") and the May 2012 Offering had the following effects on the membership units and common stock equivalents of X-Factor:
(a) Each X-Factor common and preferred membership unit issued and outstanding immediately prior to the Merger was automatically converted into 5.286767 (the "Initial Exchange Ratio") shares of Holdings common stock. Upon the final closing of the May 2012 Offering in August 2012 the Initial Exchange Ratio was adjusted to reflect 5.550657 (the “Final Exchange Ratio”) and all initial exchanges were adjusted to reflect the Final Exchange Ratio. This resulted in the issuance of an additional 439,098 shares of Holdings common stock. All disclosures in this document reflect the Final Exchange Ratio.
(b) Each holder of an X-Factor preferred membership unit received 1.190229 shares of Holdings common stock as payment to eliminate the liquidation preference of the preferred membership units.
(c) Each X-Factor warrant or option issued and outstanding immediately prior to the Merger was automatically converted into the right to purchase 5.550657 shares of Holdings common stock. The new conversion price applicable to each warrant and option is equal to the conversion price in effect immediately prior to the Merger divided by 5.550657.
(d) All convertible debt of X-Factor outstanding immediately prior to the Merger was automatically converted into the right to purchase 5.550657 shares of Holdings common stock. The new conversion price applicable to convertible debt is equal to the conversion price in effect immediately prior to the Merger divided by 5.550657.
(e) One holder of a warrant to purchase X-Factor Preferred Membership Interests agreed to receive an additional warrant to purchase, for a period of 10 years from the Effective Time, 148,942 shares of Holdings common stock which was equal to the aggregate exercise price of such preferred warrant, which was $125,137, multiplied by 1.190229 and the exercise price of such additional warrant was the quotient of the exercise price of such preferred warrant, which was $4.33 per X-Factor Preferred Membership Interest, divided by 5.550657.
As an inducement for X-Factor to consummate the transactions contemplated by the Merger Agreement, on May 15, 2012, the Company cancelled 10,000,000 shares of common stock and warrants to purchase up to 5,000,000 shares of common stock owned of record by certain stockholders of the Company immediately prior to the Effective Time, pursuant to the terms and conditions of a cancellation agreement, dated May 15, 2012.
Note 2 – Liquidity and Going Concern
At June 30, 2013 the Company had a stockholders' deficit of $1,302,884, a working capital deficiency of $720,583 and incurred a net loss of $870,847 for the six months then ended and a net loss of $3,420,138 in the year ended December 31, 2012. There can be no assurance that: (1) existing stockholders will continue to support the operational and financial requirements of the Company, (2) that the Company will be able to raise sufficient equity or (3) that the Company will continue to be able to comply with existing covenants with creditors in future periods. While the Company has been successful to date in raising funds through sales of securities, the Company does not currently have any sources of committed funding available. The report of our independent registered public accounting firm on our December 31, 2012 financial statements included a paragraph indicating that there was substantial doubt concerning the Company’s ability to operate as a going concern. X-Factor has historically incurred net losses and recurring negative cash flows from operations. Furthermore X-Factor has, in the past, defaulted on debt service payments and been in default of covenants in certain debt agreements and there are no assurances that investors will continue to support X-Factor or that X-Factor will be able to raise sufficient capital or debt financing to sustain operations. All of these conditions raise substantial doubt about X-Factor’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to the carrying value of assets and liabilities that might result from the outcome of these uncertainties.
During the six months ended June 30, 2013 the Company sold 820,537 shares of its common stock for gross proceeds of $560,000 (see Note 18) and an additional 669,644 shares of its common stock for gross proceeds of $375,000 subsequent to June 30, 2013 (see Note 20).
The Company believes that the remainder of net cash proceeds received from the sale of securities in the Offerings will only provide sufficient equity to fund its operations for the next three to four months from the date of filing this Quarterly Report on Form 10-Q. Additional significant amounts of capital will be needed to be raised to continue the Company’s operations. There are no assurances, however, that the Company will be able to raise additional capital as may be needed, or increase revenue levels and profitability. Further, if the current economic climate negatively impacts the Company, as it may, and the Company is unable to raise additional capital on acceptable terms, it could have a material adverse effect on the Company's financial condition, future operations and cash flows.
Note 3 - Basis of Presentation and Summary of Significant Accounting Policies
Interim Financial Information and Results of Operations
The consolidated financial statements as of June 30, 2013 and for the six and three months ended June 30, 2013 and 2012 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2013, and the results of operations for the six and three months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2012, as included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on May 16, 2013. Results of operations and cash flows for interim periods are not necessarily indicative of those expected for a full year.
Presentation of historical membership unit, option, warrant and convertible note amounts and conversion prices – Reclassifications
X-Factor is a limited liability company with equity comprised of membership units. As a result of the Merger on May 15, 2012, in which X-Factor became a wholly owned subsidiary of the Company, all outstanding membership units of X-Factor were exchanged for shares of common stock of Holdings. Therefore, all historical references to membership units, options, warrants and convertible notes have been adjusted to reflect the conversion into, or into the right to purchase, 5.550657 shares of Holdings’ common stock as of the beginning of the reported periods. The new conversion price applicable to each option, warrant or convertible note is equal to the conversion price in effect immediately prior to the Merger divided by 5.550657. As a result of the Merger and exchange, the number of X-Factor membership units, options, warrants and exercise prices as of December 31, 2011 were adjusted as follows:
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Common
Stock
After
Exchange
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Membership
Units
Before
Exchange
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|
|
|
|
|
|
|
|
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|
Common
|
|
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7,239,216
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|
|
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1,304,210
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|
|
Preferred (A )
|
|
|
1,996,685
|
|
|
|
359,683
|
|
|
Total shares or units
|
|
|
9,235,901
|
|
|
|
1,663,893
|
|
Note A – The preferred membership units were exchanged for shares of common stock.
