X-FACTOR COMMUNICATIONS HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our audited balance sheets as of December 31, 2011 and 2010 and the related statements of operations and members' deficit and cash flows for the years ended December 31, 2011 and 2010 and the notes attached thereto and the unaudited consolidated balance sheet as of September 30, 2012 and the related unaudited consolidated statements of operations and stockholders' and members' deficit and cash flows for the nine and three months ended September 30, 2012 and 2011 and the notes attached thereto. Such 2011 financial statements exclude the effects of the Merger and the related reorganization. This interim financial information reflects, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments and changes in estimates, where appropriate) to present fairly the results for the interim periods. The results of operations and cash flows for such interim periods are not necessarily indicative of the results for the full year.

All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future development plans, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. The Company operates in one segment and therefore segment information is not presented.

The statements contained herein, other than historical information, are or may be deemed to be forward-looking statements and involve factors, risks and uncertainties that may cause our actual results in future periods to differ materially from such statements. These factors, risks and uncertainties are discussed below and include market acceptance and availability of digital media communication services, rapid technological change affecting demand for our services, competition from other digital media communication service providers, deteriorating economic conditions, the availability of sufficient financial resources to enable us to pay our existing obligations and expand our operations, adequacy of internal controls, being an early stage software development company, as well as other risks and uncertainties that may be detailed from time to time in our filings with the Securities and Exchange Commission.

Overview X-Factor Communications Holdings, Inc. (formerly, Organic Spice Imports, Inc.) ("Holdings" or the "Company"), through its wholly-owned subsidiary X-Factor Communications, LLC ("X-Factor"), a New York limited liability company, located in South Hackensack, New Jersey, provides interactive digital media network software and services. 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 sells its software and services throughout the United States. The Company has limited its staffing and marketing efforts, expenditures and expenses to date. Over the past two years the Company has benefited from limited direct sales efforts and sales referrals from Cisco Systems, Inc. ("Cisco") and some of the larger integrators/reseller sales channels in the marketplace. The Company believes it is now positioned to implement an aggressive marketing campaign to increase the sales volume through these sales channels. In addition, the Company has introduced stand-alone solutions to the marketplace that it plans to market along with its partner oriented product portfolio.

27 -------------------------------------------------------------------------------- Liquidity and Capital Resources At December 31, 2011 the Company had a members' deficit of $1,294,187, a working capital deficiency of $441,953 and incurred a net loss of $1,502,638 for the year then ended. In addition, there was a decrease in revenue of $929,797 in 2011 when compared to 2010 levels.

At September 30, 2012 the Company had a stockholders' deficit of $1,032,645, a working capital deficiency of $473,648 and incurred a net loss of $2,996,648 and $1,088,704 for the nine and three months then ended, respectively. In addition, there was a decrease in revenue of $129,313 and $96,013 for the nine and three months ended September 30, 2012, respectively, when compared to 2011 levels. 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 (see Note 18) or (3) that the Company will continue to be able to comply with existing covenants with creditors in future periods (see Note 20). 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. At present, these factors raise substantial doubt about the Company's ability to continue as a going concern. The report of our independent registered public accounting firm (as included in our Form 8-K filing dated May 21, 2012) 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. 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 nine months ended September 30, 2012 and the year ended December 31, 2011, the Company received an aggregate $75,000 and $850,000, respectively; in cash proceeds from the sale of promissory notes (see Note 12). In 2012 the Company received additional net cash proceeds of $1,857,417 raised in connection with the Offering.

The Company believes that the $1,857,417 of net cash proceeds received from the sale of securities in connection with a private placement offering (the "Offering") and the conversion of $881,478 of promissory notes in 2012, along with management's expectation for greater financing opportunities as a result of Holdings' public reporting status (see Note 18), will provide sufficient equity to fund its operations for the next four to six months. 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.

Critical Accounting Policies 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, estimates the portion, if any, of the balance that will not be collected.

28 -------------------------------------------------------------------------------- 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 will be reported in results of operations.

Long-Lived Assets The Company periodically evaluates the net realizable value of long-lived assets, principally equipment and leasehold improvements, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying value of an asset is recognized whenever anticipated future undiscounted cash flows from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value. There were no impairment losses recognized in the nine and three month periods ended September 30, 2012 and 2011.

