UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2009
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to _____________
Commission File Number: 002-41703
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The X-Change Corporation
(Exact Name of Registrant as Specified in Its Charter)
Nevada 90-0156146
(State of Incorporation) (I.R.S. Employer ID Number)
12655 North Central Expressway, Suite 1000, Dallas, Texas 75243
(Address of Principal Executive Offices)
(972) 386-7350
(Registrant's Telephone Number)
17120 N. Dallas Parkway, Suite 235, Dallas, Texas 75248
(Former name or former address, if changed since last report)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] NO [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: April 15, 2010: 136,089,746
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
THE X-CHANGE CORPORATION
Form 10-Q for the Quarter ended March 31, 2009
Table of Contents
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3
Item 2 - Management's Discussion and Analysis or Plan of Operation 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16
Item 4 - Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Recent Sales of Unregistered Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits 17
SIGNATURES 17
2
PART I
ITEM 1 - FINANCIAL STATEMENTS
THE X-CHANGE CORPORATION
BALANCE SHEETS
March 31, 2009 and December 31, 2008
(Unaudited) (Audited)
March 31, December 31,
2009 2008
------------ ------------
ASSETS
CURRENT ASSETS
Cash on hand and in bank $ -- $ 18,503
------------ ------------
TOTAL CURRENT ASSETS -- 18,503
------------ ------------
OTHER ASSETS
Prepaid debt financing fees, net of accumulated
amortization of approximately $224,389 and $168,507 858,548 914,880
------------ ------------
TOTAL OTHER ASSETS 858,548 914,880
------------ ------------
TOTAL ASSETS $ 858,548 $ 933,383
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Convertible debenture payable, net of unamortized discount $ 164,533 $ 137,750
Convertible notes payable, net of unamortized discount 1,765,984 1,502,582
Accounts payable - trade 15,757 --
Accrued interest payable 30,263 4,600
------------ ------------
TOTAL CURRENT LIABILITIES 1,976,537 1,644,932
------------ ------------
TOTAL LIABILITIES 1,976,537 1,644,932
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $0.001 par value
75,000,000 shares authorized
none issued and outstanding -- --
Common stock - $0.001 par value
750,000,000 shares authorized
106,337,307 and 104,108,673 shares
issued and outstanding 106,337 104,109
Additional paid-in capital 17,729,560 17,938,909
Accumulated deficit (20,900,423) (18,545,328)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,117,989) (711,549)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 858,548 $ 933,383
============ ============
The accompanying notes are an integral part of these financial statements.
3
THE X-CHANGE CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three months ended March 31, 2009 and 2008
(UNAUDITED)
Three months Three months
ended ended
March 31, March 31,
2009 2008
------------ ------------
REVENUES - net of returns and allowances $ -- $ --
COST OF SALES -- --
------------ ------------
GROSS PROFIT -- --
------------ ------------
OPERATING EXPENSES
General and administrative expenses 758 77,531
------------ ------------
TOTAL OPERATING EXPENSES 758 77,531
------------ ------------
LOSS FROM OPERATIONS (758) (77,531)
OTHER INCOME (EXPENSE)
Interest income -- 637
Interest expense, including amortization of
financing fees and note discounts (374,300) (287,068)
Other -- --
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (374,300) (286,431)
------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (375,058) (363,962)
PROVISION FOR INCOME TAXES -- --
------------ ------------
LOSS FROM CONTINUING OPERATIONS (375,058) (363,962)
DISCONTINUED OPERATIONS, NET OF INCOME TAXES
Loss from discontinued operations, net of provision
for income taxes of $-0- and $-0-, respectively -- (313,842)
Loss on disposition of discontinued operations,
net of provision for income taxes of
$-0- and $-0-, respectively (33,500) --
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS (33,500) (313,842)
------------ ------------
OTHER COMPREHENSIVE INCOME -- --
------------ ------------
COMPREHENSIVE LOSS $ (408,558) $ (677,804)
============ ============
Net loss per weighted-average share of common stock
outstanding, calculated on Net Loss - basic and
fully diluted
From continuing operations $ (0.00) $ (0.01)
From discontinued operations (0.00) (0.01)
------------ ------------
TOTAL $ (0.00) $ (0.02)
============ ============
Weighted-average number of shares of common stock
outstanding 106,019,757 31,589,501
============ ============
The accompanying notes are an integral part of these financial statements.
