10-Q 1 form10q5to1033111.htm 5 TO 1 FORM 10-Q 03/31/11 form10q5to1033111.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from _________________ to _________________

Commission File No.: 333-173592

5TO1 HOLDING CORP.
(Exact name of registrant as specified in its charter)

Delaware
  
26-3461705
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)

1453 3rd Street
Santa Monica, CA 90401
(Address of principal executive offices)

Issuer’s telephone number:   (800) 521-0770
 

 
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   x   No   o

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

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

Large accelerated filter  ¨
  
Accelerated filter  ¨
Non-accelerated filter  ¨
(Do not check if a smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes    o   No   x

APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 10, 2011, there were 35,970,856 shares of our common stock outstanding.

Transitional Small Business Disclosure Format:    Yes   ¨   No   x 


 
 
 

 Quarterly Report on Form 10-Q for the
 
Quarterly Period Ended March 31, 2011
 
Table of Contents
 
     
Page
  
   
  Item 1. Financial Statements 2  
    3  
    Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (unaudited): 4   
    Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited): 5  
    6  
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10  
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 12  
  Item 4. Controls and Procedures 12  
         
   
  Item 1. Legal Proceedings 13   
  Item 1A. Risk Factor 13  
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13  
  Item 3. Defaults upon Senior Securities 13  
  Item 4. Removed and Reserved 13  
  Item 5. Other Information 13  
  Item 6. Exhibits 13  
       
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
    
CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002    

 

 
1
 

PART 1:  FINANCIAL INFORMATION
 
ITEM 1 – FINANCIAL STATEMENTS
 
Condensed Consolidated Balance Sheets
 
ASSETS
             
 
March 31,
  
December 31,
 
2011
  
2010
  
             
Current Assets:
            
 Cash and cash equivalents
 $
1,946,205
   $
3,629,523
  
 Accounts receivable
  
                   71,135
    
              240,263
  
 Prepaid expenses and other current assets
  
                 312,825
    
              484,247
  
       Total current assets
  
              2,330,165
    
           4,354,033
  
             
             
 Office Equipment, net of accumulated
            
    depreciation of $29,704 and $24,964, respectively
                   27,750
    
                30,943
  
Security deposits
  
                   41,561
    
                44,561
  
Debt Issue Costs
  
                   18,839
    
                21,100
  
             
  $
2,418,315
   $
4,450,637
  
             
 
LIABILITIES AND STOCKHOLDERS' EQUITY
             
 Current Liabilities:
            
 Accounts payable
 $
230,230
   $
400,543
  
 Accrued expenses and payroll taxes payable
  
                   14,016
    
                93,555
  
 Notes payable - current portion
  
                 166,667
    
              166,667
  
 Derivative Liabilities
  
              1,052,083
    
                        -
  
 Total current liabilities
  
              1,462,996
    
              660,765
  
             
             
 Notes Payable, less current portion
  
                 166,667
    
              208,333
  
             
 Total liabilities
  
              1,629,663
    
              869,098
  
             
 Commitments and Contingencies
            
             
             
 STOCKHOLDERS' EQUITY
            
 Preferred stock, $.0001 par value, 10,000,000 shares authorized;
      
  Zero shares issued and outstanding at March 31, 2011 and
                           -
    
                        -
  
  and December 31, 2010
            
 Common stock, $.0001 par value, 190,000,000 shares authorized;
  
   36,034,212 shares issued and outstanding at March 31, 2011 and
  
    at December 31, 2010
  
                     3,605
    
                  3,605
  
 Additional paid-in capital
  
            16,961,944
    
         16,894,156
  
 Accumulated deficit
  
           (16,163,416
 )   
       (13,303,155
 ) 
 Treasury Stock, at cost (101,390 and 38,034 shares at March 31, 2011
  
    and at December 31, 2010, respectively)
  
                  (13,481
 )   
              (13,067
 ) 
             
 Total stockholders' equity
  
                 788,652
    
           3,581,539
  
             
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 $   2,418,315   $   4,450,637  
             
             

The accompanying notes are an integral part of these consolidated financial statements.
 