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Common
Stock
After
Exchange
|
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|
Membership
Units
Before
Exchange
|
|
|
|
|
|
|
|
|
|
|
Options – issued
|
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2,161,920
|
|
|
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389,490
|
|
|
Warrants – issued
|
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1,012,757
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|
|
|
182,457
|
|
|
|
|
|
|
|
|
|
|
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Options – weighted average exercise price
|
|
$
|
0.579
|
|
|
$
|
3.210
|
|
|
Warrants – weighted average exercise price
|
|
$
|
0.229
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|
|
$
|
1.270
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|
Since all common and preferred membership units of X-Factor were exchanged for shares of common stock of the Company, we have replaced all references to common and preferred membership units with a reference to common stock.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on an accrual basis of accounting.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings and our wholly owned subsidiary, X-Factor. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Significant estimates relate to the determination of the allowance for doubtful accounts, the valuation of long lived assets, the technological capabilities (and thus the valuation) of equipment, the determination of amounts owed under contingent arrangements and derivatives issued and the calculations of debt discounts and equity-based compensation. Actual results could differ from those estimates.
Concentration of Credit Risk (See Note 15)
At various times, certain balances at a financial institution may exceed the Federal Deposit Insurance Corporation's (“FDIC”) limit. At June 30, 2013, the Company’s cash balances did not exceed such FDIC levels. Management regularly monitors the financial condition of the institution it works with, along with their balances in cash and endeavors to keep this potential risk at a minimum, and has not experienced any collection losses with this institution.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are uncollateralized, non interest bearing, customer obligations due under normal trade terms and are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer's remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
The carrying amount of the Company's accounts receivable may, at times, be reduced by a valuation allowance that reflects management's best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances periodically and based on an assessment of the current creditworthiness of the customer, estimates the portion, if any, of the balance that will not be collected.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation on equipment is recorded over the estimated useful lives of the assets (five years) using the straight-line method. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life of the asset (seven years) or the expected term of the occupancy. Included in equipment are fixed assets subject to capital leases which are depreciated over the life of the respective asset. Maintenance and repair costs are charged to expense as incurred. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reported in results of operations.
Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived assets, principally equipment and leasehold improvements, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying value of an asset is recognized whenever anticipated future undiscounted cash flows from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value. There were no impairment losses recognized in the six and three months ended June 30, 2013 and 2012.
Loss per Share
Basic loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common shares outstanding during the periods. Prior to the Merger in 2012, X-Factor was not obligated, as an LLC, to calculate and present loss per share. As such, it is not practicable for the Company to determine the historical net loss (and net loss per share) from January 1, 2012 through June 30, 2012. However, the Company has presented unaudited pro forma loss per share for the six and three months ended June 30, 2012, as if the Merger occurred on January 1, 2012 and the related shares were outstanding for the six and three months ended June 30, 2012. Such pro forma loss per share is presented below:
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Six Months
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Three Months
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|
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Ended
|
|
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Ended
|
|
|
|
|
June 30, 2012
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|
June 30, 2012
|
|
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Pro forma net loss attributable to common stockholders:
|
|
$
|
(1,907,944
|
)
|
|
$
|
(716,901
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)
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|
Basic and diluted loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
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Weighted average number of common shares outstanding:
|
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|
|
|
|
|
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Basic and diluted
|
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14,264,887
|
|
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14,264,887
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|
The historical loss per share for the six and three months ended June 30, 2013 is presented below:
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Six Months
|
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Three Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
June 30, 2013
|
|
|
June 30, 2013
|
|
|
Historical net loss attributable to common stockholders:
|
|
$
|
(870,847
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)
|
|
$
|
(265,465
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)
|
|
Basic and diluted loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
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|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
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Basic and diluted
|
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17,492,449
|
|
|
|
17,698,370
|
|
Diluted loss per share for the six and three months ended June 30, 2013 is the same as basic loss per share. Potential shares of common stock associated with outstanding options and warrants and shares issuable upon conversion of our convertible notes (totaling 9,109,228 and 4,291,107 as of June 30, 2013 and 2012, respectively) have been excluded from the calculations of diluted loss per share because the effects, as a result of our net loss, would be anti-dilutive.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. The Company has certain arrangements where it is obligated to deliver multiple products and/or services (multiple elements). In these arrangements, the Company allocates the total revenue among the elements based on the sales price of each element when sold separately using vendor-specific objective evidence. Revenue from multi-year licensing arrangements is accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the billing coverage period. Unearned revenue also consists of future maintenance and upgrade services that will be provided by the Company in future periods under terms of a non-refundable service contract. The revenues are principally derived from the following two services.