4
THE X-CHANGE CORPORATION
STATEMENTS OF CASH FLOWS
Three months ended March 31, 2009 and 2008
(UNAUDITED)
Three months Three months
ended ended
March 31, March 31,
2009 2008
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $(408,559) $(677,804)
Adjustments to reconcile net loss to net cash
provided by operating activities
Equity in loss of foreclosed subsidiary -- 313,842
Depreciation and amortization 276,068 253,533
Stock based compensation expense -- 77,483
Expenses paid with common stock -- --
Interest expense capitalized as principal 72,000 36,837
Interest expense paid with common stock 568 --
Loss on foreclosure of subsidiary -- --
Net cash used by foreclosed subsidiary -- --
(Increase) Decrease in
Deferred financing fees and other prepaid expenses -- --
Current assets of foreclosed subsidiary -- --
Increase (Decrease) in
Accounts payable and other 15,757 --
Accrued interest payable 25,663 (2,670)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (18,503) 1,221
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed assets acquired by foreclosed subsidiary -- --
Cash advanced to foreclosed subsidiary -- (630,000)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES -- (630,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received on sale of common stock -- --
Cash received on notes payable, net of fees paid -- --
Cash paid on related party notes payable -- (1,002)
Cash paid on convertible debenture principal -- (1,000)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES -- (2,002)
--------- ---------
INCREASE (DECREASE) IN CASH (18,503) (630,781)
Cash at beginning of period 18,503 631,870
--------- ---------
CASH AT END OF PERIOD $ -- $ 1,089
========= =========
SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID
Interest paid for the period $ -- $ 9,298
========= =========
Income taxes paid for the period $ -- $ --
========= =========
The accompanying notes are an integral part of these financial statements.
5
THE X-CHANGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2009 and December 31, 2008
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
The X-Change Corporation (Company) was incorporated under the laws of the State
of Delaware on February 5, 1969 and changed its corporate domicile to the State
of Nevada on October 4, 2000. We were originally organized to seek merger and/or
acquisition candidates and engaged in various transactions since our inception.
As of December 31, 2008, we have disposed of all of the assets and operations.
On July 20, 2005, the Company exchanged 10,000,000 shares of common stock for
100% of the issued and outstanding stock of AirGATE Technologies, Inc.
(AirGATE). This transaction made AirGATE a wholly-owned subsidiary of the
Company.
In December 2008, the lender of a note payable by AirGATE began foreclosure
proceedings against its collateral, which included 100% of the Company's
holdings in AirGATE and the right to convert the note into restricted,
unregistered shares of the Company's common stock. The foreclosure proceeding
was consummated on January 16, 2009 and Company's holdings in AirGATE were
forfeited. Due to the timing of this transaction, the foreclosure and related
disposition of AirGATE is reflected in the accompanying financial statements as
of December 31, 2008.
On March 11, 2010, the Company announced a change in our strategic direction and
business plan to focus on offering multimedia and e-commerce to the diverse and
growing Hispanic markets within the United States and in other countries. The
Company anticipates having two distinct divisions and operating each within a
wholly-owned operating subsidiary corporation consisting of a Latino-targeted
media delivery service and a bilingual home shopping network. On March 25, 2010,
we formed the wholly-owned subsidiaries - Caballo Blanco Communications, Ltd.
and Commerce Services, Inc. - as Colorado corporations to conduct these
operations.
NOTE B - PREPARATION OF FINANCIAL STATEMENTS
The Company follows the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America and has
adopted a year-end of December 31.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management further acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-K containing the Company's
financial statements for the year ended December 31, 2008. The information
presented within these interim financial statements may not include all
disclosures required by generally accepted accounting principles and the users
of financial information provided for interim periods should refer to the annual
financial information and footnotes when reviewing the interim financial results
presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-Q are unaudited and contain all material adjustments,
consisting only of normal recurring adjustments necessary to present fairly the
financial condition, results of operations and cash flows of the Company for the
respective interim periods presented. The current period results of operations
are not necessarily indicative of results which ultimately will be reported for
the full fiscal year ending December 31, 2009.
6
THE X-CHANGE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2009 and December 31, 2008
NOTE C - GOING CONCERN UNCERTAINTY
As of March 31, 2009, the Company has no operations, limited cash on hand, and
significant debt related to the financing of the operations of its former
subsidiary, AirGATE. Because of these factors, the Company's auditors have
issued an audit opinion on the Company's financial statements which includes a
statement describing our going concern status. This means, in the auditor's
opinion, substantial doubt about our ability to continue as a going concern
exists at the date of their opinion.
The Company's current business plan is to focus on offering multimedia and
e-commerce to the diverse and growing Hispanic markets within the United States
and in other countries. The Company anticipates having two distinct divisions
and operating each within a wholly-owned operating subsidiary corporation
consisting of a Latino-targeted media delivery service and a bilingual home
shopping network. On March 25, 2010, we formed the wholly-owned subsidiaries -
Caballo Blanco Communications, Ltd. and Commerce Services, Inc. - as Colorado
corporations to conduct these operations.
The Company's continued existence is dependent upon its ability to generate
sufficient cash flows from operations to support its daily operations as well as
provide sufficient resources to retire existing liabilities and obligations on a
timely basis. Further, the Company faces considerable risk in its business plan
and a potential shortfall of funding due to any inability to raise capital in
the equity securities market. If no additional operating capital is received
during the next twelve months, the Company will be forced to rely on existing
cash in the bank and additional funds loaned by management and/or significant
stockholders.