 
2
 
 
Condensed Consolidated Statement of Operations
 
   
Three Months Ended
  
   
March 31, 2011
    
March 31, 2010
  
             
Revenue
 $
25,925
   $
233,547
  
Cost of Revenue
  
                        71,510
    
                      182,972
  
    Gross Profit (loss)
  
                      (45,585)
    
                        50,575
  
             
             
Operating Expenses
            
  Compensation
  
                     920,867
    
                   1,017,725
  
  Other operating expenses
  
                     835,850
    
                      453,213
  
   
                  1,756,717
    
                   1,470,938
  
             
Loss from Operations
  
                 (1,802,302)
    
                 (1,420,363)
  
             
Other Income/(Expenses):
            
Interest income
  
                                -
    
                                16
  
Interest expense
  
                    (772,076)
    
                         (8,396)
  
Change in fair value of derivative liabilities
  
                    (285,883)
    
                              235
  
   
                 (1,057,959)
    
                         (8,145)
  
             
Net Loss
 $
(2,860,261)
   $
(1,428,508)
  
             
Net Loss per Share
  
                          (0.08)
    
                         (13.93)
  
             
Weighted Average number of shares outstanding    35,993,864      102,560  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
 
3
 
 
Condensed Consolidated Statement of Cash Flows
 
   
Three Months Ended
  
   
March 31, 2011
    
March 31, 2010
  
             
CASH FLOW FROM OPERATING ACTIVITIES
            
Net (loss)
 $
 (2,860,261
 )  $ 
(1,428,508
 ) 
             
Adjustments to reconcile net loss to net cash
            
used in operating activities:
            
   Depreciation
  
                          4,739
    
                                 3,990
  
   Interest expense relating to derivative liability
  
                      766,200
    
                                        -
  
   Change in fair value of derivative liabilities
  
                      285,883
    
                                  (235
 ) 
   Amortization of debt issue costs
  
                          2,261
    
                                 2,261
  
   Stock Compenstaion
  
                          7,700
        
             
Changes in operating assets and liabilities
            
    Accounts receivable
  
                      169,128
    
                           (142,559
 ) 
    Prepaid expenses
  
                      171,422
    
                                 9,573
  
    Security deposits
  
                          3,000
    
                             (32,870
 ) 
    Accounts payable
  
                    (170,313
 )   
                               98,212
  
    Accrued expenses and taxes payable
  
                      (19,451
 )   
                             (81,339
 ) 
             
Net cash used in operating activities
  
                 (1,639,692
 )   
                       (1,571,475
 ) 
             
CASH FLOWS FROM INVESTING ACTIVITIES:
            
    Advance to stockholders
  
                                 -
    
                             (30,568
 ) 
    Purchase of office equipment
  
                        (1,546
 )   
                             (11,796
 ) 
             
   Net cash used in investing activities
  
                        (1,546
 )   
                             (42,364
 ) 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
            
    Repayment of Notes payable
  
                      (41,666
 )       
    Acquistition of common stock subject to repurchase
  
                            (414
 )   
                                        -
  
             
   Net cash used in financing activities
  
                      (42,080
 )   
                                        -
  
             
NET DECREASE IN CASH AND CASH EQUIVALENTS
  
                 (1,683,318
 )   
                       (1,613,839
 ) 
             
CASH AND CASH EQUIVALENTS:
            
   BEGINNING OF PERIOD
  
                   3,629,523
    
                         2,207,423
  
   END OF PERIOD
 $ 
1,946,205
   $
593,584
  
             
Supplemental disclosures of cash flow information:
            
    Interest paid
 $ 
5,876
   $ 
8,396
  
    Taxes paid
 $ 
 -
   $
800
  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4
 
Notes To Condensed Consolidated Financial Statements
(Unaudited)
 
NOTE 1 - Business
 
5to1 Holding Corp, formerly known as FTOH Corp, (“FTOH”), a Delaware corporation, through its wholly owned subsidiary, 5to1, Inc. (5to1 and together with FTOH, “our”, “us”, “we” or the “Company”), provides a proprietary advertisement publishing platform that enables major media publishers to manage and sell their ad space inventory using a publisher-only controlled advertising platform.
 
