f10k2012_xfactor.htm

X-Factor Communications Holdings, Inc.

Consolidated Balance Sheets

December 31, 2012 and 2011

	December 31,			December 31,
	2012			2011
Assets
Current assets:
Cash	$	311,843		$	78,639
Accounts receivable, net of allowance for doubtful accounts
of $26,200 and $25,900 respectively		79,964			216,110
Other current assets		27,793			209,081
Total current assets		419,600			503,830

Equipment and leasehold improvements		24,705			65,292
Total assets	$	444,305		$	569,122

Liabilities and Stockholders’ and Members’ Deficit
Current liabilities:
Line of credit	$	97,846		$	97,836
Current portion of note payable, net of discount of $2,256 and $9,377, respectively		24,800			161,078
Current portion of capital leases payable		10,705			10,457
Accounts payable		624,045			405,482
Accrued expenses		137,213			172,955
Current portion of unearned revenues		30,008			58,845
Derivative financial instruments		165,640			39,130
Total current liabilities		1,090,257			945,783

Long term liabilities:
Note payable, less current portion, net of discount of $5,848 and $6,166, respectively		304,402			277,924
Notes payable – related parties, net of discount of $0 and $582,209, respectively		282,680			614,543
Capital leases payable, less current portion		—			10,705
Unearned revenues, less current portion		—			14,354
Total long term liabilities		587,082			917,526
Total liabilities		1,677,339			1,863,309

Commitments and contingencies

Stockholders’ and members’ deficit:
Members' deficit (liquidation value of preferred units of $1,140,287)		—			(1,294,187	)
Preferred stock, $.0001 par value; 20,000,000 shares authorized,
no shares issued and outstanding		—			—
Common stock, $.0001 par value; 100,000,000 shares authorized,
17,214,934 shares issued and outstanding at December 31, 2012		1,721			—
Additional paid-in capital		6,519,602			—
Accumulated deficit		(7,754,357	)		—
Total stockholders’ and members’ deficit		(1,233,034	)		(1,294,187	)
Total liabilities and stockholders' and members’ deficit	$	444,305		$	569,122

See accompanying notes to consolidated financial statements.

F-3

X-Factor Communications Holdings, Inc.

Consolidated Statements of Operations

Years Ended December 31, 2012 and 2011

	Year Ended
	December 31,
	2012			2011

Revenue	$	676,415		$	849,096
Cost of revenue		243,661			238,578
Gross profit		432,754			610,518

Operating expenses
Salaries and fringe benefits		818,817			457,820
General and administrative		1,810,015			1,146,611
Depreciation and amortization		44,422			67,081
Total operating expenses		2,673,254			1,671,512

Loss from operations		(2,240,500	)		(1,060,994	)

Other expenses
Interest expense, including $182,503 and $292,932,
respectively for related parties		248,195			373,925
Change in the fair value of derivative financial
instruments for related parties		197,463			—
Professional fees related to Merger		202,867			62,188
Loss on modification or extinguishment
of debt		523,259			—
Other expenses		7,854			5,531
Total other expenses		1,179,638			441,644

Net loss	$	(3,420,138	)	$	(1,502,638	)

See accompanying notes to consolidated financial statements.

F-4

X-Factor Communications Holdings, Inc.

Consolidated Statement of Stockholders’ and Members’ Deficit

Years Ended December 31, 2012 and 2011

				Common						Membership			Additional									Stockholders’
	Common			Shares			Membership			Units			Paid in			Accumulated			Members’			Deficit
	Shares			Amount			Units			Amount			Capital			Deficit			Deficit			Total
Balance at January 1, 2011		—		$	—			—		$	—		$	—		$	—		$	(1,222,068	)	$	(1,222,068	)
Sale of membership units		—			—			—			—			—			—			49,153			49,153
Membership units issued in connection with issuance of notes payable – related parties		—			—			—			—			—			—			457,600			457,600
Beneficial conversion feature related to notes payable – related parties		—			—			—			—			—			—			342,400			342,400
Equity based compensation – options issued to employees and consultants		—			—			—			—			—			—			72,298			72,298
Equity based compensation – warrants issued to consultants		—			—			—			—			—			—			484,868			484,868
Warrants issued in connection with notes payable – related parties		—			—			—			—			—			—			24,200			24,200
Net loss		—			—			—			—			—			—			(1,502,638	)		(1,502,638	)
Balance at December 31, 2011		—			—			—			—			—			—			(1,294,187	)		(1,294,187	)
Reclassification of Members’ deficit into Stockholders’ accounts		—			—			1,663,893			166			3,039,866			(4,334,219	)		1,294,187			—
Conversion of common membership units into common shares		7,239,216			724			(1,304,210	)		(130	)		(594	)		—			—			—
Conversion of preferred membership units into common shares		1,996,685			200			(359,683	)		(36	)		(164	)		—			—			—
Issuance of common shares and warrants to eliminate liquidation preference on preferred membership units and warrants for preferred membership units		1,357,203			136			—			—			(136	)		—			—			—
Issuance of common shares to exchange Organic holdings		1,180,000			118			—			—			(118	)		—			—			—
Issuance of common shares sold in Offerings		3,133,333			313			—			—			2,362,187			—			—			2,362,500
Costs of Offerings incurred in 2011		—			—			—			—			(64,060	)		—			—			(64,060	)
Cash paid for costs of Offerings incurred in 2012		—			—			—			—			(431,951	)		—			—			(431,951	)
Equity based compensation – common shares and warrants issued to pay costs of Offerings		—			—			—			—			(1,269,016	)		—			—			(1,269,016	)
Equity based compensation – common shares and warrants issued to Placement Agent		1,589,059			159			—			—			1,191,635			—			—			1,191,794
Equity based compensation – warrants issued to Placement Agent		—			—			—			—			57,922			—			—			57,922
Warrants issued in Offerings		—			—			—			—			19,300			—			—			19,300
Equity based compensation – shares issued in settlement of accounts payable		157,932			16			—			—			118,431			—			—			118,447
Cancellation of Controlling Stockholders shares		(656,667	)		(66	)		—			—			66			—			—			—
Conversion of promissory notes		1,218,173			121			—			—			881,357			—			—			881,478
Warrants issued related to refinancing of note payable		—			—			—			—			6,250			—			—			6,250
Equity based compensation – options issued in settlement of accounts payable		—			—			—			—			7,723			—			—			7,723
Equity based compensation – options issued to employees and consultants		—			—			—			—			513,747			—			—			513,747
Reclassification of fair value of warrants issued to Placement Agent and note holder with an anti-dilution feature		—			—			—			—			(92,000	)		—			—			(92,000	)
Equity based compensation – warrants issued to consultants		—			—			—			—			16,204			—			—			16,204
Cancellations of derivative liabilities		—			—			—			—			162,953			—			—			162,953
Net loss		—			—			—			—			—			(3,420,138	)		—			(3,420,138	)
Balance at December 31, 2012		17,214,934		$	1,721			—		$	—		$	6,519,602		$	(7,754,357	)	$	—		$	(1,233,034	)

See accompanying notes to consolidated financial statements.