The Company may become dependent upon additional external sources of financing;
including being dependent upon its management and/or significant stockholders to
provide sufficient working capital in excess of the Company's initial
capitalization to preserve the integrity of the corporate entity.
The Company anticipates offering future sales of equity securities. However,
there is no assurance that the Company will be able to obtain additional funding
through the sales of additional equity securities or, that such funding, if
available, will be obtained on terms favorable to or affordable by the Company.
The Company's certificate of incorporation authorizes the issuance of up to
75,000,000 shares of preferred stock and 750,000,000 shares of common stock. The
Company's ability to issue preferred stock may limit the Company's ability to
obtain debt or equity financing, The Company's ability to issue these authorized
but unissued securities may also negatively impact our ability to raise
additional capital through the sale of our debt or equity securities.
The Company's current controlling stockholder has maintained the corporate
status of the Company and has provided all nominal working capital support on
the Company's behalf since the December 2008 foreclosure action. Because of the
Company's lack of operating assets, its continuance is fully dependent upon the
majority stockholder's continuing support. It is the intent of this controlling
stockholder to continue the funding the nominal necessary expenses to sustain
the corporate entity. However, no formal commitments or arrangements to advance
or loan funds to the Company or repay any such advances or loans exist. There is
no legal obligation for either management or significant stockholders to provide
additional future funding. Further, the Company is at the mercy of future
economic trends and business operations for this controlling stockholder to have
the resources available to support the Company. Should this pledge fail to
provide financing, the Company has not identified any alternative sources of
working capital to support the Company.
In such a restricted cash flow scenario, the Company would be unable to complete
its business plan steps, and would, instead, delay all cash intensive
activities. Without necessary cash flow, the Company may become dormant during
the next twelve months, or until such time as necessary funds could be raised in
the equity securities market.
While the Company is of the opinion that good faith estimates of the Company's
ability to secure additional capital in the future to reach its goals have been
made, there is no guarantee that the Company will receive sufficient funding to
sustain operations or implement any future business plan steps.
7
THE X-CHANGE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2009 and December 31, 2008
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Financing Fees
Financing fees recorded in connection with debt issuances are amortized on
a straight-line basis over the maturity term of the related debt.
3. Convertible Debt Instruments
The Company records debt net of debt discount for beneficial conversion
features and warrants, on a relative fair value basis. Beneficial
conversion features are recorded pursuant to the Beneficial Conversion
Feature and Debt Topics of the FASB Accounting Standards Codification. The
amounts allocated to warrants and beneficial conversion rights are recorded
as debt discount and as additional paid-in-capital. Debt discount is
amortized to interest expense over the life of the debt.
5. Accounting for Stock Options
The Company has adopted the provisions of the Compensation Topic of the
FASB Accounting Standards Codification which requires the measurement and
recognition of compensation expense for all share-based payment awards made
to its employees and directors based on estimated fair values at the time
of grant. In addition, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 "Share-Based Payment" (SAB 107) in March 2005,
which provides supplemental accounting guidance.
The valuation techniques used in applying these provisions are sensitive to
certain assumptions and parameters used including the volatility and
liquidity of the Company's stock. The Black Scholes option valuation model
used in this process was developed for use in estimating the fair value of
trading options that have no vesting restrictions and are fully
transferable. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
The Company has recorded in the past, and may record in the future,
substantial non-cash compensation expense which is not expected to have a
significant effect on our financial condition or cash flows but are
expected to have a significant, adverse effect on our reported results of
operations.
The Company follows the provisions of the Compensation topic of the FASB
Accounting Standards Codification for equity instruments granted to
non-employees.
6. Income taxes
The Company files income tax returns in the United States of America and
various states, as appropriate and applicable. As a result of the Company's
bankruptcy action, the Company is no longer subject to U.S. federal, state
and local, as applicable, income tax examinations by regulatory taxing
authorities for any period prior to December 31, 2006. The Company does not
anticipate any examinations of returns filed for periods ending after
December 31, 2006.
8
THE X-CHANGE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2009 and December 31, 2008
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Income taxes - continued
The Company uses the asset and liability method of accounting for income
taxes. At March 31, 2009 and December 31, 2008, the deferred tax asset and
deferred tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences generally represent differences in the recognition of assets
and liabilities for tax and financial reporting purposes, primarily
accumulated depreciation and amortization, allowance for doubtful accounts
and vacation accruals.
The Company has adopted the provisions required by the Income Taxes topic
of the FASB Accounting Standards Codification. The Codification Topic
requires the recognition of potential liabilities as a result of
management's acceptance of potentially uncertain positions for income tax
treatment on a "more-likely-than-not" probability of an assessment upon
examination by a respective taxing authority. As a result of the
implementation of Codification's Income Tax Topic, the Company did not
incur any liability for unrecognized tax benefits.