On November 3, 2010, 5to1 entered into a merger (the “Merger”) with FTOH Acquisition Corp., a Delaware corporation and wholly owned subsidiary of FTOH, with 5to1 remaining as the surviving corporation in the Merger. An aggregate of 17,954,222 shares of FTOH common stock was issued to the holders of 5to1 common stock in exchange for their common shares, representing approximately 68% of the combined entity. The Merger has been accounted for as a reverse merger and recapitalization in which 5to1 is treated as the accounting acquirer and FTOH is the surviving legal entity.
 
NOTE 2 - Liquidity and Financial Condition
 
Since our inception in 2008, we have generated losses from operations and we anticipate that we will continue to generate losses from operations for the foreseeable future. We incurred a net loss of $2,860,261 for the three months ended March 31, 2011. As of March 31, 2011, we had cash and cash equivalents of $1,946,205 and working capital of $867,169.
 
The Company has undertaken several measures during the quarter ended March 31, 2011 to reduce and control operating costs and increase its overall base of customers. In addition, the Company incurred significant non-recurring expenses in connection with the Merger. As a result, management anticipates that the Company’s capital resources, including funds it expects to generate from operations, will enable it to meet its general working capital requirements, repay the current portion of its debt obligations and continue its business development efforts through at least April 1, 2012. However, in order to execute the Company’s long-term strategy and penetrate new and existing markets, the Company may need to raise additional funds, through public, debt financings, or other means. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings or other means; however, the Company has not secured any commitments for new financing at this time, nor can it provide any assurance that new financing will be available on commercially acceptable terms, if needed. If the Company is unable to secure additional capital, it may be required to curtail its business development initiatives and take additional measures to reduce costs in order to conserve its cash.
 
NOTE 3 - Summary of Significant Accounting Policies
 
Basis of Presentation.
 
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2011 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K/A for the year ended December 31, 2010, filed on April 19, 2011, and updated, as necessary, in this Quarterly Report on Form 10-Q.
 
Use of Estimates.
 
The preparation of the financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions and share based payment arrangements, determining the fair value of 5to1.Com common stock prior to the completion of the merger, the collectability of accounts receivable and deferred taxes and related valuation allowances. Certain of our estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate all of our accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
 
Cash and Cash Equivalents.
 
We consider all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents.
 
Revenue Recognition
 
 
5
 
 
We follow the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104 for revenue recognition and Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition.” Accordingly, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the selling price to the customer is fixed or determinable and collectability of the revenue is reasonably assured.
 
Our sole source of revenue is from the distribution of internet advertising, which principally includes hosting advertising copy on a proprietary portal for the eventual placement on media providers’ websites. Revenue is recognized when the advertisement is delivered to a consumer. Such revenue consists of the gross value of billings to advertisers. We report these revenues gross because we are the primary obligor and bear responsibility for fulfillment of the service provided to our customers, we have latitude in setting the price paid to our customers, have discretion with respect to choosing publishers, and assume the credit risk for the entire amount of the sale.
 
Accounts Receivable and Allowance for Doubtful Accounts Receivable
 
Accounts receivable are generally due 30 days from the invoice date. We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for potential bad debts if required.
 
We determine whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. We may also record a general allowance as necessary.
 
Direct write-offs are taken in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that we should abandon such efforts. We have determined that an allowance for doubtful accounts is not required for any of the periods presented.
 
Fair Value Measurements
 
We adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which  defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
 
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
 
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
 
  Level 1 — quoted prices in active markets for identical assets or liabilities
   
  Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
   
  Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
   
The SVB and Bridge Note Warrant liability (Note 6) classified as level 3 liabilities are the only financial liabilities measured at fair value on a recurring basis.
 