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Six Months
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Three Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
June 30,
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|
|
June 30,
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|
|
June 30,
|
|
|
June 30,
|
|
|
|
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2013
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|
|
2012
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|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital media software and services
|
|
$
|
294,751
|
|
|
$
|
71,684
|
|
|
$
|
212,072
|
|
|
$
|
35,069
|
|
|
Webcasting
|
|
|
93,149
|
|
|
|
254,109
|
|
|
|
36,165
|
|
|
|
107,795
|
|
|
|
|
$
|
387,900
|
|
|
$
|
325,793
|
|
|
$
|
248,237
|
|
|
$
|
142,864
|
|
Derivative Financial Instruments
The Company's objectives in using debt-related derivative financial instruments are to obtain the lowest cash cost source of funds. Derivatives are recognized in the balance sheet at fair value based on the criteria specified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") Topic 815,
"Derivatives and Hedging
" (“ASC Topic 815”). Under ASC Topic 815, the estimated fair value of derivative liabilities is revalued at each balance sheet date with the changes in value, if any, recorded in the other (income) expense section of the accompanying Consolidated Statements of Operations and in derivative financial instruments of the liability section of the Consolidated Balance Sheets.
Financial Instruments with Anti-Dilution Features
The Company has issued 605,203 warrants that contain a weighted average anti-dilution feature that in certain circumstances could provide the warrant holders with protection against changes in the market value of the Company's common stock; accordingly, they are required under applicable accounting standards to be recorded at fair value as of the balance sheet date. On the balance sheet date, the Company evaluates the fair value of the warrants using a valuation model and the net difference, if material, between their previous periods’ fair values and their current fair values is recorded in the other (income) expense section of the accompanying Consolidated Statements of Operations and in derivative financial instruments of the liability section of the Consolidated Balance Sheets.
With the sales of common stock in the June 2013 Offering the anti-dilution feature in these warrants will require the Company to issue an additional 13,699 warrants and the Company will reduce the weighted average exercise price of the warrants from $0.757 to $0.740 per share.
Advertising and Marketing Expense
Advertising and marketing costs are expensed as incurred and included in general and administrative expenses. Advertising and marketing expenses for the six months ended June 30, 2013 and 2012 were $22,857 and $14,145, respectively. Advertising and marketing expenses for the three months ended June 30, 2013 and 2012 were $19,430 and $6,645, respectively.
Equity-Based Compensation
Equity-based awards for common stock have been accounted for as required by FASB ASC Topic 718,
“Compensation – Stock Compensation”
(“ASC Topic 718”). Under ASC Topic 718, equity-based awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period. The Company values its equity-based awards using the Black-Scholes option valuation model. The fair value of the common stock used in these valuation models is based on the most recent sale of a share of common stock of the Company.
We periodically grant options for common stock to employees and consultants in accordance with the provisions of our stock option plans (see Note 16), with the exercise price of the options established at the price of a recent sale of a share of common stock of the Company. As a consequence of the Merger, no additional grants may be made from the 2006 and 2010 Plans and the options are exercisable into shares of the Company.
We periodically grant warrants for common stock to consultants and investors (see Note 17). The fair value of warrants for shares of common stock issued to consultants or investors are recognized over the requisite service period with a corresponding credit to Additional Paid-in Capital. Warrants issued to consultants are based on the fair value of a share of common stock related to the warrants. Warrants for common stock issued to equity investors have no effect on Additional Paid-in Capital; that is, the fair value of the warrants granted to investors and charged to Additional Paid-in Capital are entirely offset by a corresponding adjustment to Additional Paid-in Capital.
In April 2013, the Company issued 120,000 shares of common stock to an attorney in settlement of our payable to them by $90,000.
Professional Fees (see Note 18)
Professional Fees Related to the Merger have been expensed as incurred. Professional fees related to the Offerings are offset against the proceeds from the sale of that stock.
Income Taxes
Holdings operates as a “C” corporation. Prior to the Merger, the members of X-Factor elected to be treated as a limited liability corporation, under the applicable provisions of the Internal Revenue Code and State of New Jersey tax laws. Holdings uses the asset and liability method to determine our income tax expense or benefit. Deferred tax assets and liabilities are computed based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that are expected to be in effect when the differences are expected to be recovered or settled. Any resulting net deferred tax assets are evaluated for recoverability and an assessment of whether it is more likely than not that such amount will be realized. Based on an assessment of all available evidence, a valuation allowance has been established against net deferred tax assets of $1,102,000 (principally composed of a $753,000 net operating loss (“NOL”) and $298,000 of compensation expenses) at June 30, 2013. From the effective date of the Merger through December 31, 2012 and the 2013 period the Company did not record a benefit for income taxes. At June 30, 2013 the Company had Federal and New Jersey NOL carry-forwards of approximately $1,882,000 which begin to expire in 2032. The utilization of our NOL for Federal income tax purposes sustained by the Company may be substantially limited annually as a result of an "ownership change" (as defined by Section 382 of the Internal Revenue Code of 1986, as amended). If it is determined that there is a change in ownership, or if the Company undergoes a change of ownership in the future, the utilization of the Company’s NOL carry-forwards may be materially constrained. This would result in a reduction in equal amounts to the deferred tax assets and the related valuation reserves.