7. Income (Loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common stockholders by the weighted-average number of
common shares outstanding during the respective period presented in our
accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income
(loss) per share except that the denominator is increased to include the
number of common stock equivalents (primarily outstanding options and
warrants).
Common stock equivalents represent the dilutive effect of the assumed
exercise of the outstanding stock options and warrants, using the treasury
stock method, at either the beginning of the respective period presented or
the date of issuance, whichever is later, and only if the common stock
equivalents are considered dilutive based upon the Company's net income
(loss) position at the calculation date.
As of March 31, 2009 and 2008, the Company's outstanding stock options,
warrants, and convertible debentures are considered to be anti-dilutive due
to the Company's net operating loss.
8. New and Pending Accounting Pronouncements
The Company is of the opinion that any and all pending accounting
pronouncements, either in the adoption phase or not yet required to be
adopted, will not have a significant impact on the Company's financial
position or results of operations.
NOTE E - NOTE PAYABLE TO STOCKHOLDER
During Calendar 2009, the Company executed a $100,000 Line of Credit Note
Payable with South Beach Live, Ltd. (South Beach), a significant Company
stockholder, to provide funds necessary to support the corporate entity and
comply with the periodic reporting requirements of the Securities Exchange Act
of 1934, as amended. This note bears interest at 10.0% and matures in Calendar
2011. Through December 31, 2009, South Beach or its affiliates have advanced an
aggregate of approximately $56,000 against this note.
9
THE X-CHANGE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2009 and December 31, 2008
NOTE F - COMMON STOCK TRANSACTIONS
During the year ended December 31, 2008, the Company issued an aggregate
17,202,139 shares of restricted, unregistered common stock as consideration for
financing fees in conjunction with the receipt of approximately $1,800,000 in
new debt financing.
During the year ended December 31, 2008, the Company issued an aggregate 600,000
shares of restricted, unregistered common stock to a consulting firm as
consideration for services rendered.
During the year ended December 31, 2008, the Company issued an aggregate
3,812,161 shares of registered common stock in exchange for the conversion of
approximately $36,500 in convertible debenture debt. As the conversion price was
below the "fair value" of the securities issued, the Company experienced a
non-cash charge to operations of approximately $22,500 which was classified as
"interest expense" in the accompanying financial statements.
In December 2008, the Company issued 51,000,000 shares of restricted,
unregistered common stock in connection with the redemption of $51,000 in
principal against a note payable in conjunction with a foreclosure action by the
noteholder.
In January 2009, the Company issued an aggregate 2,118,506 shares of restricted,
unregistered common stock in connection with the redemption of $1,550 in
convertible debenture debt. As the conversion price was below the "fair value"
of the securities issued, the Company experienced a non-cash charge to
operations of approximately $568 which was classified as "interest expense" in
the accompanying financial statements.
In December 2009, the Company undertook a reconciliation of its issued and
outstanding shares versus the Company's independent stock transfer agent's
records. As a result of this analysis, the Company noted that an additional
110,128 shares were appropriately issued and outstanding based on various
factors, principally, but not limited to, rounding on stock split transactions
and clerical errors in the Company's files from periods prior to 2006. The
Company has adjusted the issued and outstanding shares in the accompanying
financial statements as of the year ended December 31, 2009.
NOTE G - CONTINGENCIES
On December 15, 2008, the Company defaulted on its promissory note obligation to
Melissa CR 364, LTD. for failing to remit the outstanding balance and unpaid,
but accrued, interest payable on the contractual maturity date. Melissa CR 364,
LTD. served the Company with a demand for payment in full of the promissory
note. As of the demand date, the Company did not have the funds available to pay
Melissa CR 364, LTD. Melissa CR 364, LTD. has a security interest in the shares
of stock of our wholly owned subsidiary, AirGATE. Additionally, a default under
the Melissa CR 364, LTD. note triggered a default under our loan agreement with
La Jolla Cove Investors, Inc. Upon an event of default under the La Jolla Cove
Investors, Inc. debenture, the Company may be (I) required to pay a default rate
equal to 3.75% percent and (ii) accelerate the payment of the entire outstanding
amounts owed at 120% of the outstanding principal amount.
On January 21, 2009, Melissa CR 364, LTD. informed the Company it had completed
a foreclosure on its security interest in the 100% of the issued and outstanding
shares of the stock of our wholly-owned subsidiary, AirGATE Technologies, Inc.
and held a sale of the AirGATE stock on January 16, 2009. As disclosed in the
Company's Form 8-K, filed on January 26, 2009, Melissa CR 364, LTD.'s
foreclosures and auction of their holdings reduced the Company's debt to Melissa
CR 364, LTD. by $10,000, the amount realized from the auction. After this
foreclosure action and auction sale, The X-Change Corporation (Company) had no
operations or operating assets.