We measured our derivative liabilities at fair value using the Black-Scholes option pricing model with assumptions that include the fair value of the stock underlying the derivative instrument, the exercise or conversion price of the derivative instrument, the risk free interest rate for a term comparable to the term of the derivative instrument and the volatility rate and dividend yield for our common stock. We determined the fair value of our common stock based on the closing price of our stock on the applicable issuance date. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid dividends to date and does not expect to pay dividends in the foreseeable future due to its substantial accumulated deficit. Accordingly, expected dividends yields are currently zero. Expected volatility is based principally on an analysis of historical volatilities of similarly situated companies in the marketplace for a number of periods that is at least equal to the contractual term or estimated life of the applicable financial instrument.
 
We also considered the use of the lattice or binomial models with respect to valuing derivative financial instruments that feature anti-dilution price protection; however, the differences in the results are insignificant due to the low probability of triggering price adjustments in such financial instruments.
 
Concentration of Credit Risk
 
Financial instruments that potentially expose us to concentrations of credit risk consist principally of cash and cash equivalents. We maintain our cash accounts at high quality financial institutions with balances, at times, in excess of federally insured limits. As of March 31, 2011, we had $1,696,205 of balances in excess of federally insured limits. Management believes that the financial institutions that hold our deposits are financially sound and therefore pose minimal credit risk.
 
Stock-Based Compensation
 
 
6
 
 
We recognize compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, we calculate the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
 
Loss per Share
 
Basic earnings per common share are computed using the weighted-average number of common shares outstanding during the year. Diluted earnings per common share are computed using the weighted-average number of common shares outstanding during the year plus the incremental shares outstanding assuming the exercise of dilutive stock options, restricted stock and convertible instruments. As described in Notes 7 and 9, at March 31, 2011, the Company had outstanding options to purchase 278,718 shares of its common stock, with an exercise price of $2.20 per share and 65,000 SVB Warrants and 306,348 Bridge Warrants, each with an exercise price of $1.00 per common share.  These options and warrants have been excluded in computing diluted earnings per common share because the Company incurred a net loss during the three month period ended March 31, 2011 and inclusion of the Warrants and options would be antidilutive.
 
NOTE 4 – Income Taxes
 
We use the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
 
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties as tax expense.
 
The Company has  approximately $1,100,000 of pre merger net operating loss carryforwards (computed in accordance in with IRS section 382) that are available to reduce future taxable income. These NOLs begin to expire in 2028.   In addition losses incurred from the date of the merger to December 31, 2010 aggregating approximately $200,000 are also available to reduce future taxable income. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred tax assets for every period because it is more likely than not that all of the deferred tax assets will not be realized.
 
The Company files U.S. federal and states of California and Washington tax returns that are subject to audit by tax authorities beginning with the year ended December 31, 2008.
 
NOTE 5 – Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consist of the following;
 
  Prepaid taxes $  6,426  
 
Prepaid online market data subscriptions
  
                 27,625
  
 
Prepaid investor relations consulting fees
  
               233,333
  
 
Prepaid sales commissions
  
                 45,441
  
    $ 
 312,825
  
 
In November 2010, the Company paid $400,000 to an investor relations consulting firm pursuant to an agreement with the consultant to provide certain market awareness and shareholder communication services for a one year period. The cost incurred is being amortized over the 12 month life of the agreement.

NOTE 6 - Loans and Notes Payable
 
Loan and Security Agreement with Silicon Valley Bank
 
 
7
 
 
On October 14, 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) pursuant to which SVB agreed to provide us with up to $1,000,000 of loans in two separate tranches of $500,000 each, subject to certain conditions. We borrowed the first $500,000 of the facility prior to December 31, 2009. The availability of the remaining $500,000 of credit under the second tranche of the facility was subject to our achievement of certain financial performance targets that we did not attain during a contractual draw period that commenced on January 1, 2010 and expired on March 1, 2010.
 
