Listen to this and tell me what do you think, honestly.
That sounds pretty bad. Is that just a guitar running into the TimeFactor running into an amp? That could potentially be a problem with your TimeFactor's converters or with its memory, but it could also potentially be a problem with your set-up. If it is a problem with the TimeFactor's converters or its memory, the TimeFactors self tests should be able to confirm that.
If you want to run the TimeFactors self tests, what you would need to do is connect its audio inputs to its outputs so that input 1 is connected to output 1 and input 2 is connected to output 2 and you would need to connect its MIDI input to its MIDI output. Then it will be able to test its converters by doing loopback tests. To start the tests, you turn your TimeFactor off and then turn it on again with the left footswitch pressed. The display will say 01 TEST and will scroll to say TEST ALL. If you press the algorithm selection encoder, that will start the tests. The screen initially will say P0E0T0. P is the number of passes. E is the number of errors on the current test and T is the total number of errors. There are about 20 tests, and if you just leave the TimeFactor running it will run these same 20 tests over and over again. If you don't mind doing this, please let us know what the display says after your let the tests run for an hour or so.