10
THE X-CHANGE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2009 and December 31, 2008
NOTE G - CONTINGENCIES - CONTINUED
On January 26, 2009, we received notice of a default on our Amended and Restated
Senior Secured Convertible Term Notes - Tranche A and our Senior Secured
convertible Term Note - Tranche B from Samson Investment Company, Ironman PI
Fund (QP), L.P. and John Thomas Bridge and Opportunity Fund, L.P., with a
collective principal amount of $3,600,000, plus unpaid, but accrued, interest
payable, related to Melissa CR 364, LTD.'s notice of foreclosure on the AirGATE
stock. Samson Investment Company, Ironman PI fund (QP), L.P. and John Thomas
Bridge and Opportunity Fund, L.P. collectively demanded redemption of the notes
within seven days of the notice of default date for $1,975,162.87, $1,975,162.87
and $637,149.31, respectively. At the time notice of default was received, the
Company did not have the funds available to satisfy the collective obligations.
Samson Investment Company, Ironman PI Fund (QP), L.P. and John Thomas Bridge and
Opportunity Fund, L.P., has a security interest in all of the assets of AirGATE.
On May 4, 2009, the Company entered into a Settlement Agreement and Release with
AirGATE Technologies Inc. (AirGATE), HM Energy Technologies Inc. (HM), WM Chris
Mathers (Mathers), Kathleen Hanafan (Hanafan), Duke Loi (Loi), Samson Investment
Company (Samson), Ironman PI Fund (QP), L.P. (Ironman), John Thomas Bridge and
Opportunity Fund, LP (John Thomas and, collectively with Samson and Ironman,
SIJ) and Melissa CR 364, LTD (Melissa).
Under the terms of the Agreement, (I) SIJ foreclosed on the assets of AirGATE,
which had been security for the SIJ Notes; (ii) SIJ transferred and assigned
7,196,429 shares of the Company's common stock held by Samson, 7,196,429 shares
of the Company's common stock held by Ironman and 2,321,428 shares of the
Company's common stock held by John Thomas, comprising all of the shares of
Company common stock owned by them, to Melissa and others; (iii) SIJ cancelled
the SIJ Notes, SIJ Guaranty, the Tranche A Warrants and the Tranche B Warrants
issued in connection with the SIJ Notes, and any other security convertible or
exchangeable into the common stock of X-Change; (iv) SIJ and Hanafan paid
$75,000.00 to Melissa to defray costs to be incurred by the Company for
completion of an audit of the consolidated financial statements of the Company
and AirGATE for the fiscal year ended December 31, 2008; and (v) all the parties
agree to mutual releases and confidentiality, except that Melissa did not
release the Company from the balance of the Melissa Note.
In summary, as a result of the various transactions effected under the
Agreement, SIJ surrendered all of their shares in the Company; cancelled
financial obligations of the Company that exceeded $3.6 million, with interest;
and terminated their rights under warrant and guaranty agreements. The Company
provided all parties with a full release of claims, known and unknown, in
exchange for these various surrenders, cancellations and terminations. To the
extent that the cancellation of debt constitutes a taxable event, management is
of the opinion that the Company's cumulative net operating loss carryforward
will more than offset any taxes due as a result of this event.
On May 26, 2009, effective as of December 15, 2008, the Company issued
51,000,000 shares of its $0.001 par value common stock to K & D Equity
Investments, Inc. (K&D) , a Texas corporation, pursuant a Debt Assignment and
the conversion features of the Convertible Promissory Note between the Company,
AirGATE and Melissa CR 364, LTD. The issuance was originally approved by the
Board in December 2008, but was not accepted by Melissa CR 364, LTD. and
assigned to K & D until May 26, 2009. This issuance is reflected in the
accompanying financial statements as of the effective date of the Board Action.
NOTE H - SUBSEQUENT EVENTS
On March 26, 2010, LJII issued a Debenture Conversion Notice to the Company for
the conversion of $32,000 of the outstanding debenture balance into 3,902,439
shares of the Company's common stock. This conversion was completed on April 12,
2010 with the delivery of the shares to LJII. As the conversion price was below
the "fair value" of the securities issued, the Company experienced a non-cash
charge to operations of approximately $57,760 which will be classified as
"interest expense" in the financial statements for the quarter ended March 31,
2010. In conjunction with this conversion, a continued disagreement exists
between LCII and the Company's management over the requirements of the
contractual mandatory exercise of approximately 320,000 warrants related to the
conversion of this approximately $32,000 of the debenture balance. The disputed
balance on this transaction is approximately $3,200,000 due to the Company on
contractually exercisable warrants by LCII.
11
THE X-CHANGE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2009 and December 31, 2008
NOTE H - SUBSEQUENT EVENTS - CONTINUED
There is a remote possibility that this delinquency could be deemed a default by
LCII by the Company's management. The Company's management is investigating
potential remedies to this situation.
Management has evaluated all activity of the Company through April 20, 2010 (the
issue date of the financial statements) and concluded that no subsequent events,
other than as disclosed above, have occurred that would require recognition in
the financial statements or disclosure in the notes to financial statements.