FASB ASC Topic 740
“Income Taxes
,
”
clarifies the accounting for uncertainty in income taxes recognized in an entity’s consolidated financial statements and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. The standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition requirements. Prior to the Merger, X-Factor operated as a limited liability corporation and Federal and state taxes are passed through to the members, so too would the assessments from any tax examinations and, since the Merger, has generated an operating loss. The Company conducts business domestically and, as a result, files Federal and state income tax returns. In the normal course of business, the Company is subject to examination by taxing authorities. There are no ongoing or pending examinations by Federal or state tax agencies. The Company has evaluated its tax positions for all currently open tax years, 2009 through 2011, and has concluded that there are no significant uncertain tax positions for either Federal or state purposes.
There were no interest or penalties related to income taxes that have been accrued or recognized as of June 30, 2013 and December 31, 2012, or for the six and three months ended June 30, 2013 and 2012.
Fair Value Disclosures
The Company has financial instruments, principally accounts receivable, accounts payable, loans payable, notes payable and accrued expenses. We estimate that the fair value of these financial instruments at June 30, 2013 and December 31, 2012 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets. However, because the Company presents certain common stock warrants and embedded conversion features (associated with various convertible notes—See Notes 11 and 12) and accounts for such derivative financial instruments at fair value, such derivatives are impacted by the market value of the Company's stock and therefore subject to a high degree of volatility. The Company's future results may be materially impacted by changes in the Company's closing stock price as of the date it prepares future periodic financial statements.
The Company measures fair value as required by the FASB ASC Topic 820
“Fair Value Measurements and Disclosures”
(“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
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●
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Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
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●
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Level 2 - inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
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●
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Level 3 - unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
|
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company has no financial instruments that merit classification as Level 1 or 2 assets and liabilities. The Company's liability for derivative financial instruments is considered a Level 3 liability at June 30, 2013 and December 31, 2012. The fair value of this liability is determined using the most recent sale of a common share and the number of shares that are not considered fixed and determinable under the conversion features (see Note 13).
New Accounting Pronouncements
In January 2010, the FASB issued guidance that revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The guidance also clarifies that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. These new disclosure requirements became effective for the Company's financial statements for the year ended December 31, 2011, except for the requirement concerning gross presentation of Level 3 activity, which became effective in 2012. Since this guidance is only related to financial statement disclosures, there was no impact to the Company's consolidated financial statements as a result of the adoption of this guidance.
In May 2011, the FASB issued ASU 2011-04
, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards” (“IFRS”)
(“ASU 2011-04”), which amends ASC Topic 820. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011 (early adoption is prohibited), result in a common definition of fair value and common requirements for measurement of and disclosure requirements between U.S. GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The adoption of ASU 2011-04 did not have an impact on the Company's consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05
, “Presentation of Comprehensive Income”
(“ASU 2011-05”), which amends FASB ASC Topic 220, “
Comprehensive Income”
. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present components of other comprehensive income as part of the statement of stockholders' and members’ deficit was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of loss per share. The adoption of ASU 2011-05 did not have an impact on the Company's consolidated financial statements as the Company has no items that require reporting as a component of comprehensive loss.
The Company is not aware of any other pronouncements, not yet issued or adopted, that would have a material effect on its consolidated financial statements.
Note 4 - Related Parties
Certain investors, officers and relatives of officers of the Company have loaned the Company funds which are evidenced by promissory notes (see Note 12) (the “Related Parties”). Related Parties and certain service providers are considered Related Parties for purposes of related party disclosures.
The President of the Company provides a guaranty on the Company's line of credit. There is no cost ascribed to the value of this service in the accompanying consolidated financial statements.
Related Parties who are not officers of the Company provided product development, legal and management services to the Company for $0 and $48,236 for the six months ended June 30, 2013 and 2012, respectively. These services amounted to $0 and $21,746 for the three months ended June 30, 2013 and 2012, respectively.
Included in accounts payable are $102,745 and $103,445 as of June 30, 2013 and December 31, 2012, respectively, owed to Related Parties.
Included in accrued expenses are $74,734 and $0 as of June 30, 2013 and December 31, 2012, respectively, owed to Related Parties.
The Company leases office and technical operations space and purchases various communication services from a Related Party totaling $15,867 and $21,992 for the six months ended June 30, 2013 and 2012, respectively. These services amounted to $7,500 and $11,547 for the three months ended June 30, 2013 and 2012, respectively.
Note 5 – Holdings’ Capital Stock (see Notes 16, 17 and 20)
We are authorized by our certificate of incorporation to issue an aggregate of 120,000,000 shares of capital stock, of which 100,000,000 are shares of common stock, par value $.0001 per share and 20,000,000 are shares of preferred stock, par value $.0001 per share. As of June 30, 2013, there are 18,155,471 shares of common stock outstanding and no shares of preferred stock outstanding. All outstanding shares of common stock are of the same class and have equal rights and attributes. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders. All stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the board of directors out of funds legally available, subject to the rights of any preferred stock we issue. In the event of liquidation, the holders of common stock are entitled to share ratably in all assets remaining after payment of all liabilities, subject to the rights of any preferred stock we issue. The stockholders do not have cumulative or pre-emptive rights.