F-5

X-Factor Communications Holdings, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2012 and 2011

	Year Ended
	December 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(3,420,138	)	$	(1,502,638	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		44,422			67,081
Capitalized interest payments for notes - related parties		48,500			30,403
Capitalized interest income for note receivable		(1,128	)		(435	)
Accretion of discount on notes		139,154			259,112
Amortization of prepaid financing costs		11,869			23,277
Change in fair value of derivative
financial instruments for related parties		197,463			—
Loss on modification or extinguishment of debt		523,259			—
Bad debt expense		300			25,000
Equity-based compensation		529,951			557,166
Changes in operating assets and liabilities:
Accounts receivable		131,146			(106,648	)
Other current assets		(16,231	)		—
Accounts payable		344,735			110,026
Accrued expenses		(35,743	)		156,464
Unearned revenue		(43,191	)		(144,195	)
Net cash used in operating activities		(1,545,632	)		(525,387	)

Cash flows from investing activities:
Refund (payment) of deposit for company to be acquired in Merger		75,000			(75,000	)
Advances made for note receivable		—			(10,000	)
Purchase of equipment and leasehold improvements		(3,835	)		(8,257	)
Net cash provided by (used in)investing activities		71,165			(93,257	)

Cash flows from financing activities:
Sale of common stock		2,362,500			49,153
Costs incurred in connection with Offerings		(431,951	)		(64,060	)
Principal repayments of note payable		(117,239	)		(24,622	)
Principal payments of line of credit		10			(303	)
Proceeds from notes payable - related parties		75,000			850,000
Costs incurred in connection with notes payable – related parties		—			(82,863	)
Principal repayments of obligations under capital leases		(10,457	)		(27,439	)
Principal repayments of notes payable - related parties		(167,774	)		(25,000	)
Costs incurred in connection with NJEDA refinancing		(2,418	)		—
Net cash provided by financing activities		1,707,671			674,866
Net change in cash		233,204			56,222
Cash - beginning of year		78,639			22,417
Cash - end of year	$	311,843		$	78,639

See accompanying notes to consolidated financial statements.

F-6

X-Factor Communications Holdings, Inc.

Consolidated Statements of Cash Flows (Continued)

Years Ended December 31, 2012 and 2011

	Year Ended
	December 31,
	2012		2011
Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	45,840	$	61,134
Non-cash investing and financing activities:
Conversion of promissory notes to equity	$	881,478	$	—
Equity-based compensation costs of Offerings	$	1,269,016	$	—
Accounts receivable used to offset notes payable - related parties	$	4,700	$	—
Equity issued in settlement of accounts payable	$	118,447	$	—
Options issued in settlement of accounts payable	$	7,723	$	—
Cancellations of derivative liabilities	$	162,953	$	—
Warrants issued in connection with refinancing of note payable	$	6,250	$	—
Warrants issued to Placement Agent and note holder with an anti-dilution feature	$	92,000	$	—
Warrants issued in connection with notes payable – related parties	$	—	$	24,200
Beneficial conversion feature for notes payable – related parties	$	—	$	342,400
Equity issued in connection with notes payable – related parties	$	—	$	457,600

See accompanying notes to consolidated financial statements.

F-7

X-Factor Communications Holdings, Inc.

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 signage, 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 December 2012 the “December 2012 Offering” collectively referred to as the "Offerings") the Company issued and sold an aggregate of 2,883,333 shares of common stock at a price of $0.75 per share, for gross proceeds of $2,162,500.

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.

F-8

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 December 31, 2012 the Company had a stockholders' deficit of $1,233,034, a working capital deficiency of $670,657 and incurred a net loss of $3,420,138 for the year then ended. In addition, there was a decrease in revenue of $172,681 for the year ended December 31, 2012 when compared to 2011. 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 included an explanatory 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 years ended December 31, 2012 and 2011, the Company received an aggregate $75,000 and $850,000, respectively, in cash proceeds from the sale of promissory notes (see Note 12). Through December 31, 2012 the Company received additional net cash proceeds of $1,930,549 raised in connection with the Offerings.

The Company believes that the remainder of net cash proceeds received from the sale of securities in the Offerings and the conversion of promissory notes in 2012 will only provide sufficient equity to fund its operations for the next two to three months from the date of filing this Annual Report on Form 10-K. 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

Presentation of historical membership unit, option, warrant and convertible note amounts and conversion prices – Reclassifications

Prior to the Merger on May 15, 2012, X-Factor was a LLC and the equity was 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 and all membership units were converted into shares of common stock of Holdings, 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 conversion, the number of X-Factor membership units, options, warrants and exercise prices as of December 31, 2011 were adjusted as follows:

	Common Stock After Conversion		Membership Units Before Conversion

Common		7,239,216		1,304,210
Preferred (A )		1,996,685		359,683
Total shares or units		9,235,901		1,663,893

F-9

Note A – The preferred membership units were converted into shares of common stock.

	Common Stock After Conversion		Membership Units Before Conversion

Options – issued		2,161,920		389,490
Warrants – issued		1,012,757		182,457

Options – weighted average exercise price	$	0.579	$	3.210
Warrants – weighted average exercise price	$	0.229	$	1.270

Since all common and preferred membership units of X-Factor were converted into 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 December 31, 2012, the Company had $61,843 of cash balances that exceeded 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.

F-10

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 years ended December 31, 2012 and 2011.

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 year. For 2011, X-Factor was not obligated, as an LLC, to calculate and present loss per share. It is not practicable for the Company to determine the historical net loss (and net loss per share) from the date of the Merger through December 31, 2012. However, the Company has presented unaudited pro forma loss per share for the year ended December 31, 2012, as if the Merger occurred on January 1, 2012 and the related shares were outstanding for the entire year ended December 31, 2012. Such pro forma loss per share is presented below:

For the Year Ended December 31, 2012
Net loss attributable to common stockholders per share:	$	(3,420,138	)
Basic and diluted	$	(0.23	)

Weighted average number of common shares outstanding:
Basic and diluted		14,674,290

Diluted loss per share for the year ended December 31, 2012 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 7,864,461 as of December 31, 2012) 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 two services: digital signage software and services of $272,380 and $549,988 for the years ended December 31, 2012 and 2011, respectively, and webcasting of $404,035 and $299,108 for the years ended December 31, 2012 and 2011, respectively.