(Remainder of this page left blank intentionally)
12
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(1) CAUTION REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this quarterly filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-Q and investors are cautioned
not to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
(2) GENERAL
The X-Change Corporation (Company) was incorporated under the laws of the State
of Delaware on February 5, 1969 and changed its corporate domicile to the State
of Nevada on October 4, 2000. We were originally organized to seek merger and/or
acquisition candidates and engaged in various transactions since our inception.
As of December 31, 2008, we have disposed of all of the assets and operations.
On July 20, 2005, the Company exchanged 10,000,000 shares of common stock for
100% of the issued and outstanding stock of AirGATE Technologies, Inc.
(AirGATE). This transaction made AirGATE a wholly-owned subsidiary of the
Company.
In December 2008, the lender of a note payable by AirGATE began foreclosure
proceedings against its collateral, which included 100% of the Company's
holdings in AirGATE and the right to convert the note into restricted,
unregistered shares of the Company's common stock. The note and accrued, and
unpaid, interest was converted to 51,000,000 shares of the Company's common
stock and the foreclosure proceeding was consummated on January 16, 2009. Due to
the timing of this transaction, the foreclosure and related disposition of
AirGATE is reflected in the accompanying financial statements as of December 31,
2008.
On May 4, 2009, the Company entered into a Settlement Agreement and Release with
AirGATE, HM Energy Technologies, Inc. (HM), Wm. Chris Mathers, the Company's
former CFO, (Mathers), Kathleen Hanafan, the Company's former CEO, (Hanafan),
Duke Loi, an employee of AirGATE, (Loi), Samson Investment Company (Samson),
Ironman PI Fund (QP), L.P. (Ironman), John Thomas Bridge and Opportunity Fund,
LP ("John Thomas" collectively with Samson and Ironman, SIJ) and Melissa CR 364,
LTD (Melissa).
Under the terms of the Agreement, (I) SIJ foreclosed on the assets of AirGATE,
which had been security for the SIJ Notes; (ii) SIJ transferred and assigned
7,196,429 shares of the Company's common stock held by Samson, 7,196,429 shares
of the Company's common stock held by Ironman and 2,321,428 shares of the
Company's common stock held by John Thomas, comprising all of the shares of
Company common stock owned by them, to Melissa and its assigns; (iii) SIJ
cancelled the SIJ Notes, SIJ Guaranty, the Tranche A Warrants and the Tranche B
Warrants issued in connection with the SIJ Notes, and any other security
convertible or exchangeable into the common stock of the Company; (iv) SIJ and
Hanafan paid $75,000.00 to Melissa to defray costs to be incurred by Melissa on
behalf of the Company for various general and administrative expenses; and (v)
all the parties agree to mutual releases and confidentiality, except that
Melissa did not release the Company from the Melissa Note.
As a result of the various transactions effected under the Agreement, SIJ
surrendered all of their shares in the Company; cancelled all financial
obligations of the Company, which approximated $3.96 million, including accrued
but unpaid interest); and terminated their rights under the various warrant and
guaranty agreements. The Company provided all parties with a full release of
claims, known and unknown, in exchange for these various surrenders,
13
cancellations and terminations. To the extent that the cancellation of these
debts constitutes a taxable event, the Company's net operating loss
carry-forward is anticipated to compensate for any taxes due from this event.
On March 11, 2010, we announced a change in our strategic direction and business
plan to focus on offering multimedia and e-commerce to the diverse and growing
Hispanic markets within the United States and in other countries. The Company
anticipates having two distinct divisions and operating each within a
wholly-owned operating subsidiary corporation consisting of a Latino-targeted
media delivery service and a bilingual home shopping network. On March 25, 2010,
we formed the wholly-owned subsidiaries - Caballo Blanco Communications, Ltd.
and Commerce Services, Inc. - as Colorado corporations to conduct these
operations.
(3) RESULTS OF OPERATIONS
The Company had no separately earned revenue, except for nominal interest
income, for either of the three month periods ended March 31, 2009 and 2008,
respectively. All operating revenues through December 31, 2008 were earned in
the Company's former wholly-owned subsidiary, AirGATE Technologies, Inc.
General and administrative expenses for the three months ended March 31, 2009
and 2008 were approximately $700 and $77,000, respectively. The significant
decline in 2009 expenditures related directly to the decreased activity and the
ultimate disposition of the Company's former wholly-owned subsidiary, AirGATE
Technologies, Inc. which was foreclosed upon as of December 31, 2008. The
expenditures incurred during the first three months of 2008 relate principally
to the financial impact of outstanding employee stock options which were
eventually cancelled in December 2008 upon the foreclosure of the Company's
former wholly-owned subsidiary, AirGATE.
The Company recognized interest accruals, amortization of debt financing fees
and accretion of debt discounts of approximately $374,000 and $287,000 during
the three months ended March 31, 2009 and 2008, respectively. The Company's
convertible debenture with La Jolla Cove Investors, Inc. matures in August 2010.