Note 6 - Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following as of June 30, 2013 and December 31, 2012:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
$
|
515,331
|
|
|
$
|
515,331
|
|
|
Leasehold improvements
|
|
|
3,210
|
|
|
|
3,210
|
|
|
Equipment and leasehold improvements, at cost
|
|
|
518,541
|
|
|
|
518,541
|
|
|
Accumulated depreciation and amortization
|
|
|
(502,846
|
)
|
|
|
(493,836
|
)
|
|
|
|
$
|
15,695
|
|
|
$
|
24,705
|
|
Depreciation and amortization expense totaled $9,010 and $32,109 for the six months ended June 30, 2013 and 2012, respectively. Depreciation and amortization expense totaled $4,501 and $16,044 for the three months ended June 30, 2013 and 2012, respectively.
Included in equipment and software as of both June 30, 2013 and December 31, 2012 is $219,811 of assets under capital leases, which had accumulated depreciation and amortization of $218,506 and $215,172 as of June 30, 2013 and December 31, 2012, respectively.
Note 7 – Other Current Assets
Other current assets consist of the following as of June 30, 2013 and December 31, 2012:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Note receivable
|
|
$
|
12,121
|
|
|
$
|
11,563
|
|
|
Prepaid insurance
|
|
|
11,329
|
|
|
|
12,294
|
|
|
Prepaid leases
|
|
|
3,360
|
|
|
|
3,936
|
|
|
|
|
$
|
26,810
|
|
|
$
|
27,793
|
|
In August 2011, the Company entered into a $10,000 convertible note receivable with a strategic partner which originally matured in August 2012 and bears interest at prime plus 8.00% per annum (11.25% at June 30, 2013 and December 31, 2012). Interest is accrued and paid on the maturity date and the note is convertible into common stock of the borrower at the option of the Company. The Company has extended the maturity date of the note to December 31, 2013 and accordingly has classified this note as a current asset. This strategic partner has developed a kiosk software application that is synergistic with the Company’s digital media platform.
Note 8 – Accrued Expenses
Accrued expenses consist of the following as of June 30, 2013 and December 31, 2012:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Compensation and payroll taxes (A)
|
|
$
|
220,423
|
|
|
$
|
112,506
|
|
|
Operating expenses payable
|
|
|
15,000
|
|
|
|
2,630
|
|
|
Travel and related expenses
|
|
|
6,388
|
|
|
|
21,771
|
|
|
Accrued interest payable
|
|
|
6,814
|
|
|
|
306
|
|
|
|
|
$
|
248,625
|
|
|
$
|
137,213
|
|
|
(A)
|
The Company has temporarily delayed the payment of some of the compensation paid to certain employees and officers. These funds will bear interest at 8.5% interest and will be paid when sufficient cash is available.
|
Note 9 - Unearned Revenues
Unearned, non-refundable revenues as of June 30, 2013 are expected to be earned during the twelve months ended June 30, 2014.
Note 10 - Line of Credit
The Company has a revolving line of credit in the amount of $100,000 with JPMorgan Chase Bank of which $97,836 and $97,846 was outstanding as of June 30, 2013 and December 31, 2012, respectively. Interest accrues at a defined prime rate plus 0.5% (3.75% at June 30, 2013 and December 31, 2012). This line of credit has a secured interest in all business assets, inventory, equipment, accounts receivable, general intangibles, chattel paper, documents, instruments, and letter of credit rights. In addition, the line of credit is personally guaranteed by the President of the Company. There is no maturity date for the line of credit and there are no debt covenants.
Note 11 – Note Payable
In July 2009, X-Factor entered into a $500,000 note payable with the New Jersey Economic Development Authority (the "NJEDA") which initially was scheduled to mature in August 2014 and currently bears interest at 6.00% per annum. This note was modified in January 2011, September 2011 and February 2012, to provide for: (1) interest only payments through March 1, 2012; (2) repayment of up to $250,000 of promissory notes (the Company repaid $167,774); (3) a principal payment of $56,818 and an interest payment on April 1, 2012; and (4) beginning on May 1, 2012, twenty-eight monthly payments of interest and principal through August 2014.
Upon the closing of the Merger, the warrants issued in July 2009 in connection with the NJEDA note were converted into warrants exercisable for 160,414 shares of common stock of the Company at an exercise price of $0.78 per share. The $45,945 estimated fair value of the warrants in 2009 was calculated using the Black-Scholes option valuation model, and, together with $5,040 of closing costs, is classified as a discount of the note and is expensed, using the effective interest method, over the term of the debt.
In connection with the Merger, and as consideration for the amendment to the NJEDA note described above, the Company agreed to issue to NJEDA an additional warrant to acquire 148,942 shares of common stock exercisable as of May 15, 2012, at an exercise price of $0.78 per share with an expiration date of May 15, 2022. The $31,688 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model, and was charged to Additional Paid-in Capital with a related credit to Additional Paid-in Capital for the same amount.
With the closing of the May 2012 Offering, the Company paid NJEDA an additional principal payment of $17,808. The amended note is subordinated to the aforementioned line of credit and requires the maintenance of various non-financial covenants, such as providing consolidated financial statements and budgets on a timely basis, maintaining records and accounts and making punctual payments. The holder of the note has a secondary interest in all assets of the Company behind the holder of the Company's line of credit. The note includes certain restrictions that: (1) prevent the Company from initiating any corporate changes through merger or consolidation, (2) prevent the Company from creating or incurring new debt and (3) prevent the Company from paying dividends or distributions or redeeming outstanding stock, without the written consent of the NJEDA. The note is convertible, at the NJEDA's option, to an equity interest in the Company, the conversion price of which will be based on defined terms of a future equity offering.