F-11

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 interest and other 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 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 interest and other expense section of the accompanying Consolidated Statements of Operations and in derivative financial instruments of the liability section of the Consolidated Balance Sheets.

Advertising and Marketing Expense

Advertising costs are expensed as incurred and included in general and administrative expenses. Advertising expenses for the years ended December 31, 2012 and 2011 were $46,519 and $3,261, 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 employees 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.

Professional Fees (see Note 18)

Professional Fees Related to the Merger have been expensed as incurred through December 31, 2012. Professional fees related to the May 2012 Offering were capitalized at December 31, 2011 based on an assessment of the viability of the May 2012 Offering through that date. When the May 2012 Offering was consummated, the Company offset these costs against proceeds from the sale of the 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 $700,000 (principally composed of a $430,000 net operating loss [“NOL”] and $215,000 of compensation expenses) at December 31, 2012. For the period from the effective date of the Merger through December 31, 2012 the Company did not record a benefit for income taxes. At December 31, 2012 the Company had Federal and New Jersey NOL carry-forwards of approximately $1,085,000 which expire in 2032 and 2019, respectively. 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.

F-12

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 2012, 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 December 31, 2012 and 2011, or for the years ended December 31, 2012 and 2011.

Fair Value Disclosures

The Company has financial instruments, principally accounts receivable, accounts payable, loan payable, notes payable and accrued expenses. We estimate that the fair value of these financial instruments at December 31, 2012 and 2011 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:

	●	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.
	●	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.
	●	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 December 31, 2012 and 2011. 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.

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.

F-13

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.

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.

In 2011, the President of the Company loaned the Company $10,000 to cover certain operating expenses. The obligation was repaid in May 2012.

Related Parties who are officers of the Company provided accounting and management services to the Company for $152,449 and $58,140 for the years ended December 31, 2012 and 2011, respectively, before they became employees of the Company.

Related Parties who are not officers of the Company provided product development, legal and management services to the Company for $114,631 and $116,709 for the years ended December 31, 2012 and 2011, respectively

Included in accounts payable and accrued expenses are $103,445 and $212,890 as of December 31, 2012 and 2011, respectively, owed to Related Parties.

Included in accounts receivable are $5,725 and $7,700 as of December 31, 2012 and 2011, respectively, due from Related Parties.

The Company leases office and technical operations space and purchases various communication services from a Related Party totaling $40,122 and $33,551 for the years ended December 31, 2012 and 2011, respectively.

Note 5 – Holdings’ Capital Stock (see Notes 16 and 17)

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 December 31, 2012, there are 17,214,934 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.

F-14

Note 6 - Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following as of December 31:

	2012			2011

Equipment and software	$	515,331		$	511,496
Leasehold improvements		3,210			3,210
Equipment and leasehold improvements, at cost		518,541			514,706
Accumulated depreciation and amortization		(493,836	)		(449,414	)
	$	24,705		$	65,292

Depreciation and amortization expense totaled $44,422 and $67,081 for the years ended December 31, 2012 and 2011, respectively.

Included in equipment and software is $219,811 of assets under capital leases, which had accumulated depreciation and amortization of $215,172 and $188,454 as of December 31, 2012 and 2011, respectively.

Note 7 – Other Current Assets

Other current assets consist of the following as of December 31:

	2012		2011

Note receivable	$	11,563	$	10,435
Prepaid insurance		12,294		—
Prepaid leases		3,936		—
Professional and other costs related to the May 2012 Offering		—		64,060
Prepaid financing costs, net of amortization		—		59,586
Deposit for the acquisition of Merger corporation		—		75,000
	$	27,793	$	209,081

In 2011, X-Factor deposited $75,000 in escrow for the acquisition of the Company. In 2012, it was determined that certain individual investors of X-Factor would acquire the Company and the $75,000 deposit in escrow was returned to X-Factor (the "Pre-Merger Acquisition”). We have incurred professional and other costs in connection with the Merger which are expensed as incurred.

In connection with the May 2012 Offering, the Company prepaid various professional fees. When the May 2012 Offering was consummated, the Company offset these costs and future direct costs against proceeds from the sale of the stock (see Note 18).

In connection with the Bridge Notes (discussed and defined in Note 12) we paid our investment bankers a fee of 10% of the gross proceeds of the Bridge Notes financing. The $80,000 fee, with $2,863 of professional fees, was classified as prepaid financing costs and was amortized, using the effective interest method, over the original and amended terms of the Bridge Notes. In connection with the amendment of the Bridge Notes in February 2012, $30,874 was recognized as a Loss on Modification or Extinguishment of Debt. In connection with the conversion of certain Bridge Notes upon the closing of the Merger; an additional $16,843 was expensed.

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 December 31, 2012 and 2011). 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. This strategic partner has developed a kiosk software application that is synergistic with the Company’s digital media platform.

F-15

Note 8 – Accrued Expenses

Accrued expenses consist of the following as of December 31:

	2012		2011

Compensation and payroll taxes	$	112,506	$	17,468
Operating expenses payable		2,630		—
Accounting		—		57,420
Legal		—		55,835
Accrued interest payable		306		316
Travel and related expenses		21,771		7,500
Customer refund		—		16,000
Due to President of the Company		—		9,848
Consulting fees		—		5,000
Other current liabilities		—		3,568
	$	137,213	$	172,955

Note 9 - Unearned Revenues

Unearned, non-refundable revenues as of December 31, 2012 are expected to be earned during the twelve months ending December 31, 2013.

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 $97,846 and $97,836 was outstanding as of December 31, 2012 and 2011, respectively. Interest accrues at a defined prime rate plus 0.5% (3.75% at December 31, 2012 and 2011). 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.

F-16

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 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 December 31:

	2012			2011

Notes payable	$	337,306		$	454,545
Discount		(8,104	)		(15,543	)
Note payable, net of discount		329,202			439,002
Less: current portion of notes payable, net of discount of $2,256(A)		(24,800	)		(161,078	)
Notes payable, net of current portion	$	304,402		$	277,924

(A) With the amendment of the note in October 2012 the Company currently estimates a payment of $27,056 (4% of 2012 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.

F-17

(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 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.

(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 $14,643 and $15,503 was converted to additional promissory notes in the years ended December 31, 2012 and 2011, 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 $178,521 and $163,878 as of December 31, 2012 and 2011, 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 $11,224 was converted to additional promissory notes in the year ended December 31, 2012. The unpaid principal and interest of these notes amounted to $80,770 and $192,974 as of December 31, 2012 and 2011, 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 December 31, 2012 and 2011, respectively.