This debenture is discussed more fully in our Annual Report on Form 10-K for the
year ended December 31, 2008. We specifically note that all of the Company's
debt is in default due to the December 2008 foreclosure action and, accordingly,
has been classified as "current" on the Company's balance sheet regardless of
the stated maturity date(s).
Due to the minimal expenditures in 2009, management anticipates that future
expenditure levels will fluctuate, either up or down, as the Company complies
with its periodic reporting requirements and implements the business plan of
identifying a suitable situation for a business combination transaction.
Earnings per share for the respective three month periods ended March 31, 2009
and 2008 were $(0.00) and $(0.02) based on the weighted-average shares issued
and outstanding at the end of each respective period.
The Company does not expect to generate any meaningful revenue or incur
operating expenses for purposes other than fulfilling the obligations of a
reporting company under the Securities Exchange Act of 1934 unless and until
such time that the Company completes a business combination transaction.
(4) PLAN OF BUSINESS
On March 11, 2010, we announced a change in our strategic direction and business
plan to focus on offering multimedia and e-commerce to the diverse and growing
Hispanic markets within the United States and in other countries.
We anticipate forming two distinct divisions and operating each within a newly
formed subsidiary corporation - one a Latino-targeted media delivery service and
one a bilingual home shopping network.
Our management intends to develop and leverage relationships with existing home
shopping networks to build significant Hispanic audiences that purchase
merchandise via internet connections and through other smart mobile devices.
These relationships and the know-how of management will conserve capital that
would ordinarily be required for buying, inventory warehousing management,
development of an online sales infrastructure, shipping and returns, customer
service, and the focus on effective merchandising and marketing. Our management
understands and is in a position to monitor the buying preferences and behaviors
of its markets--each of which has unique characteristics. We intend to develop
intriguing episodic productions that feature popular Hispanic talent promoting
their product lines, an approach that has been successfully implemented at other
home shopping platforms such as QVC.
Our media-delivery network will be similar to the approach taken by video
services such as Hulu(R) with a focus on providing popular Hispanic entertaining
and informative content as streaming media to the web and mobile devices. The
state of the art of video-delivery technology is sophisticated and advanced, and
this business is considered a content-licensing and promotion play, where the
entity's value grows with viewership. Revenue shall be derived from advertising,
subscriptions, and the sale of smartphone applications. Channels will organize
14
content on offer to the widely varying tastes of its markets and individual
subscribers, ranging from romance to mystery to science fiction to drama to
police procedurals. The content will be a combination of individual segments,
serial productions, and motion pictures.
On March 17, 2010, we announced that we reached agreement with Los Angeles-based
technology company IPTVWorld, Inc., to work as partners in the development and
deployment of a broad range of Internet-based services, with a first release of
a new product line scheduled for staged release starting in May, 2010. These
services will include compelling video programming, including entertainment,
information, news, sports, religion, lifestyle, shopping, and country-specific
programs. These offerings are anticipated to be made available several ways,
including on a subscription basis through television set-top boxes, through web
browsers, and, in future versions, through mobile devices. Subscriptions will be
offered that are similar to but far less expensive than traditional cable or
satellite plans. Also, among the completely integrated Internet services to be
offered will be a home telephone service featuring a low-cost international
calling component which is expected to be a popular option in the targeted
consumer markets.
On March 25, 2010, we formed the wholly-owned subsidiaries - Caballo Blanco
Communications, Ltd. and Commerce Services, Inc. - as Colorado corporations to
conduct these operations. We anticipate that the operations of Caballo Blanco
Communications, Ltd. will be housed at One Wilshire, a premier communications
hub located in Southern California to assure reliable and fast delivery of our
programming.
(5) LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2009 and December 31, 2008, respectively, the Company had a working
capital of approximately $(1,976,000) and $(1,626,000).
The Company's current business plan is to focus on offering multimedia and
e-commerce to the diverse and growing Hispanic markets within the United States
and in other countries. The Company anticipates having two distinct divisions
and operating each within a wholly-owned operating subsidiary corporation
consisting of a Latino-targeted media delivery service and a bilingual home
shopping network. On March 25, 2010, we formed the wholly-owned subsidiaries -
Caballo Blanco Communications, Ltd. and Commerce Services, Inc. - as Colorado
corporations to conduct these operations.
The Company's continued existence is dependent upon its ability to generate
sufficient cash flows from operations to support its daily operations as well as
provide sufficient resources to retire existing liabilities and obligations on a
timely basis. Further, the Company faces considerable risk in its business plan
and a potential shortfall of funding due to any inability to raise capital in
the equity securities market. If no additional operating capital is received
during the next twelve months, the Company will be forced to rely on existing
cash in the bank and additional funds loaned by management and/or significant
stockholders.