In October 2012, the Company and NJEDA amended the note. The amended note extends the maturity date to August 2016. Interest will continue to accrue at 6% per annum and debt service will be an agreed upon percentage of the prior year’s revenue which will be paid on July 1st of the following year. The unpaid balance of the loan will be due on August 1, 2016. Depending on the amount of revenue, the note could be paid in full prior to August 1, 2016. As compensation for this modification the Company issued NJEDA warrants to acquire 27,521 shares of its common stock at $0.75 per share (the then determined fair value of the Company’s common stock) with an expiration date of 10 years after the grant date. Using the Black-Scholes option valuation model, with current pricing information, these warrants have a $6,250 estimated fair value.
The percentages of revenue to be used in the calculation of the debt service payment are as follows:
|
Debt Service Payment Based on
Revenue for the year ended or ending
|
|
% of Revenue
|
|
Date Debt Service Paid
|
|
December 31, 2012
|
|
4%
|
|
July 1, 2013
|
|
December 31, 2013
|
|
5%
|
|
July 1, 2014
|
|
December 31, 2014
|
|
6%
|
|
July 1, 2015
|
|
December 31, 2015
|
|
7%
|
|
July 1, 2016
|
|
|
|
Balloon
|
|
August 1, 2016
|
The amendment of the NJEDA note in October 2012, which extended the maturity date to August 1, 2016, eliminated monthly principal repayments and requires annual principal payments based on a percentage of the prior year’s revenues, significantly changed the cash flows related to the NJEDA note. To determine the accounting treatment of this modification the Company followed the guidance espoused in FASB ASC Topic 470-50, “
Debt – Modifications and Extinguishments”
(“ASC 470-50”)
.
ASC 470-50 requires the Company to determine the present value of the cash flows of the original and revised NJEDA note. The difference in the present value of the cash flows exceeded 10% and the modification of the NJEDA note was accounted for as an “extinguishment of debt” with the original NJEDA note effectively defeased and the modified NJEDA note treated as a new note. With the defeasement of the original NJEDA note, the Company expensed any unamortized discount costs related to those notes. The Company determined that the difference in the present value of the cash flows exceeded the 10% threshold and that the modification of the NJEDA note should be accounted for as an “extinguishment of debt”. The Company recorded a charge for this modification as a Loss on Modification or Extinguishment of Debt of $8,124 in October 2012.
Notes payable consisted of the following as of June 30, 2013 and December 31, 2012:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
337,306
|
|
|
$
|
337,306
|
|
|
Discount
|
|
|
(6,976
|
)
|
|
|
(8,104
|
)
|
|
Note payable, net of discount
|
|
|
330,330
|
|
|
|
329,202
|
|
|
Less: current portion of notes payable, net of discount of $2,256(A)
|
|
|
(24,800
|
)
|
|
|
(24,800
|
)
|
|
Notes payable, net of current portion
|
|
$
|
305,530
|
|
|
$
|
304,402
|
|
`
(A) The Company made a payment of $27,056 (4% of 2012’s revenue) on July 1, 2013.
Note 12 - Notes Payable – Related Parties
The following notes payable, to individuals that the Company considers to be Related Parties (as described in Note 4), are outstanding;
|
(A)
|
In March 2012, the Company issued a promissory note to the President of the Company in an aggregate principal amount of $30,460 for an aggregate purchase price of $25,000. This promissory note, along with accrued interest of $183 was repaid in August 2012. This note was unsecured and beginning on August 1, 2012, bore interest at 10% per annum payable on the maturity date. The $5,460 difference between the amount lent to the Company and the face amount of the promissory note is classified as a discount of the note and was expensed; using the effective interest method, over the four month period ending on August 1, 2012, the date that interest began to accrue on the promissory note. The effective interest rate of this note was 16.4% in 2012.
|
|
(B)
|
In March 2012, the Company issued a promissory note to an acquaintance of the President in an aggregate principal amount of $60,920 for an aggregate purchase price of $50,000. In August 2012, $30,920 of this promissory note along with accrued interest of $367 was repaid and we issued 40,000 shares of our common stock at a price of $0.75 per share, in exchange for the conversion of the remaining $30,000 of this promissory note. This note was unsecured and beginning on August 1, 2012, bore interest at 10% per annum payable on the maturity date. The $10,920 difference between the amount loaned to the Company and the face amount of the promissory note was classified as a discount of the note and was expensed; using the effective interest method, over a four month period, the date that interest began to accrue on the promissory note. The effective interest rate of this note was 16.4% in 2012.
|
|
(C)
|
The Company has two notes payable outstanding to the President of the Company and another officer of the Company. The maturity date of these notes is the later of August 1, 2014 or such date when all debt owed by the Company to the NJEDA has been paid by the Company. These notes are unsecured and bear interest at 8.50% per annum. Interest is required to be paid monthly, however, when interest payments have not been paid, the Company and these Related Parties have settled such amounts by issuing additional promissory notes equivalent to the related interest expense. Unpaid interest of $7,605 and $7,644 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $3,863 and $3,866 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. In February 2012 these notes were amended to make them convertible into equity at a conversion rate of $0.595 per share of common stock of the Company. The Company recorded a charge of $52,329 associated with the amendment in February 2012. The unpaid principal and interest of these notes amounted to $186,126 and $178,521 as of June 30, 2013 and December 31, 2012, respectively.