F-18

(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 $2,150 was converted to additional promissory notes in the year ended December 31, 2012. The Company recorded a charge of $8,299 associated with the amendment in February 2012. In June 2012, $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 $23,389 and $25,938 as of December 31, 2012 and 2011, 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 $19,932 and $4,906 was converted to additional promissory notes in the years ended December 31, 2012 and 2011, respectively. Unpaid interest of $864 and $4,906 was converted to additional promissory notes in the years ended December 31, 2012 and 2011, 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. Principal and accrued interest of these notes amounted to $0 and $813,962 as of December 31, 2012 and 2011, respectively.

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 are classified as a discount of the Bridge Notes and was expensed, using the effective interest method, over the terms of the Bridge Notes. The unamortized discount related to the Issued Shares and beneficial conversion feature amounted to $0 and $581,021 as of December 31, 2012 and 2011, respectively. 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%.

F-19

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 payable - Related Parties consisted of the following as of December 31:

	2012		2011
Notes payable – Related Parties	$	282,680	$	1,196,752
Unamortized discount - Related Parties		-		(582,209	)
Notes payable - Related Parties - net of discount		282,680		614,543
Less: current portion		-		-
Notes payable – Related Parties, net of current portion	$	282,680	$	614,543

Note 13 – Derivative Financial Instruments

The holders of Notes Payable – Related Parties, with $282,680 and $192,974 of principal as of December 31, 2012 and 2011, respectively, have the option to convert the notes to equity at a conversion rate of $0.595 and $0.649 per share of common stock of the Company, respectively. 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 Sheets. 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 as of December 31, 2011 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 $0.75 as quoted on the Over-the-Counter Bulletin Board for December 31, 2012 and $0.78 based on related private sales of the Company’s common stock as of December 31, 2011.

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 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 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 December 31, 2012 and 2011, along with the bases for the determination of fair value:

	Quoted Prices		Observable		Unobservable
	In Active		Measurement		Measurement
	Markets		Criteria		Criteria			Total
December 31, 2012:
Derivative instruments (A )		—		—	$	(165,640	)	$	(165,640	)

December 31, 2011:
Derivative instruments (A )		—		—	$	(39,130	)	$	(39,130	)

F-20

Note (A) – Embedded beneficial conversion feature.

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 years ended December 31 and are presented below:

	2012			2011
Derivative financial instruments, beginning of year	$	39,130		$	39,130
Cancellation of derivative – reclassified to stockholders’ deficit		(39,130	)		—
Recognition of beneficial conversion feature of notes
after modification of debt (recognized in the results of operations)		121,296			—
Recognition of beneficial conversion feature of warrants issued with anti-dilution feature		92,000			—
Conversion of notes payable resulting in cancellation of
derivative – reclassified to stockholders’ deficit		(123,823	)		—
Change in fair value of derivative financial instruments (recognized in
the results of operations)		76,167			—
Derivative financial instruments, end of year	$	165,640		$	39,130

Note 14 – Interest Expense

The components of interest expense for the years ended December 31 are presented below:

	2012		2011

Notes payable – Related Parties	$	51,332	$	47,404
Notes payable - Related Parties – discount amortization		131,171		245,528
Note payable – NJEDA		23,255		28,569
Note payable - NJEDA – discount amortization		7,983		13,584
Amortization of prepaid financing costs		11,869		23,277
Obligations under capital leases		2,903		5,491
Line of credit		3,730		3,719
Other interest expense		15,952		6,353
	$	248,195	$	373,925

Note 15 - Concentrations

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable and revenues. The following are the percentages for those customers that exceeded 10% of either net accounts receivable as of December 31, 2012 and 2011 and revenue for the years then ended:

	Accounts Receivable, net						Revenue
	2012			2011			2012			2011
Customer A		—			—			—			23	%
Customer B		16	%		5	%		22	%		2	%
Customer C		32	%		—			4	%		—
Customer D		—			—			7	%		13	%
Customer E		—			14	%		15	%		4	%
Customer F		—			30	%		—			8	%
Customer G		—			25	%		—			6	%
Customer H		25	%		4	%		15	%		10	%
		73	%		78	%		63	%		66	%

F-21

Note 16 - Stock Option Plans

Prior to the Merger, X-Factor approved the 2006 Long-Term Incentive Plan (the "2006 Plan") and the 2010 Long-Term Incentive Plan (the "2010 Plan"). These plans provided for the granting of options to purchase a share of common stock in X-Factor to individuals selected by X-Factor's managing member. Awards under the these plans consist of a specified number of options awarded subject to the satisfaction of various vesting conditions specified by X-Factor at the time of the award. Awards have been granted to employees, consultants and investors. With the Merger, no additional grants may be made from these plans and the options are exercisable into shares of common stock of the Company.

In August 2012 the Company’s Board of Directors approved a 2012 Long-Term Incentive Plan (the "2012 Plan"). This plan reserved 5,000,000 shares of the Company’s common stock to be used for the purpose of making awards under the 2012 Plan. Options granted under the 2012 Plan to employees are non-statutory stock options unless the plan is approved by the stockholders of the Company by August 2013, in which case the grants will be incentive stock options. Options granted under the 2012 Plan to consultants are non-statutory stock options. There are 1,364,172 options available for granting under the 2012 Plan as of December 31, 2012.

The exercise price of a grant was established by the Company at its discretion, but could not be less than the fair value, as determined through historical transactions or an annual valuation, of a share of common stock as of the date of grant. Common stock options, subject to certain restrictions, may be exercisable for a defined period of time from the date of the grant after full vesting occurs. Upon termination of employment any unvested options are immediately cancelled, while vested options are exercisable for a defined period. Upon cessation of services performed by consultants any unvested options are immediately cancelled, while vested options are exercisable until the expiration of the option term. The vesting period for awards was established by the Company at its discretion on the date of grant. The various grants can vest immediately upon issuance or up to three years after the grant.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average activity and assumptions during the year ended December 31, 2012 (there were no options granted in 2011):

Number of options granted		3,710,828
Exercise price	$	0.762
Risk-free interest rate		1.2	%
Expected lives in years		6.7
Expected volatility		26.7	%
Expected dividend yields		None
Fair value of common stock	$	0.75
Fair value per option	$	0.220
Fair value of options granted	$	816,382

Prior to the Merger, the Company’s common stock was not traded and since the Merger the Company’s common stock had a limited number of trades. As a result, the Company calculated expected volatility for an equity-based grant based on the Standard & Poor’s North American Technology Software Index during the period immediately preceding the grant that is equal in length to the expected term of the grant. The risk-free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants, with terms approximating the expected period of the grants. The assumptions used in the Black-Scholes option valuation model are inherently highly subjective, and can materially affect the resulting valuation.

F-22

Other Option Information

A summary of options granted, exercised, forfeited and outstanding as of and for the years ended December 31, 2012 and 2011, which as a result of the Merger are convertible into common shares of common stock of the Company, is presented below:

	Outstanding					Exercisable
				Weighted			Weighted
	Number			Average		Number	Average
	of			Exercise		Of	Exercise
	Options			Price		Options	Price

Outstanding, January 1, 2011		2,528,929		$	0.618	1,695,113	$	0.859
Granted		—			—
Forfeited or expired		(367,009	)		0.703
December 31, 2011		2,161,920		$	0.579	2,161,920	$	0.579
Granted		3,710,828			0.762
Forfeited or expired		(272,158	)		0.793
December 31, 2012		5,600,590		$	0.689	4,414,828	$	0.671

Additional information as of December 31, 2012, with respect to all outstanding options:

		Outstanding						Exercisable
				Weighted
				Average		Weighted				Weighted
		Number		Remaining		Average		Number		Average
		of		Contractual		Exercise		of		Exercise
Range of Price		Options		Life (In Years)		Price		Options		Price

$	0.364		1,134,499		4.0	$	0.364		1,134,499	$	0.364
	0.659 – 0.780		3,253,657		9.4		0.745		2,217,895		0.742
	0.825 – 0.865		1,212,434		8.5		0.846		1,062,434		0.849
	0.364 – 0.865		5,600,590		8.1		0.689		4,414,828		0.671

A summary of nonvested options as of and changes during the years ended December 31, 2012 and 2011, is presented below:

				Weighted
	Number			Average
	of			Exercise
	Options			Price

Outstanding, January 1, 2011		1,144,651		$	0.618
Granted		—			—
Vested		(805,729	)		—
Forfeited or expired		(338,922	)		0.703
December 31, 2011		—			—
Granted		3,710,828			0.762
Vested		(2,450,066	)		0.763
Forfeited or expired		(75,000	)		0.750
December 31, 2012		1,185,762			0.759

No compensation costs were capitalized as part of the cost of any asset.

Of the options granted in 2012, 1,576,000 vested on the date of the grant for bonuses to certain employees for rewarding them for their activities in the Merger and Offerings and for certain strategic consultants who were engaged in the third quarter. The related compensation expense of these grants was $340,569.

F-23

The non-cash compensation expense related to these options was allocated as follows for the years ended December 31, 2012 and 2011:

	Year Ended
	December 31,
	2012		2011

Salaries and fringe benefits	$	239,312	$	37,664
General and administrative		274,435		34,634
	$	513,747	$	72,298

There is $278,154 of additional compensation expense related to these options, assuming that the options vest, to be recognized as of December 31, 2012 over the next two years.

Note 17 - Warrants

A summary of warrants granted, exercised, forfeited and outstanding as of, and for the years ended December 31, 2012 and 2011, which as a result of the Merger are convertible into common shares of common stock of the Company, is presented below (all warrants are exercisable upon date of grant):

			Weighted
			Average
			Exercise
	Warrants		Price

Outstanding, January 1, 2011		358,911	$	0.643
Granted		653,846		0.002
Forfeited or expired		—		—
December 31, 2011		1,012,757		0.229
Granted		776,018		0.765
Forfeited or expired		—		—
December 31, 2012		1,788,775		0.461

Warrants with Anti-Dilution Features

At December 31, 2012, there were 605,203 warrants outstanding 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 December 31, 2012 the Company evaluated the fair value of the warrants using a binomial valuation model and the net difference was not significant between their initial carrying values and their fair values on December 31, 2012.

The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes valuation model with the following weighted average activity and assumptions during the years ended December 31, 2012 and 2011:

	Year Ended
	December 31,
	2012			2011

Number of warrants granted		776,018			653,846
Exercise price	$	0.765		$	0.002
Risk-free interest rate		0.7	%		2.4	%
Expected lives in years		4.4			7.0
Expected volatility		25.4	%		24.5	%
Expected dividend yields	None			None
Fair value of common stock	$	0.760		$	0.780
Fair value per warrant	$	0.169		$	0.779
Fair value of warrants granted	$	131,147		$	509,346

F-24

Since prior to the Merger the Company’s common stock was not traded and since the Merger had a limited number of trades, the Company calculated expected volatility for an equity-based grant based on the Standard & Poor’s North American Technology Software Index during the period immediately preceding the grant that is equal in length to the expected term of the grant. The risk-free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants, with terms approximating the expected period of the grants. The assumptions used in the Black-Scholes option valuation model are inherently highly subjective, and can materially affect the resulting valuation.

Additional information as of December 31, 2012, with respect to all outstanding warrants:

			Outstanding
					Weighted
					Average		Weighted
			Number		Remaining		Average
			of		Contractual		Exercise
Range of Price			Warrants		Life (In Years)		Price

	$	0.002		743,939		8.3		$	0.002
		0.764		835,466		3.7			0.764
		0.888		209,370		5.6			0.888
		0.002 – 0.888		1,788,775		5.9			0.461

The non-cash compensation expense related to warrants was allocated as follows for the years ended December 31, 2012 and 2011:

	Year Ended
	December 31,
	2012		2011

Salaries and fringe benefits	$	—	$	—
General and administrative		16,204		484,868
		16,204		484,868
Loss on modification or extinguishment of debt		8,156		—
Interest expense – amortization of warrants		7,441		38,791
	$	31,801	$	523,659

There is no additional compensation expense related to these warrants to be recognized as of December 31, 2012 (excluding the $5,842 of amortization of warrants to debt holders).

Note 18 – Offerings

In May and August, 2012, in connection with the May 2012 Offering, we issued an aggregate of 2,883,333 shares of our common stock at a price of $0.75 per share, for gross proceeds of $2,162,500. We issued an aggregate of 1,010,732 shares of our common stock at a price of $0.75 per share, in exchange for the conversion of certain outstanding convertible promissory notes of X-Factor in an aggregate principal amount of $758,049. In addition, as an inducement to consummate the Merger, those certain stockholders who acquired control of the Company (the "Controlling Stockholders") in connection with the Pre-Merger Acquisition agreed to transfer an aggregate of 656,667 shares of common stock to the Placement Agent on behalf of the Company as partial compensation to the Placement Agent in connection with the May 2012 Offering. The Controlling Stockholders retained 393,333 shares of common stock acquired in connection with the Pre-Merger Acquisition.

In December 2012, we issued an aggregate of 250,000 shares of our common stock at a price of $0.80 per share and warrants to acquire 125,000 shares of common stock at an exercise price of $0.90, with an expiration date of December 2017, for gross proceeds of $200,000. The $14,125 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model was charged to Additional Paid-in Capital with a related credit to Additional Paid-in Capital for the same amount.

F-25

The following is a summary of the shares issued and amounts raised or converted in 2012:

			Transaction
	Shares		Amount
Shares sold pursuant to subscription agreements		3,133,333	$	2,362,500
Conversion of convertible promissory notes		1,218,173		881,478
Controlling Stockholders’ investment		393,333		295,000
		4,744,839	$	3,538,978

The following is a summary of the cash and equity-based compensation costs of the Offerings:

			Cost or
	Shares		Valued at
Cash costs:
Placement Agent 10% fee of proceeds		—	$	341,555
Legal fees		—		134,861
Placement Agent travel costs		—		16,000
Other costs		—		3,595
Total cash costs		—		496,011

Equity-based compensation:
Shares issued at closing of May 2012 Offering (Note A)		932,392		699,294
Shares transferred from Controlling Stockholders (Note A)		656,667		492,500
Warrants issued to Placement Agent (Note B)		453,740		57,922
Warrants issued to investors in December 2012 Offering (Note C)		125,000		19,300
Potential shares to be issued for the December 2012 Offering (Note D)		—		—
Total equity-based compensation		2,167,799		1,269,016
Total costs		2,167,799	$	1,765,027

Note A – in connection with the May 2012 Offering the Placement Agent received shares of common stock resulting in a total ownership percentage of the Company’s then outstanding equity equal to 9.9%. In addition to the 1,589,059 shares of common stock due to the Placement Agent as compensation in the May 2012 Offering (the “Placement Agent Shares”) the Placement Agent’s owns an additional 69,933 common shares. The Company issued 932,392 shares to the Placement Agent and the Controlling Stockholders agreed to transfer an additional 656,667 shares to the Placement Agent. The $699,294 and $492,500 fair value of these shares issued as compensation is based on a stock price of $0.75 per share. For accounting purposes the Company treats the 656,667 transferred shares as having been “cancelled” in the Merger and then “reissued” by the Company.

Note B – the Placement Agent received warrants equal to 10% of the shares issued in the Offerings. The warrants issued in connection with the May 2012 Offering had an exercise price of $0.75 per share and a three year term. The warrants issued in December 2012 had an exercise price of $0.90 per share and a five year term. Therefore, warrants to acquire 428,740 shares at $0.75 with expiration dates from May 2015 through August 2015 were issued in connection with the May 2012 Offering and warrants to acquire 25,000 shares at $0.90 with expiration date of December 2017 were issued in December 2012. The $57,922 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model.

Note C – the investors that purchased shares in December 2012 received warrants equal to 50% of the shares issued in the Offerings. The warrants issued in connection with the December 2012 Offering had an exercise price of $0.90 per share and a five year term. Therefore, warrants to acquire 125,000 shares at $0.90 with expiration date of December 2017 were issued in connection with the December 2012 Offering. The $19,300 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model.

Note D – the Placement Agent has the potential to receive shares of common stock based on the total amount raised in the December 2012 Offering. The Placement Agent will receive these shares if the gross proceeds of the December 2012 Offering equal or exceed $1,000,000, as additional compensation, 250,000 shares of common stock of the Company and, if the gross proceeds of the Offering are between $1,000,001 and $2,000,000, .25 shares of common stock of the Company for each $1.00 raised in gross proceeds in excess of $1,000,000, up to a maximum of 250,000 additional shares, for a total of 500,000 potential shares of common stock. If the Placement Agent receives these shares their value will be charged to Additional Paid-in Capital with a related credit to Additional Paid-in Capital for the same amount.

F-26

The $496,011 of cash costs of the Offerings were charged to Additional Paid-in Capital. The $1,269,016 of equity-based compensation costs, related to shares and warrants issued to the Placement Agent and investors, was charged to Additional Paid-in Capital with a related credit to Additional Paid-in Capital for the same amount.

To eliminate the liquidation preference of the preferred membership units we issued 1,357,203 shares of common stock which had a fair value of $1,017,902 based on the $0.75 price per common share in the May 2012 Offering. We agreed to issue to the NJEDA, as an inducement to eliminate the liquidation preference in connection with a warrant issued by X-Factor, an additional warrant to purchase, for a period of 10 years from the Effective Time, 148,942 shares of our common stock. The $29,669 estimated fair value of the warrants was calculated using the Black-Scholes option valuation model. The $1,047,571 fair value related to shares and warrants issued to eliminate the liquidation preferences was charged to Additional Paid-in Capital with a related credit to Additional Paid-in Capital for the same amount less the $136 par value of the 1,357,203 issued shares of common stock was credited to common stock.

Note 19 - Commitments and Contingencies

Lease Commitments

The Company leases equipment under a non-cancelable lease arrangement at an interest rate of 17.6% per annum. The Company also leases its primary office facility from a Related Party under a non-cancelable operating lease that expired on February 28, 2011. Upon the expiration of the original term, the lease term was modified to provide for the facility rental on a month-to-month basis. Rent expense totaled $21,600 and $19,500 for the years ended December 31, 2012 and 2011, respectively.

The future minimum payments for the capital lease as of December 31, 2012 are as follows:

Total future minimum lease payments in 2013	$	11,663
Amount representing interest		(958	)
Present value of future minimum lease payments		10,705
Less: current portion		10,705
Lease obligations, net of current portion	$	—

Placement Agent Agreement

In December 2012 the Company entered into an Investment Banking Agreement with its Placement Agent, pursuant to which the Company is obligated to pay the Placement Agent a monthly retainer of $5,000. The Placement Agent will receive 10% of the gross proceeds raised in the December 2012 Offerings, 10% warrant coverage with an exercise price equal to the price of any warrants granted in the December 2012 Offering. The Placement Agent has the potential to receive shares of common stock based on the total amount raised in the December 2012 Offering. The Placement Agent will receive if the gross proceeds of the December 2012 Offering equal or exceed $1,000,000, as additional compensation, 250,000 shares of common stock of the Company and, if the gross proceeds of the Offering are between $1,000,001 and $2,000,000, .25 shares of common stock of the Company for each $1.00 raised in gross proceeds in excess of $1,000,000, up to a maximum of 250,000 additional shares, for a total of 500,000 potential shares of common stock. The initial term of this agreement is for three months and may be extended by the Company for an additional three month term and the agreement shall continue on a month to month basis. Either the Company or the placement Agent may cancel this agreement upon thirty days notice. For a year following the cancellation of the agreement the Company will still be obligated to pay fees for any leads introduced by the Placement Agent for financing, investors, or acquisitions.

In June 2011 the Company entered into an Investment Banking Agreement with its Placement Agent, pursuant to which the Company was obligated to pay the Placement Agent a monthly retainer of $5,000. This agreement was cancelled by the Company in August 2012 upon completion of the Offerings. But for two years following the cancellation of the agreement the Company will still be obligated to pay fees for any leads introduced by the Placement Agent for financing, investors, or acquisitions. For arranging financing for the Company, the Placement Agent received 10% of the gross proceeds raised in the Offerings, 10% warrant coverage with an exercise price equal to the effective price of the equity securities sold or, in the case of publicly traded equity securities, the closing stock bid on the date the transaction closes and common equities resulting in a total ownership percentage of the Company’s then outstanding equity equal to 9.9%.