The SVB Loan is due on March 1, 2013 and is secured by a first priority lien on all of our assets.
 
The SVB Loan bears interest at an annual rate of 6.5%, payable monthly, with interest only through March 1, 2010. Thereafter we are obligated to make 36 consecutive monthly payments, each consisting of $13,889 of principal plus an amount equal to interest on the unpaid balance. Contractual interest expense for the three months ended March 31, 2011 was $5,875.  The SVB Loan matures on March 1, 2013 and is secured by a first priority llien on all of our assets.
 
As additional consideration for the SVB Loan, we issued to SVB a warrant to purchase 536 shares of Series A Convertible Preferred at closing and an additional 214 shares upon accessing the first $500,000 tranche of the facility at an exercise price of $46.67 per share. The warrant had a 10 year term but was cancelled upon the completion of the Merger. On March 11, 2011, the Board of Directors of the Company authorized the issuance of 65,000 new warrants to SVB as additional compensation (Note 9).
 
NOTE 7 - Stock-based Compensation
 
On March 11, 2011, we issued options to purchase 278,718 shares of our common stock under the 2011 Equity Incentive Plan to certain employees and to an advisor. All of the options carry a strike price of $2.20 per common share, which was the fair market value of our stock at the time of grant. The options have a 10 year term and vest as follows: 20% on the sixth month anniversary of the option grant date, and 1/30th on a monthly basis thereafter, with a 100% vesting upon change in control, as defined in the Plan.
 
We calculated the issuance date fair value of the options using the Black-Scholes option-pricing model, with a fair value at issuance amounting to $554,426.  This amount is being recorded as compensation expense over the three year term of the options. For the three months ended March 31, 2011, the amount of $7,700 was recorded as compensation expense with a corresponding increase in Additional Paid in Capital.
 
The expected term of the options is 7 years based on the average of the ten year contractual term and the four year vesting period of the options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid dividends to date and does not expect to pay dividends in the foreseeable future due to its substantial accumulated deficit. Accordingly, expected dividends yields are currently zero. Expected volatility is based principally on an analysis of historical volatilities of similarly situated companies in the marketplace.
 
NOTE 8 - Commitments and Contingencies
 
We are committed under three separate operating leases for office space. One lease expires in 2011, one expires in 2012 and the other is cancelable on a monthly basis. Rental commitments on non cancellable leases for years ending December 31, 2011 and 2012 are $147,405 and $9,390, respectively. Rent expense charged to operations, including rent paid on month to month leases, was approximately $58,848 and $32,331 for the three months ended March 31, 2011 and 2010, respectively.
 
Employment Agreements. Effective as of November 1, 2010, we entered into an employment agreement with Mr. Jim Heckman, our Chief Executive Officer. The Employment Agreement provides for a three year employment term with automatic renewals for successive one year periods unless either party provides the other party with prior written notice of intention not to renew the Agreement. The annual base salary provided in the Agreement is $300,000 during the first year of employment, $350,000 during the second year of employment and $400,000 during the third year of employment. Also, the Agreement provides that Mr. Heckman is entitled to receive a sign on bonus of $150,000, which was paid prior to December 31, 2010, and an additional bonus in the amount of 50% of his annual base salary upon achievement of various performance targets that currently are not probable of being met. Accordingly, the Company has not recorded any expense for performance based compensation..
 
In addition, Mr. Heckman purchased 7,843,994 shares of stock from the Company at a cost of $51,254. The Company, in its sole discretion, has the right to repurchase, (a) up to 4,311,509 shares in the event of Mr. Heckman’s termination of employment at any time during the three year period of his agreement and (b) up to 3,082,345 shares if the Company does not achieve certain revenue, earnings or other performance targets including the completion of additional capital raising transactions or acquisitions over certain contractually defined periods of time. Repurchases made at Company’s discretion would be at an amount equal to Mr. Heckman’s cost pursuant to restricted stock repurchase agreements. The amount that the Company has the option to repurchase under (a) reduces ratably over a three period.