The Company may become dependent upon additional external sources of financing;
including being dependent upon its management and/or significant stockholders to
provide sufficient working capital in excess of the Company's initial
capitalization to preserve the integrity of the corporate entity.
The Company anticipates offering future sales of equity securities. However,
there is no assurance that the Company will be able to obtain additional funding
through the sales of additional equity securities or, that such funding, if
available, will be obtained on terms favorable to or affordable by the Company.
The Company's certificate of incorporation authorizes the issuance of up to
75,000,000 shares of preferred stock and 750,000,000 shares of common stock. The
Company's ability to issue preferred stock may limit the Company's ability to
obtain debt or equity financing, The Company's ability to issue these authorized
but unissued securities may also negatively impact our ability to raise
additional capital through the sale of our debt or equity securities.
The Company's current controlling stockholder has maintained the corporate
status of the Company and has provided all nominal working capital support on
the Company's behalf since the December 2008 foreclosure action. Because of the
Company's lack of operating assets, its continuance is fully dependent upon the
majority stockholder's continuing support. It is the intent of this controlling
stockholder to continue the funding the nominal necessary expenses to sustain
the corporate entity. However, no formal commitments or arrangements to advance
or loan funds to the Company or repay any such advances or loans exist. There is
no legal obligation for either management or significant stockholders to provide
additional future funding. Further, the Company is at the mercy of future
economic trends and business operations for this controlling stockholder to have
the resources available to support the Company. Should this pledge fail to
provide financing, the Company has not identified any alternative sources of
working capital to support the Company.
In such a restricted cash flow scenario, the Company would be unable to complete
its business plan steps, and would, instead, delay all cash intensive
activities. Without necessary cash flow, the Company may become dormant during
the next twelve months, or until such time as necessary funds could be raised in
the equity securities market.
15
While the Company is of the opinion that good faith estimates of the Company's
ability to secure additional capital in the future to reach its goals have been
made, there is no guarantee that the Company will receive sufficient funding to
sustain operations or implement any future business plan steps.
Regardless of whether the Company's cash assets prove to be inadequate to meet
the Company's operational needs, the Company might seek to compensate providers
of services by issuances of stock in lieu of cash.
(6) CRITICAL ACCOUNTING POLICIES
Our financial statements and related public financial information are based on
the application of accounting principles generally accepted in the United States
(GAAP). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported. These estimates can
also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We
believe our use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently and conservatively applied. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to
monitor significant estimates made during the preparation of our financial
statements.
Our significant accounting policies are summarized in Note D of our financial
statements. While all these significant accounting policies impact our financial
condition and results of operations, we view certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on our financial statements and require management to
use a greater degree of judgment and estimates. Actual results may differ from
those estimates. Our management believes that given current facts and
circumstances, it is unlikely that applying any other reasonable judgments or
estimate methodologies would cause effect on our consolidated results of
operations, financial position or liquidity for the periods presented in this
report.
(7) EFFECT OF CLIMATE CHANGE LEGISLATION
The Company currently has no known or identified exposure to any current or
proposed climate change legislation which could negatively impact the Company's
operations or require capital expenditures to become compliant. Additionally,
any currently proposed or to-be-proposed-in-the-future legislation concerning
climate change activities, business operations related thereto or a publicly
perceived risk associated with climate change could, potentially, negatively
impact the Company's efforts to identify an appropriate target company which may
wish to enter into a business combination transaction with the Company.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company may be subject to certain market risks, including changes in
interest rates and currency exchange rates. At the present time, the Company
does not undertake any specific actions to limit those exposures.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (Exchange Act), as of March 31, 2009.
Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to our Company required to be included in our reports filed or
submitted under the Exchange Act.
16
(b) Changes in Internal Controls
There were no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal
controls over financial reporting that occurred during the quarter ended
March 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company may become involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters should not have an adverse material impact either
individually or in the aggregate on results of operations, financial position or
cash flows of the Company.
ITEM 2 - RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS
In January 2009, the Company issued an aggregate 2,118,506 shares of restricted,
unregistered common stock in connection with the redemption of $1,550 in
convertible debenture debt. As the conversion price was below the "fair value"
of the securities issued, the Company experienced a non-cash charge to
operations of approximately $568 which was classified as "interest expense" in
the accompanying financial statements.
In March 2010, the Company issued an aggregate 3,902,439 shares of restricted,
unregistered common stock in connection with the redemption of $32,000 in
convertible debenture debt. As the conversion price was below the "fair value"
of the securities issued, the Company experienced a non-cash charge to
operations of approximately $57,760 which will be classified as "interest
expense" in the financial statements for the quarter ended March 31, 2010.
ITEM 3 - DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has held no regularly scheduled, called or special meetings of
stockholders during the reporting period.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE X-CHANGE CORPORATION
Dated: April 20, 2010 By: /s/ Haviland Wright
-------------- -------------------------------------------
Haviland Wright
Chairman, Chief Executive Officer,
Acting Chief Financial Officer and Director
17