F-27

Sales Agreement

In August 2012 the Company entered into a sales agreement with an individual who was granted options to purchase 335,000 shares of common stock that will vest upon the attainment of certain sales goals by December 31, 2013. Options not vested will expire on that date.

Software Development Agreement

In April 2012 the Company entered into Software Development Agreements with two individuals with a minimum fee commitment of approximately $21,000. As of December 31, 2012 no services have been provided under these agreements. In addition, upon the completion of the software development projects options to purchase 370,000 shares of common stock that were granted to these individuals will vest.

Note 20 - Subsequent Events

Management evaluated subsequent events through the date that the Company's consolidated financial statements were issued. Based on this evaluation, the Company has determined that no subsequent events have occurred which require disclosure through the date that these consolidated financial statements were issued, other than the following:

Additional amounts raised in December 2012 Offering

In connection with the December 2012 Offering efforts, we issued in the first quarter of 2013 an aggregate of 418,750 shares of our common stock at a price of $0.80 per share, for gross proceeds of $335,000. The purchasers also received warrants to acquire 209,375 shares at $0.90 with a five year term in connection with this raise. The Placement Agent received $33,500 (10% of the gross proceeds) and warrants to acquire 41,875 shares at $0.90 with a five year term were issued in connection with this raise.

Common shares issued to Attorney

In April 2013, the Company issued 120,000 shares of common stock to an attorney in settlement of $90,000 of our payable to them ($174,139 payable as of December 31, 2012).

Delaware		45-1545032
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	Large Accelerated Filer o	Accelerated Filer o

	Non-accelerated Filer o	Smaller Reporting Company x
	(Do not check if a smaller reporting company.)

Plan Category	Number of Shares of Common Stock to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted average exercise price of outstanding options warrants and rights (b)		Number of Shares of Common Stock remaining available for future issuance under the equity compensation plan (excluding Shares of Common Stock reflected in column (a)) (c)

Equity Incentive Plans approved by Security Holders		637,434	$	0.865		None

Equity Incentive Plans not approved by Security Holders		4,963,156	$	0.664	1,364,172

					Favorable
	December 31,				(Unfavorable)
	2012		2011		Change
Salaries	$	448,359	$	357,712	$	(90,647	)
Equity-based compensation		239,312		29,779		(209,533	)
Commissions and bonuses		39,278		7,489		(31,789	)
Employee insurance		28,364		11,140		(17,224	)
Payroll taxes		63,504		51,700		(11,804	)
Total salaries and fringe benefits	$	818,817	$	457,820	$	(360,997	)

					Favorable
	December 31,				(Unfavorable)
	2012		2011		Change
Professional fees and consultants – Operations (A)	$	686,506	$	266,915	$	(419,591	)
Professional fees and consultants – Legal (B)		181,501		44,462		(137,039	)
Professional fees and consultants – Accounting (B)		215,829		44,159		(171,670	)
Professional fees and consultants – Equity based compensation (C)		290,639		527,387		236,748
Travel (F)		121,933		78,250		(43,683	)
Bad debts		300		25,000		24,700
Communication expenses		45,397		52,820		7,423
Insurance (E)		45,749		5,931		(39,818	)
SEC printing and filing fees (D)		44,272		—		(44,272	)
Settlement of customer dispute		—		26,000		26,000
Computer and office supplies (F)		86,996		35,518		(51,478	)
Advertising and marketing (F)		46,519		3,261		(43,258	)
Miscellaneous expenses		44,374		36,908		(7,466	)
Total general and administrative	$	1,810,015	$	1,146,611	$	(663,404	)

Note A –	Increase is primarily a full year’s salary for the Company’s Interim Chief Financial Officer and Chief Marketing and Sales Officer and the addition of several sales and marketing consultants.
Note B –	Increase is primarily related to reporting requirements of a “Public Company”.
Note C –	In 2011 an individual received equity based compensation of approximately $285,000 for performing legal services.
Note D –	Costs related to being a “Public Company”.
Note E –	Increase is primarily related to a Directors and Officers liability insurance policy the Company obtained upon becoming a “Public Company”.
Note F –	Increase are primarily related to the Company starting up a sales and marketing program upon the completion of the Offering.

			Payments Due By Period
Obligations	Total		Less Than 1 Year		2 – 3 Years		4 – 5 Years
Notes payable – Note A	$	337,306	$	27,056	$	206,834	$	103,416
Notes payable – related parties		282,680		—		—		282,680
Capital leases		11,663		11,663		—		—
Line of credit – Note B		97,846		97,846		—		—
	$	729,495	$	136,565	$	206,834	$	386,096

Note A –	Payments are based on a percentage of the prior year’s revenues with any unpaid principal due on August 1, 2016. For purposes of this table we were unable to estimate our revenues for the next three years so we have assumed that the unpaid principal balance, after our payment in July 2013, will be paid equally in years 2, 3 and 4.
Note B –	There is no maturity date for the Line of Credit; however the Company has classified this obligation as a current liability.

Index to Financial Statements	F-1

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3

Consolidated Statements of Operations	F-4

Consolidated Statement of Changes in Stockholders’ and Members Deficit	F-5

Consolidated Statements of Cash Flows	F-6 - F7

Notes to Consolidated Financial Statements	F-8

Name	Age	Position	Officer/Director Since

Charles Saracino	56	Chief Executive Officer, President, Secretary and Chairman of the Board	May 15, 2012
Edwin F. Heinen	61	Interim Chief Financial Officer	May 15, 2012
Jeffrey Singman	49	Chief Marketing & Sales Officer	May 15, 2012
Ken Makow	46	Chief Technology Officer	May 15, 2012
Brian Watts	61	Chief Information Officer	May 15, 2012
Jim Morris	54	Director	May 15, 2012
Louis Siracusano	46	Director	May 15, 2012

Name	Number of Transactions not Reported on a Timely Basis	Failure to File a Required Form
Charles Saracino Jim Morris Ed Heinen Ken Makow Goldhill Associates Luis Siracusano Jeff Singman Brian Watts	1 1 1 2 1 1 1 1	Form 4 Form 4 Form 4 Form 3, Form 4 Form 3 Form 4 Form 4 Form 4

Name and Principal Position	Year	Salary (3)		Bonus		Option Awards (1)		All Other Compensation (2)		Total
Charles Saracino,	2012	$	155,562	$	---	$	87,523	$	3,300	$	246,385
Chief Executive Officer and President	2011		112,083		---		12,346		6,600		131,029

Edwin Heinen,	2012		155,723		---		81,323		---		237,046
Interim Chief Financial Officer	2011		57,420		---		---		---		57,420

Kenneth Makow,	2012		135,583		---		76,417		6,050		218,050
Chief Technology Officer	2011		111,250		---		12,346		---		123,596

Jeffrey Singman,	2012		152,500		30,000		41,532		---		224,032
Chief Marketing and Sales Officer	2011		57,500		---		98,776		---		156,276

Brian Watts,	2012		109,375		---		49,582		---		158,957
Chief Information Officer	2011		35,500		---		25,926		---		61,426

(2)	These amounts represent a vehicle allowance for the officer.
(3)	As of the date of this report, a portion of the accrued 2012 salary shown above for Saracino ($10,374), Heinen ($36,833), Makow ($3,675), Singman ($4,650) and Watts ($3,750) remains unpaid.

Name and Address of Beneficial Owners (1)	Number of Shares Owned (2)		Percentage of Outstanding Shares
Executive Officers and Directors:
Charles Saracino (3) Chief Executive Officer and President		4,230,635		22.7	%
Jim Morris (4) Director		1,000,287		5.6	%
Louis Siracusano (5) Director		45,000		*
Jeffrey Singman (6) Chief Marketing and Sales Officer		736,934		4.1	%
Edwin Heinen (7) Interim Chief Financial Officer		350,000		2.0	%
Ken Makow (8) Chief Technology Officer		1.035,007		5.8	%
Brian Watts (9) Chief Information Officer		224,942		1.3	%
All directors and executive officers as a group (7 people)		7,622,805		36.1	%
5% Owners:
Goldhill Associates, Witch Hollow, Ashridge Park, Little Gaddesden, Berkhamstead, Hertfordshire, HP4 1NT, UK (10)		1,755,362		10.2	%
Peter Quigley, Ch Des Cuttemers, 2 Founex, Switzerland, 1297 (11)		1,019,051		5.9	%

* Less than 1%

(1)	Unless otherwise noted, the address of each listed person is c/o X-Factor Communications LLC, 3 Empire Boulevard, 5th Floor, Hackensack, NJ 07606

(2)	Unless indicated by footnote, the named persons have sole voting and investment power with respect to the common stock beneficially owned.

(3)	Includes 1,203,579 options that are presently exercisable or exercisable within 60 days and 125,183 common shares issuable upon the conversion of the principal amount of a convertible promissory note. Additional shares will be issued for any accrued and unpaid interest.

(4)	Includes 651,369 options and warrants that are presently exercisable or exercisable within 60 days.

(5)	Includes 45,000 options that are presently exercisable or exercisable within 60 days.

(6)	Includes 736,934 options and warrants that are presently exercisable or exercisable within 60 days.

(7)	Includes 350,000 options that are presently exercisable or exercisable within 60 days.

(8)	Includes 325,000 options that are presently exercisable or exercisable within 60 days and 178,976 common shares issuable upon the conversion of the principal amount of a convertible promissory note. Additional shares will be issued for any accrued and unpaid interest.

(9)	Includes 224,942 options and warrants that are presently exercisable or exercisable within 60 days.

(10)	Mr. Michael Gold is the sole principal of Goldhill Associates and has sole voting and dispositive powers with respect to the securities of the Company owned by Gold Hill Associates and therefore may be deemed to be a beneficial owner of such securities.

(11)	Includes 125,000 warrants that are presently exercisable or exercisable within 60 days.

Statement	Page*

Index to Financial Statements	F-1

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3

Consolidated Statements of Operations	F-4

Consolidated Statement of Changes in Stockholders’ and Members Deficit	F-5

Consolidated Statements of Cash Flows	F-6 - F-7

Notes to Consolidated Financial Statements	F-8

Exhibit		Description

2.1		Agreement and Plan of Merger, dated as of March 5, 2012 by and among X-Factor Communications, LLC, Organic Spice Imports, Inc. and X-Factor Acquisition Corp. (5)

3.1		Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to the registrant’s Form 10 filed with the Securities and Exchange Commission on April 8, 2011). (5)

3.2		Bylaws (incorporated by reference from Exhibit 3.2 to the registrant’s Form 10 filed with the Securities and Exchange Commission on April 8, 2011). (1)

3.3		Certificate of Ownership and Merger filed with the Office of Secretary of State of Delaware on May16, 2012. (5)

4.1		Convertible Promissory Note, dated March 22, 2012, issued to Charles Saracino. (5)

4.2		Convertible Promissory Note, dated March 22, 2012, issued to Ken Makow. (5)

4.3		Secured Convertible Promissory Note, dated July 31, 2009, issued to NJEDA. (5)

4.4		Convertible Promissory Note, dated March 22, 2012, issued to Frank Casatelli. (5)

4.5		Convertible Promissory Note, dated March 22, 2012, issued to Robert Slingsby. (5)

4.6		Convertible Promissory Note, dated March 22, 2012, issued to Michelle Wallace. (5)

4.7		Promissory Note, dated March 30, 2012, issued to Charles Saracino. (5)

4.8		Promissory Note, dated March 30, 2012, issued to John Bloomer. (5)

4.9		First Amendment to Warrant No.1, dated as of September 28, 2012, by and between the Company and the New Jersey Economic Development Authority (NJEDA)

4.10		Warrant No. 2, dated as of September 28, 2012 issued to NJEDA

10.1		Form of Subscription Agreement for May 2012 Offering. (5)

10.2		Cancellation Agreement, dated May 15, 2012. (5)

10.3		General Assignment and Assumption Agreement, dated February 10, 2012 (incorporated by reference from Exhibit 10.1 to the registrant’s Form 8-K filed with the Securities and Exchange Commission on February 16, 2012). (5)

10.4		Third Modification of Convertible Loan Agreement, dated as of September 28, 2012 by and between the X-Factor Communications, LLC and the NJEDA

10.5		Security Agreement, dated as of September 28, 2012 by and between the Company and the NJEDA

10.6		Membership Interest Pledge Agreement, dated as of September 28, 2013 by and between the Company and the NJEDA

14.1		Code of Ethics (4)

(3)	Filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 9, 2012 and incorporated herein by this reference.

(4)	Filed as an exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on May 15, 2012 and incorporated herein by this reference.

	X-FACTOR COMMUNICATIONS HOLDINGS, INC.

Date: May 16, 2013	By:	/s/ Charles Saracino
		Charles Saracino, Chief Executive Officer (Principal Executive Officer)

Date: May 16, 2013	By:	/s/ Edwin F. Heinen
		Edwin F. Heinen, Interim Chief Financial Officer (Principal Financial and Accounting Officer)