The Company has 1,845,605 common shares outstanding, which were issued to employees other than Mr. Heckman, that are subject to repurchase by the Company in its sole discretion if certain specified revenue targets are not achieved. The Board of Directors has temporarily suspended any repurchase of such shares.

NOTE 9  - Warrants
 
On March 11, 2011, the Board of Directors of the Company authorized the issuance of 65,000 warrants to SVB (the “SVB Warrants”) and 306,348 warrants to certain prior bridge lenders to the Company (the “Bridge Warrants”, and together with the SVB Warrants, the “Warrants”). The Warrants have a strike price of $1.00 per common share and a term of 10 years. The Warrants were issued to SVB and the former holders of convertible notes that were exchanged for equity upon the Merger as additional compensation.
 
The fair value of the SVB Warrants and the Bridge Warrants at the date of issuance was $134,114 and $632,086, respectively. We recorded the fair value of the Warrants as a derivative liability due to anti-dilution price protection, with a corresponding increase in interest expense for the three month period ended March 31, 2011.
 
The carrying amount of the SVB Warrants, recorded as derivative liabilities due to anti-dilution price protection, were adjusted to fair value at December 31, 2009 and at their expiration. We calculated the fair value of the SVB Warrants using the Black-Scholes option-pricing model with the following assumptions:
 
 
8
 
 
       
March 11, 2011
      
March 31, 2011
    
 
Fair Value of stock
   $
 2.20
     $
2.99
    
 
Exercise Price
   $ 
1.00
     $
 1.00
    
 
Term (Years)
    
10
      
9.94
    
 
Dividend Rate (%)
    
0
      
0
    
 
Volatility (%)
    
100
 %     
100
 %   
 
Risk Free Rate (%)
    
3.4
 %    
3.4
 %   
 
Number of warrants
    
              371,348
      
               371,348
    
 
Aggregate fair value
   $
766,200
     $
1,052,083
    

 

 
9
 

 
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this report.  This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions.  Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements.
 
The forward-looking events discussed in this quarterly report, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us.  For these statements, we claim the protection of the “bespeaks caution” doctrine.  All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements.  Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
 
General
 
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report.  Historical results and percentage relationships among any amounts in these financial statements are not necessarily indicative of trends in operating results for any future period. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The statements, which are not historical facts contained in this Report, including this Management’s discussion and analysis of financial condition and results of operation, and notes to our unaudited condensed consolidated financial statements, particularly those that utilize terminology such as “may” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to various risks and uncertainties. Future events and our actual results may differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, dependence on existing and future key strategic and strategic end-user customers, limited ability to establish new strategic relationships, ability to sustain and manage growth, variability of operating results, our expansion and development of new service lines, marketing and other business development initiatives, the commencement of new engagements, competition in the industry, general economic conditions, dependence on key personnel, the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our clients, the potential liability with respect to actions taken by our existing and past employees, risks associated with international sales, and other risks described herein and in our other filings with the Securities and Exchange Commission.
 
The safe harbor for forward-looking statements provided by Section 21E of the Securities Exchange Act of 1934 excludes issuers of “penny stock” (as defined under Rule 3a51-1 of the Securities Exchange Act of 1934). Our common stock currently falls within that definition.
 
All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements.  Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
 
Overview 
 
We are a Delaware corporation that provides a proprietary advertisement publishing platform that enables major media publishers to manage and sell their ad space inventory using a publisher-only controlled advertising platform. All of our operations are conducted by our wholly owned subsidiary, 5to1, Inc. (together, “our”, “us”, “we” or the “Company”).
 
Prior to the fourth quarter of 2009, we devoted substantially all of our efforts and resources to the development of our technology platform and pre-sale activities and considered ourselves a “development stage company.” Effective September 2009, we completed the development of our technology platform, accelerated our sales efforts and emerged from our development stage activities. We operate under a single segment. Our fiscal year end is December 31. Our core business strategy is to leverage our publisher-controlled proprietary platform to generate sales commissions.
 
On November 3, 2010, 5to1 entered into the Merger with FTOH Acquisition Corp., a Delaware corporation and wholly owned subsidiary of 5to1 Holding Corp, with 5to1 as the surviving corporation in the Merger. Prior to the Merger, 5to1completed a 46.67 to1 reverse stock split. Also on November 3, 2010, 5to1 Holding Corp. sold 3,625,000 shares of common stock in a private placement at $1.00 per share to 19 accredited investors.
 
Upon the closing of the Merger and the private placement, under an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance Agreement”) dated as of November 3, 2010, 5to1 Holding Corp. agreed to transfer all of its pre-Merger assets and liabilities to its wholly-owned subsidiary, FTOH Holdings, Inc. (“SplitCo”). Thereafter pursuant to a stock purchase agreement dated as of November 3, 2010, 5to1 Holding Corp. agreed to transfer all of the outstanding capital stock of SplitCo to certain of 5to1Holding Corp. stockholders in exchange for the cancellation of 66,753,280 shares of 5to1 Holding Corp. common stock. Accordingly, the business conducted by FTOH prior to the Merger is not being operated by the combined entity post Merger.
 
At the closing of the Merger, each share of 5to1common stock issued and outstanding immediately prior to the closing of the Merger was exchanged for the right to receive 1 share of 5to1 Holding Corp. common stock. To the extent that there were fractional shares, such fractional shares were rounded to the nearest whole share and the board authorized 5to1 Holding Corp. to issue shares in order to correct any rounding
 
 
10
 
 
deficiencies resulting from the prior recapitalization.  An aggregate of 17,954,222 shares of 5to1 Holding Corp. common stock were issued to the holders of 5to1 Inc. common stock.
 
The Merger has been accounted for as a reverse merger under the acquisition method of accounting because there was a change of control.  Accordingly, 5to1 is treated as the continuing entity for accounting purposes, whereas the entity formally known as 5to1 Holding Corp. is the legal surviving entity.
 
Results of Operations
 
Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010:
 
       
Three Months Ended March 31
    
   
 
      
(in thousands)
        
                     
   
 
  
2011
  
2010
  
Change
    
                     
   
Loss from operations
  
($1,802,302
 ) 
($1,420,363
 ) 
($381,939
 )   
   
Other expenses:
  
      1,057,959
  
            8,145
  
$1,049,814
 
  
   
Net Loss
  
($2,860,261
 ) 
($1,428,508
 ) 
($1,431,753
 )   

Revenue
 
Revenue for the three months ended March 31, 2011 was $25,925 compared to $233,547 for the three months ended March 31, 2010. This decrease of $207,622 resulted from several factors, including management’s focus on and pursuit of external partnerships to provide a more cost efficient and effective sales infrastructure on a going forward basis and a corresponding effort to minimize internal sales-related expenses.
 
Cost of Revenue and Gross Profit (Loss)
 
Cost of revenue for the three months ended March 31, 2011 was $71,510 as compared to $182,972 for the three months ended March 31, 2010. This resulted in a gross loss of $45,585 for the three months ended March 31, 2011 as compared to a gross profit of $50,575 for the three months ended March 31, 2010.  This decrease in gross profit results from the reduction in revenues as described above combined with certain costs that did not decrease proportionate to the decrease in revenues.
 
Compensation
 
Compensation expense for the three months ended March 31, 2011 was $920,867 compared to $ 1,017,725 for the three months ended March 31, 2010. The decrease of $96,858 resulted from a reduction in employees during the period.
 
Other Operating Expenses
 
Other operating expense for the three months ended March 31, 2011 was $ 835,850 compared to $453,213 for the three months ended March 31, 2010. The increase of $382,637 resulted primarily from an increase in consulting and legal and audit fees.
 
Other Expenses
 
Interest expense for the three months ended March 31, 2011 was $772,076 compared to $8,396 for the three months ended March 31, 2010. This increase results from the issuance of warrants to SVB and certain prior bridge lenders to the Company, which increased interest expense by $766,200, offset by a decrease in interest paid to SVB with respect to the SVB Loan that requires monthly principal amortization in the amount of $13,889. In addition, we incurred a loss on change in fair value of derivative liabilities in the amount of $285,883, primarily resulting from an increase in the fair value of our common stock, which caused the fair value of the liability associated with the warrants to increase through March 31, 2011.
 
Income Tax Benefit
 
A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carry forwards and accordingly no income tax benefit was provided.
 
Impact of Inflation
 
The impact of inflation upon our revenue and income/(loss) from continuing operations during each of the past two fiscal years has not been material to our financial position or results of operations for those years because we have no products for sale and do not maintain any inventories whose costs are affected by inflation.
 
Liquidity and Capital Resources
 
Since our inception in 2008, we have generated losses from operations and we anticipate that we will continue to generate losses from operations for the foreseeable future. We incurred a net loss of $2,860,261 for the three months ended March 31, 2011. As of March 31, 2011, we had cash and cash equivalents of $1,946,205 and working capital of $867,169.

 
11
 
 
The Company has undertaken several measures during the quarter ended March 31, 2010 to reduce and control operating costs and increase its overall base of customers. In addition, the Company incurred significant non-recurring expenses in connection with the Merger. As a result, management anticipates that the Company’s capital resources, including funds it expects to generate from operations, will enable it to meet its general working capital requirements, repay the current portion of its debt obligations and continue its business development efforts through at least April 1, 2012. However, in order to execute the Company’s long-term strategy and penetrate new and existing markets, the Company may need to raise additional funds, through public, debt financings, or other means. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings or other means; however, the Company has not secured any commitments for new financing at this time, nor can it provide any assurance that new financing will be available on commercially acceptable terms, if needed. If the Company is unable to secure additional capital, it may be required to curtail its business development initiatives and take additional measures to reduce costs in order to conserve its cash.
 
Off –Balance Sheet Arrangements
 
As of March 31, 2011, we had no material off-balance sheet arrangements other than operating leases.
 
Contractual Obligations
 
The Company has no material contractual obligations.
 
Critical Accounting Policies and Estimates
 
There have been no material changes in our critical accounting policies and estimates from those disclosed in our 2010 Annual Report on Form 10-K, as amended. For a discussion of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in Part II, Item 7 of our 2010 Annual Report on Form 10-K/A.
 
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item.
 
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
The Company’s management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2011.  Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.
 
The reason for the ineffectiveness of our disclosure controls and procedures was the result of the lack of segregation of duties and responsibilities with respect to our cash control over the disbursements related thereto. The lack of segregation of duties resulted from our limited accounting staff.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended March 31, 2011 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 
12
 

 
 
None.
 
 
As a “small reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
 
 
On March 11, 2011, the Board authorized the issuance of options to purchase an aggregate of 278,718 shares of the Company's common stock for a period of ten years.  The options vest as follows: 20% on the sixth month anniversary of the option grant date, and 1/30th on a monthly basis thereafter with 100% vesting upon change of controls, as defined in the Company's 2011 Equity Incentive Plan.
 
On March 11, 2011, the Board authorized the issuance of 65,000 warrants to Silicon Valley Bank and 306,348 warrants to certain prior bridge lenders of the Company.  The warrants are exercisable for a period of 10 years with an exercise prices of $1.00 per share.
 
The options and the warrants were offered and issued in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506), under the Securities Act and corresponding provisions of state securities laws.
 
 
None.
 
 
 
None
 
 
 
 

 
13
 


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
5TO1 HOLDING CORP.
   
Dated:  May 10, 2011
By:  
/s/ James Heckman
 
James Heckman
Chief Executive Officer
(Principal Executive Officer)
 
Dated:  May 10, 2011
By:  
/s/ Mitchell Chun
 
Mitchell Chun
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 

 
 14