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.

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 the 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 Statements of Operations and Members' Deficit.

Equity-Based Compensation Equity-based awards for common stock have been appropriately 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.

The fair value of warrants for common stock issued to consultants or employees are recognized over the requisite service period with a corresponding decrease to members' deficit. Warrants issued to consultants are valued at the fair value of the common stock related to the warrants. Warrants for common stock issued to equity investors have no effect on stockholders' deficit; that is, the fair value of the warrants granted to investors and charged to stockholders' deficit are entirely offset by a corresponding adjustment to stockholders' deficit.

29 -------------------------------------------------------------------------------- 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 amounts will be realized. Based on an assessment of all available evidence, a valuation allowance has been established against net deferred tax assets (principally net operating losses) at September 30, 2012. For the period from the effective date of the Merger through September 30, 2012 the Company did not record a benefit for income taxes.

Accounting Standards Update ("ASU") 2009-06, which is included as part of 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. 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, 2008 through 2011, and has concluded that there are no significant uncertain tax positions for either Federal or state purposes.

There were no interest or penalties related to income taxes that have been accrued or recognized as of September 30, 2012 and December 31, 2011 or for the nine and three months ended September 30, 2012 and 2011.

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. The Company has no open tax years prior to the 2008 tax return.

Emerging Growth Company We are an "emerging growth company" under the Jumpstart Our Business Startups Act (the "JOBS Act"). We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

30 -------------------------------------------------------------------------------- Results of Operations Nine months ended September 30, 2012 (the "2012 Period") compared to the nine months ended September 30, 2011 (the "2011 Period") Revenues - Revenues decreased $129,313, or 20.8%, in the 2012 Period to $490,958 from $620,271 in the 2011 Period. The primary reason for the decrease in revenues in 2012 was that starting in 2010; Cisco drastically reduced its purchases of X-Factor's digital signage and advertising software and services. Purchases by Cisco generated $196,898 of revenue in the 2011 Period versus no revenue in the 2012 Period. In addition, the US Postal Service, due to budget constraints, ceased purchasing X-Factor's digital signage software and maintenance services for new locations which caused a $45,224 revenue reduction in the 2012 Period compared to the 2011 Period. This reduction was partially offset by successful efforts by the Company to increase its webcasting business. The following are the changes in the components of X-Factor's revenue: Nine Months Ended Favorable September 30, (Unfavorable) 2012 2011 Change Digital signage software and services $ 194,351 $ 420,898 $ (226,547 ) Webcasting 296,607 199,373 97,234 Total revenues $ 490,958 $ 620,271 $ (129,313 ) Cost of revenues - Cost of revenues increased $1,591, or 0.8% in the 2012 Period to $194,277 from $192,686 in the 2011 Period. Cost of revenues, as a percentage of revenues, were 39.6% in the 2012 Period and 31.1% in the 2011 Period. This increase in cost as a percentage of revenues is caused by the increase in the costs associated with the webcasting business.

Gross Profit - Gross profit decreased $130,904, or 30.6% in the 2012 Period to $296,681 from $427,585 in the 2011 Period. Gross profit, as a percentage of revenues, was 60.4% in the 2012 Period and 68.9% in the 2011 Period. This change was related to the reduction in revenues for digital signage software and services which have a higher gross profit compared to webcasting revenues.

Salaries and fringe benefits expenses - Compensation costs increased $175,040, or 49.1% in the 2012 Period to $531,263 from $356,223 in the 2011 Period. Compensation costs, as a percentage of revenues, were 108.2% in the 2012 Period and 57.4% in the 2011 Period. The primary reason for the increase in costs during the 2012 Period was X-Factor's granting of options which caused equity-based compensation to increase by $135,656 from the 2011 Period.

General and administrative expenses - General and administrative expenses increased $486,925, or 55.5% in the 2012 Period to $1,364,540 from $877,615 in the 2011 Period. General and administrative expenses, as a percentage of revenues, were 277.9% in the 2012 Period and 141.5% in the 2011 Period. The following are the significant changes in the components of the Company's general and administrative expenses: Nine Months Ended Favorable September 30, (Unfavorable) 2012 2011 Change Professional fees and consultants $ 842,820 $ 155,019 $ (687,801 ) Professional fees and consultants - equity based 209,325 501,247 291,922 Travel 86,635 65,450 (21,185 ) Bad debts 300 25,000 24,700 Communication expenses 37,781 41,750 3,969 Insurance 29,787 4,781 (25,006 ) SEC printing and filing fees 28,437 - (28,437 ) Settlement of customer dispute - 26,000 26,000 Computer and office supplies 63,326 28,079 (35,247 ) Advertising and marketing 31,584 3,261 (28,323 ) Miscellaneous expenses 34,545 27,028 (7,517 ) Total general and administrative $ 1,364,540 $ 877,615 $ (486,925 ) 31 -------------------------------------------------------------------------------- Depreciation and amortization - Depreciation and amortization expenses decreased $11,080, or 21.7%, in the 2012 Period to $39,936 from $51,016 in the 2011 Period. The decrease was due to some assets being fully depreciated and a lower level of equipment and leasehold improvement additions in all periods.

Loss from operations - Loss from operations increased by $781,789, or 91.2% in the 2012 Period to $1,639,058 from $857,269 in the 2011 Period.

Other expense - Other expense increased by $1,142,883 in the 2012 Period to $1,357,590 from $214,707 in the 2011 Period. Due to amendments to, and the conversion of, various Notes Payable to Related Parties in the 2012 Period, the related unamortized discounts and financing costs were expensed and shown as a Loss on Extinguishment or Modification of Debt. Professional fees related to the Merger were expensed as incurred. Due to increases in the market price of the Company's common stock there was an increase in the fair value of derivative financial instruments. The following are the changes in the components of the Company's other expenses: Nine Months Ended Favorable September 30, (Unfavorable) 2012 2011 Change Loss on Extinguishment or Modification of Debt $ 515,135 $ - $ (515,135 ) Professional fees related to Merger 202,867 22,477 (180,390 ) Change in fair value of derivative financial instruments for Related Parties 401,461 - (401,461 ) Interest 81,464 62,155 (19,309 ) Accretion of discount on notes 138,590 117,476 (21,114 ) Amortization of prepaid financing costs 11,869 8,748 (3,121 ) Other expenses 6,204 3,851 (2,353 ) Total other expenses $ 1,357,590 $ 214,707 $ (1,142,883 ) Income taxes - As a result of X-Factor being a limited liability company all profits and losses of X-Factor prior to the Merger flowed through to the individual members of X-Factor. Accordingly, X-Factor did not record a tax provision, incur any liability for incomes taxes nor record a benefit for income taxes or any deferred tax assets or liabilities for Federal or state tax purposes.

Holdings operates as a "C" corporation. Net deferred tax assets are evaluated for recoverability and an assessment of whether it is more likely than not that such amounts will be realized. Based on an assessment of all available evidence, a valuation allowance has been established against net deferred tax assets (principally net operating losses) at September 30, 2012 and for the period from the date of the Merger through September 30, 2012 the Company did not record a benefit for income taxes.

Net loss - The decrease in gross profit, increase in operating expenses and increase in other expenses are caused primarily by non-recurring expenses related to the Offering, extinguishment and modification of debt and the change in fair value of derivative financial instruments, resulting in the net loss increasing by $1,924,672, in the 2012 Period to $2,996,648 from $1,071,976 in the 2011 Period.

Three months ended September 30, 2012 (the "2012 Quarter") compared to the three months ended September 30, 2011 (the "2011 Quarter") Revenues - Revenues decreased $96,013, or 36.8%, in the 2012 Quarter to $165,165 from $261,178 in the 2011 Quarter. The primary reason for the decrease in revenues in 2012 was in 2011 Cisco drastically reduced its purchases of X-Factor's digital signage and advertising software and services. Purchases by Cisco generated $121,170 of revenue in the 2011 Quarter versus no revenue in the 2012 Quarter. In addition, the US Postal Service, due to budget constraints, ceased purchasing X-Factor's digital signage software and maintenance services for new locations which caused a $29,744 revenue reduction in the 2012 Quarter compared to the 2011 Quarter. This reduction was partially offset by successful efforts by the Company to increase their webcasting business. The following are the changes in the components of X-Factor's revenue: 32 -------------------------------------------------------------------------------- Three Months Ended Favorable September 30, (Unfavorable) 2012 2011 Change Digital signage software and services $ 122,667 $ 231,153 $ (108,486 ) Webcasting 42,498 30,025 12,473 Total revenues $ 165,165 $ 261,178 $ (96,013 ) Cost of revenues - Cost of revenues increased $21,557, or 54.5% in the 2012 Quarter to $61,119 from $39,562 in the 2011 Quarter. Cost of revenues, as a percentage of revenues, were 37.0% in the 2012 Quarter and 15.1% in the 2011 Quarter.

Gross Profit - Gross profit decreased $117,570, or 53.1% in the 2012 Quarter to $104,046 from $221,616 in the 2011 Quarter. Gross profit, as a percentage of revenues, was 63.0% in the 2012 Quarter and 84.9% in the 2011 Quarter.

Salaries and fringe benefits expenses - Compensation costs increased $241,284, or 349.2% in the 2012 Quarter to $310,388 from $69,104 in the 2011 Quarter. Compensation costs, as a percentage of revenues, were 187.9% in the 2012 Quarter and 26.5% in the 2011 Quarter. The primary reason for the increase in costs during the 2012 Quarter was X-Factor's granting of options which caused equity-based compensation to increase by $201,141 from the 2011 Period.

General and administrative expenses - General and administrative expenses increased $235,012, or 80.8% in the 2012 Quarter to $525,857 from $290,845 in the 2011 Quarter. General and administrative expenses, as a percentage of revenues, were 318.4% in the 2012 Quarter and 111.4% in the 2011 Quarter. The following are the significant changes in the components of the Company's general and administrative expenses: Three Months Ended Favorable September 30, (Unfavorable) 2012 2011 Change Professional fees and consultants $ 219,027 $ 86,177 $ (132,850 ) Professional fees and consultants - equity based 205,365 91,766 (113,599 ) Travel 22,614 22,568 (46 ) Insurance 16,476 2,829 (13,647 ) Bad debts - 25,000 25,000 SEC printing and filing fees 7,013 - (7,013 ) Settlement of customer dispute - 26,000 26,000 Communication expenses 11,466 11,928 462 Computer and office supplies 16,740 11,846 (4,894 ) Advertising and marketing 17,439 2,875 (14,564 ) Miscellaneous expenses 9,717 9,856 139 Total general and administrative $ 525,857 $ 290,845 $ (235,012 ) Depreciation and amortization - Depreciation and amortization expenses decreased $7,950, or 50.4%, in the 2012 Quarter to $7,827 from $15,777 in the 2011 Quarter. The decrease was due to some assets being fully depreciated and a lower level of equipment and leasehold improvement additions in all periods.

Loss from operations - Loss from operations increased by $585,916, or 380.2% in the 2012 Quarter to $740,026 from $154,110 in the 2011 Quarter.

33 -------------------------------------------------------------------------------- Other expense - Other expense increased by $194,421 in the 2012 Quarter to $348,678 from $154,257 in the 2011 Quarter. Professional fees related to the Merger were expensed as incurred. Due to increases in the market price of the Company's common stock there was an increase in the fair value of derivative financial instruments. The following are the changes in the components of the Company's other expenses: Three Months Ended Favorable September 30, (Unfavorable ) 2012 2011 Change Professional fees related to Merger $ - $ 22,477 $ 22,477 Change in fair value of derivative financial instruments for Related Parties 321,244 - (321,244 ) Interest 17,604 24,015 6,411 Accretion of discount on notes 6,451 97,337 90,886 Amortization of prepaid financing costs - 8,748 8,748 Other expenses 3,379 1,680 (1,699 ) Total other expenses $ 348,678 $ 154,257 $ (194,421 ) Income taxes - As a result of X-Factor being a limited liability company all profits and losses of X-Factor prior to the Merger flowed through to the individual members of X-Factor. Accordingly, X-Factor did not record a tax provision, incur any liability for incomes taxes nor record a benefit for income taxes or any deferred tax assets or liabilities for Federal or state tax purposes.

Holdings operates as a "C" corporation. Net deferred tax assets are evaluated for recoverability and an assessment of whether it is more likely than not that such amounts will be realized. Based on an assessment of all available evidence, a valuation allowance has been established against net deferred tax assets (principally net operating losses) at September 30, 2012 and for the period from the Merger Date through September 30, 2012 the Company did not record a benefit for income taxes.

Net loss - The decrease in gross profit and increase in operating expenses caused the increase in other expenses caused primarily by non-recurring expenses related to the change in fair value of derivative financial instruments, resulting in the net loss increasing by $780,337 in the 2012 Quarter to $1,088,704 from $308,367 in the 2011 Quarter.

Cash flows At September 30, 2012, the Company had a working capital deficit of $473,648, compared to a working capital deficit of $441,953 at December 31, 2011, an increase in the deficit of $31,695. The Company had $373,088 in cash at September 30, 2012, compared to $78,639 at December 31, 2011, an increase of $294,449.

Net cash used in operating activities was $1,343,487 for the 2012 Period. The components of the use of funds were a net loss of $2,996,648 ($1,472,870 excluding non-cash charges and credits), $35,620 from a reduction in unearned revenues and a $15,462 increase in other current assets partially offset by a decrease of $64,166 in accounts receivable and a $116,299 net increase in accounts payable and accrued expenses. Net cash used in operating activities was $336,189 for the 2011 Period. The components of the use of funds were a net loss of $1,071,976 ($323,380 excluding non-cash charges and credits) and $137,494 from a reduction in unearned revenues partially offset by a decrease of $2,024 in accounts receivable and a $126,709 increase in accounts payable and accrued expenses.

Cash provided by investing activities in the 2012 Period consisted of a $75,000 reimbursement by the Controlling Stockholders of the deposit advanced by X-Factor towards the acquisition of control of the Company for the purpose of consummating the Merger reduced by $3,835 for the purchase of equipment and leasehold improvements. Cash used in investing activities for the 2011 Period totaled $6,869 for the purchase of equipment and leasehold improvements and $10,000 advance made to a strategic business partner.

34 -------------------------------------------------------------------------------- Cash provided by financing activities in the 2012 Period totaled $1,566,771 and was comprised of $2,162,500 of gross proceeds from the sale of common stock in the Offering and $75,000 from the proceeds of notes payable partially offset by $377,888 in direct costs relating to the Offering and obtaining the notes payable, $7,828 of principal repayments of lease obligations, and $285,013 of principal repayments towards notes payable. Cash provided by financing activities in the 2011 Period totaled $396,685 and was comprised of $49,153 received from the sale of common stock, $475,000 from the proceeds of notes payable and $2 from an increase in the Line of Credit partially offset by $70,920 in direct costs related to obtaining the Bridge Notes, $35,417 of principal repayments toward the notes payable and $21,133 of principal repayments of lease obligations.

Off-Balance Sheet Arrangements The Company had no off-balance sheet arrangements as of September 30, 2012 and 2011 and December 31, 2011.

Recent Accounting Pronouncements In October 2009, the FASB issued guidance on revenue recognition for multiple-deliverable revenue arrangements. This guidance establishes a new selling price hierarchy to use when allocating the sales price of a multiple element arrangement between delivered and undelivered elements. The standard is generally expected to result in revenue recognition for more delivered elements than under prior rules. The Company was required to adopt this standard prospectively for new or materially modified agreements entered into on or after January 1, 2011. The implementation of this standard did not have a material impact on the Company's financial position, results of operations or cash flows.

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 period ended September 30, 2011, except for the requirement concerning gross presentation of Level 3 activity, which became effective for our 2011 year end. Since this guidance is only related to financial statement disclosures, there was no impact to the Company's financial statements as a result of the adoption of this guidance.

In May 2011, the FASB issued Accounting Standards Update ("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 FASB ASC Topic 820, "Fair Value Measurement." 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 September 30, 2012 financial statements.

In June 2011, the FASB issued ASU 2011-05, "Presentation of Comprehensive Income," 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 September 30, 2012 financial statements.

The Company is not aware of any other pronouncements, not yet issued or adopted, that would have a material effect on its future financial statements.

35 -------------------------------------------------------------------------------- Other Recent Developments The Company has recently added the following new products and solutions to its product base: - The C4 "Corporate Communications Control Center" (the "C4 Solution") is an easy to use software-based solution for multi-media, multi-channel and multi-dimensional internal and external corporate communications. C4 is an advanced and intuitive content creation and management system that supports emergency messaging, conventional publishing as well as interactive applications.

The C4 solution is complementary to other in-place systems, including intranet sites and Microsoft SharePoint, adding greater functionality and ease of use including the automated transformation of PowerPoint documents into desktop signs and alerts, for example. Content distributed over C4 is optimized for all end-points, whether large lobby displays, interactive kiosks including wayfinding capabilities, or mobile tablets and smart phones.

- MACC "Marketing and Advertising Control Center" builds upon over five years of experience developing, implementing and managing multimedia "immersive" digital media networks.

MACC makes it easier than ever to participate in the rapidly growing "Digital-Out-Of-Home" marketing trend and enables marketers and their agency partners to: - Deliver targeted advertising; - Provide product information and spur cross-selling and up-selling; - Promote features and benefits; - Help ensure consistency of messaging in multiple languages and geographies; and - Control costs via a Software-as-a-Service (SaaS) delivery model MACC is a high-impact delivery platform integrated into the way people shop, learn and play, presented at the most appropriate moments in the most interesting venues (retail shops, stadiums, public transportation hubs, on trains and buses, at medical centers, in malls, and much more). Displays can deliver messaging that is customized by geography, time of day, specific location and more in real-time, and data collected informs the real-time grooming of campaigns to ensure the highest conversion rates and ROI.

- X-Factor's "Enterprise Desktop" makes it possible to distribute content to desktops, intranet sites including SharePoint and mobile devices in real-time, including notifications, promotions, emergency alerts and more.

Desktop signage takes content usually available on the intranet or digital signs and delivers it to a large employee community in a way that is hard to miss.

While employees typically have access to a wealth of internal corporate information, due to the demands on their time, they often do not take the time to look for information unless it is related to a topic that they are specifically interested in. X-Factor's Enterprise Desktop enables company leaders to get key messages out, whether in screensaver mode or seeing content within the desktop player. Employees simply click for more information on any particular subject or to view a live webcast. X-Factor's Enterprise Desktop complements existing publishing systems including Microsoft SharePoint.

- X-Factor's mobile interactive capabilities extend the power of digital signage to audiences' mobile devices. Through X-Factor's enhanced mobile engagement solutions, its mobile applications augment point of display to deliver information, marketing, ads, coupons and offers directly to an individual's smartphone or tablet. X-Factor's product range can be combined to support large scale "real world" and "virtual world" campaigns. For example, users can be sent to one of X-Factor's unique digital players, optimized for their mobile device. After enjoying an entertaining experience at a media wall or other digital sign, consumers can download the player and its contents to enjoy after leaving the venue. At interactive kiosks, consumers can receive wayfinding directions through a simple SMS text, or can receive an e-ticket or coupon instantly.

- X-Factor has developed a multimedia player which can be easily branded and customized to aggregate content of all types (photos, animations, videos, audio files, interactive applications, and more) into a single, intuitive user experience. The player that runs automatically, without having the user download a special application, and brings multiple content feeds together in an exciting user experience. X-Factor's digital media and creative services teams can easily and cost-efficiently design and deploy custom branded media players, and because the players are fed by X-Factor's dmcp:// platform, all the advantages of our related products, including the company's advertising sales monetization products dscp:// Storefront and DMAX are easily included.

- Working with partners who provide hardware and network infrastructure, X-Factor has released advanced interactive kiosks software, enabling audience engagement and interaction, advertising and marketing content creation, publishing, distribution and management. This software allows remote monitoring of kiosks from a single location, multi-user privileges for hierarchal (local and national) publishing, targeted advertising and transparent kiosk management and collection of user information. The company works with partners to ensure clients' goals for their customized interactive kiosk network are met, ensuring that all the elements in the solution meet stringent guidelines -- from the hardware and the kiosk interface and features to the appropriate network connectivity and uptime.

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