|
|
(D)
|
The Company has two notes payable outstanding to current stockholders of the Company. When X-Factor entered into the NJEDA agreements, the Company ceased making principal payments on these notes to be in compliance with the NJEDA note. These notes were amended in February 2012 and the maturity date of these notes is the later of August 1, 2014 or such date when all debt owed by X-Factor to the NJEDA has been paid. These notes are unsecured and bear interest at a rate of 8.5% per annum and were initially convertible into equity at a conversion rate of $0.649 per share of common stock. In February 2012, these notes were amended to make them convertible into equity at a conversion rate of $0.595 per share of common stock of the Company. The Company recorded a charge of $60,668 associated with the amendment in February 2012. In addition, beginning in March 2012, interest was paid quarterly in arrears in the form of additional convertible promissory notes. In August 2012 these stockholders sold $123,427 of these promissory notes to investors and in September 2012 we issued 207,440 shares of our common stock to the investors at a price of $0.595 per share, in exchange for the conversion of those promissory notes along with $856 of accrued interest. Unpaid interest of $3,442 and $5,512 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $1,748 and $4,118 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. The unpaid principal and interest of these notes amounted to $84,212 and $80,770 as of June 30, 2013 and December 31, 2012, respectively. The effective interest rate of these notes was 11.7% in 2012.
Detachable warrants to acquire 48,216 shares common stock of the Company at $0.819 with an expiration date of January 2018 were issued in connection with the above mentioned notes. The $16,346 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model. The $16,346 fair value is classified as a discount of the notes and was expensed, using the effective interest method, over the original terms of the debt. When the notes were amended in February 2012 the unamortized discount of $841 was expensed to Loss on Modification or Extinguishment of Debt. The unamortized discount related to these warrants amounted to $0 and $1,188 as of June 30, 2013 and December 31, 2012, respectively.
|
|
(E)
|
In 2011, the Company issued promissory notes, each in the principal amount of $25,000, to two stockholders of the Company. These notes initially matured in three months and bore interest at 10% on any overdue principal. One note was repaid in 2011 while the maturity date of the other note was amended to the later of August 1, 2014 or such date when all debt owed to the NJEDA has been paid by the Company. In February 2012, this note was amended to make it convertible into equity at a conversion rate of $0.595 per share of common stock of the Company, with interest to be paid quarterly in arrears in the form of additional convertible promissory notes. Unpaid interest of $962 and 1,321 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $472 and $669 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. The Company recorded a charge of $8,299 associated with the amendment in February 2012. In June 2013 and 2012, respectively, $2,333 and $4,700 due from this investor, which was included in accounts receivable, was offset against this note. The unpaid principal and interest of this note amounted to $22,128 and $23,389 as of June 30, 2013 and December 31, 2012, respectively.
Detachable warrants to acquire 29,606 shares of common stock of the Company at $0.002 with an expiration date of May 2021 were issued in connection with the above mentioned notes. The $24,200 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model. The $24,200 fair value was classified as a discount of the notes and was expensed, using the effective interest method, over the original three month terms of the debt. The effective interest rate of these notes and the related warrants was 245%.
|
|
(F)
|
In 2011, the Company raised $800,000 by issuing convertible notes to certain stockholders of the Company (the “Bridge Notes”). The Bridge Notes bear interest at 6.00% per annum, payable quarterly in arrears, and are convertible at the option of the Company into additional Bridge Notes. Unpaid interest of $0 and $19,068 was converted to additional promissory notes in the six months ended June 30, 2013 and 2012, respectively. Unpaid interest of $0 and $6,892 was converted to additional promissory notes in the three months ended June 30, 2013 and 2012, respectively. The Bridge Notes originally matured on the first anniversary of their issuance ($600,000 of the principal amount) or on August 1, 2014 ($200,000 of the principal amount), or could be prepaid at the Company’s option, and are subordinated to the Company’s NJEDA debt. These notes were amended in February 2012 and the related maturity date of these notes was amended to be the later of: (a) August 1, 2014 or (b) such date when all debt owed to the NJEDA has been paid by the Company. The Bridge Notes are convertible to an equity interest in the Company using a conversion price which will be based on defined terms of a future equity offering. In connection with the issuance of the Bridge Notes, for each $100,000 of notes issued, holders of Bridge Notes received 163,182 shares of common stock of the Company (the “Issued Shares”). As a result of the issuance of the Issued Shares we considered the Bridge Note investors to be Related Parties; $600,000 of the Bridge Notes are convertible into shares of common stock of the Company at the option of the holders, while $200,000 of the Bridge Notes must be converted to equity of the Company in the event of a future equity offerings. We also paid our investment bankers a fee of 10% of the gross proceeds of the financing. The $80,000 fee was classified as prepaid financing costs and was expensed, using the effective interest method, over the terms of the Bridge Notes and expensed as a component of Loss on Modification or Extinguishment of Debt. Upon the closing of the Merger, $728,049 of Bridge Notes ($700,000 of principal and $28,049 of unpaid interest) was converted into 970,733 shares of common stock of the Company. In August 2012, $105,845 owed for the remaining Bridge Notes ($100,000 of principal and $5,845 of unpaid interest) was repaid.
We accounted for the issuance of the Bridge Notes and the Issued Shares by allocating the $800,000 of proceeds received to each of the instruments based on their relative fair value. The fair value of the Issued Shares was based on recent sales of shares of common stock. Since the redemption amount of the Bridge Notes is convertible into shares of common stock, we recorded the effects of a beneficial conversion feature. The value of the beneficial conversion feature was limited to the proceeds allocated to the Bridge Notes. The $457,600 value of the Issued Shares and the $342,400 value of the beneficial conversion feature was classified as a discount of the Bridge Notes and expensed, using the effective interest method, over the terms of the Bridge Notes. The effective interest rate of the Bridge Notes and the beneficial conversion features (adjusted for the amended terms of the maturity date of the Bridge Notes) was approximately 41%.
To determine the accounting treatment of the conversion of the $728,049 of Bridge Notes, the Company followed the guidance espoused in FASB ASC Topic 470-20, “
Debt – Debt with Conversion and Other Options”
(“ASC 470-20”)
.
ASC 470-20 requires that the conversion of the Bridge Notes should be accounted for as an “extinguishment of debt”. The Company recorded a charge for this extinguishment of debt as a Loss on Modification or Extinguishment of Debt of $168,430 in May 2012.
|
The amendment of the Bridge Notes in February 2012, which extended the maturity date for $600,000 of the Bridge Notes from the first anniversary of their issuance to August 1, 2014, significantly changed the cash flows related to the original and modified Bridge Notes. To determine the accounting treatment of this modification the Company followed the guidance espoused in ASC 470-50
.
ASC 470-50 requires the Company to determine the present value of the cash flows of the original and revised Bridge Notes. The difference in the present value of the cash flows exceeded 10% and the modification of the Bridge Notes was accounted for as an “extinguishment of debt” with the original Bridge Notes effectively defeased and the modified Bridge Notes treated as a new note. With the defeasement of the original Bridge Notes, the Company expensed any discounts or prepaid financing costs related to those notes. The Company determined that the difference in the present value of the cash flows exceeded the 10% threshold and that the modification of the Bridge Notes should be accounted for as an “extinguishment of debt”. The Company recorded a charge for this modification as a Loss on Modification or Extinguishment of Debt of $298,147 in February 2012.
Note 13 – Derivative Financial Instruments
The holders of Notes Payable – Related Parties, with $292,466 and $282,680 of principal as of June 30, 2013 and December 31, 2012, respectively, have the option to convert the notes to equity at a conversion rate of $0.595. When the notes were issued, the fair value of a share of common stock of the Company was $0.819. The related fair value of the embedded beneficial conversion feature is treated as a derivative liability. The derivative liability is periodically measured as the difference between the conversion price and the then current fair value of a share of common stock multiplied by the number of shares of common stock that will be issued at the conversion price. Any change in the fair value of a share of common stock or any increase in the notes will cause a change in the derivative liability, which is then recognized in the Consolidated Statement of Operations and Consolidated Balance Sheet. The amendment of certain Notes Payable – Related Parties in February 2012 to make them convertible into equity at a conversion rate of $0.624 per share of common stock of the Company or to reduce their conversion rate from $0.649 to $0.624, required the recording of the $121,296 fair value of this embedded beneficial conversion feature. The $39,130 derivative liability was reclassified to Consolidated Statements of Stockholders' Deficit when the related notes were amended in February 2012. The conversion of certain Notes Payable – Related Parties in August 2012 caused the $123,823 derivative liability related to those notes to be reclassified to the Consolidated Statements of Stockholders' Deficit. For the purposes of calculating the derivative liability we used the stock price of $0.56 and $0.75 based on recent private sales of the Company’s common stock as of June 30, 2013 and December 31, 2012, respectively.
In 2012, the Company issued 605,203 warrants to the Placement Agent (428,740 with a three year term) and NJEDA (176,463 with a ten year term) that contain a weighted average anti-dilution feature that in certain circumstances could provide the holders with protection against changes in the market value of the Company's common stock; accordingly, they are required under applicable accounting standards to be recorded at fair value as of the balance sheet date. At June 30, 2013 and December 31, 2012 the Company evaluated the fair value of the warrants using a valuation model and the net difference was not significant between their previous periods’ carrying values and their current fair values on June 30, 2013 and December 31, 2012.
Pursuant to the requirements of ASC Topic 820, the Company has provided fair value disclosure information for relevant assets and liabilities in the accompanying financial statements. The following summarizes liabilities which have been accounted for at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, along with the bases for the determination of fair value:
|
|
|
Quoted Prices
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
In Active
|
|
|
Measurement
|
|
|
Measurement
|
|
|
|
|
|
|
|
Markets
|
|
|
Criteria
|
|
|
Criteria
|
|
|
Total
|
|
|
June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (A )
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(27,006
|
)
|
|
$
|
(27,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (A )
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(165,640
|
)
|
|
$
|
(165,640
|
)
|
Note (A) – Embedded beneficial conversion and anti-dilution features.
The changes in Level 3 instruments, which are comprised of the embedded conversion feature included in the notes, are measured on a recurring basis for the six months ended June 30, 2013 and 2012 and are presented below: