10-Q 1 g4545a.txt QTRLY REPORT FOR THE QTR ENDED 9-30-10 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q -------------------------------------------------------------------------------- (Mark one) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2010 [ ] 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 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) -------------------------------------------------------------------------------- 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 [X] NO [ ] 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 (ss.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 [ ] NO [X] 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. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] 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 [X] NO [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: November 22, 2010: 5,513,000 Transitional Small Business Disclosure Format (check one): YES [ ] NO [X] THE X-CHANGE CORPORATION Form 10-Q for the Quarter ended September 30, 2010 Table of Contents Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17 Item 4 - Controls and Procedures 17 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 17 Item 2 - Sales of Equity Securities and Use of Proceeds 17 Item 3 - Defaults Upon Senior Securities 18 Item 4 - (Removed and Reserved) 18 Item 5 - Other Information 18 Item 6 - Exhibits 18 SIGNATURES 18 2 PART I ITEM 1 - FINANCIAL STATEMENTS THE X-CHANGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2010 and December 31, 2009
(Unaudited) (Audited) September 30, December 31, 2010 2009 ------------ ------------ ASSETS CURRENT ASSETS Cash on hand and in bank $ 39 $ 1,080 ------------ ------------ TOTAL CURRENT ASSETS 39 1,080 ------------ ------------ OTHER ASSETS Prepaid debt financing fees, net of accumulated amortization of approximately $29,333 and $21,332 -- 8,001 ------------ ------------ TOTAL OTHER ASSETS -- 8,001 ------------ ------------ TOTAL ASSETS $ 39 $ 9,081 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Convertible debenture payable, net of unamortized discount $ 286,225 $ 249,532 Notes payable to shareholder 784,791 723,926 Accounts payable - trade 32,641 1,245 Accrued interest payable 164,872 97,134 ------------ ------------ TOTAL CURRENT LIABILITIES 1,268,529 1,071,837 ------------ ------------ TOTAL LIABILITIES 1,268,529 1,071,837 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock - $0.001 par value 3,750,000 shares authorized none issued and outstanding -- -- Common stock - $0.001 par value 37,500,000 shares authorized 5,513,000 and 5,317,878 shares issued and outstanding 5,513 5,318 Additional paid-in capital 17,920,140 17,830,579 Accumulated deficit (19,194,143) (18,898,653) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,268,490) (1,062,756) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 39 $ 9,081 ============ ============
The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 3 THE X-CHANGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Nine and Three months ended September 30, 2010 and 2009 (UNAUDITED)
Nine months Nine months Three months Three months ended ended ended ended September 30, September 30, September 30, September 30, 2010 2009 2010 2009 ---------- ---------- ---------- ---------- REVENUES - net of returns and allowances $ -- $ -- $ -- $ -- COST OF SALES -- -- -- -- ---------- ---------- ---------- ---------- GROSS PROFIT -- -- -- -- ---------- ---------- ---------- ---------- OPERATING EXPENSES General and administrative expenses 93,302 14,988 28,762 13,712 ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES 93,302 14,988 28,762 13,712 ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS (93,302) (14,988) (28,762) (13,712) OTHER INCOME (EXPENSE) Interest expense, including amortization of financing fees and note discounts (202,188) (695,098) (38,621) (58,331) Gain on extinguishment of debt -- 464,975 -- -- ---------- ---------- ---------- ---------- TOTAL OTHER INCOME (EXPENSE) (202,188) (230,123) (38,621) (58,331) ---------- ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES (295,490) (245,111) (67,383) (72,043) PROVISION FOR INCOME TAXES -- -- -- -- ---------- ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS (295,490) (245,111) (67,383) (72,043) DISCONTINUED OPERATIONS, NET OF INCOME TAXES 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) -- -- ---------- ---------- ---------- ---------- OTHER COMPREHENSIVE INCOME -- -- -- -- ---------- ---------- ---------- ---------- COMPREHENSIVE LOSS $ (295,490) $ (278,611) $ (67,383) $ (72,043) ========== ========== ========== ========== Net loss per weighted-average share of common stock outstanding, calculated on Net Loss - basic and fully diluted From continuing operations $ (0.05) $ (0.04) $ (0.01) $ (0.01) From discontinued operations (0.00) (0.01) (0.00) (0.00) ---------- ---------- ---------- ---------- Total $ (0.05) $ (0.05) $ (0.01) $ (0.01) ========== ========== ========== ========== Weighted-average number of shares of common stock outstanding 5,452,963 5,312,644 5,513,000 5,317,878 ========== ========== ========== ==========
The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 4 THE X-CHANGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2010 and 2009 (UNAUDITED)
Nine months Nine months ended ended September 30, September 30, 2010 2009 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the period $(295,490) $(278,611) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 76,694 501,444 Gain on extinguishment of debt -- (464,975) Interest expense capitalized as principal -- 118,400 Interest expense paid with common stock 57,756 568 Increase (Decrease) in Accounts payable and other 31,396 1,245 Accrued interest payable 67,738 74,683 --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (61,906) (47,246) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES -- -- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received on related party notes payable 60,865 28,743 Cash received on notes payable, net of fees paid -- -- --------- --------- NET CASH USED IN FINANCING ACTIVITIES 60,865 28,743 --------- --------- DECREASE IN CASH (1,041) (18,503) Cash at beginning of period 1,080 18,503 --------- --------- CASH AT END OF PERIOD $ 39 $ -- ========= ========= SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID Interest paid for the period $ -- $ -- ========= ========= Income taxes paid for the period $ -- $ -- ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Conversion of Debenture Payable into Common Stock $ 32,000 $ 1,550 ========= =========
The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 5 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2010 and December 31, 2009 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. The Company was originally organized to seek merger and/or acquisition candidates and engaged in various transactions since our inception. As of December 31, 2008, the Company had disposed of all of the assets and operating activities. 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 was reflected in the Company's 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, the Company formed the wholly-owned subsidiaries - Caballo Blanco Communications, Ltd. and Commerce Services, Inc. - as Colorado corporations to conduct these operations. As of September 30, 2010, no activities have taken place in either subsidiary. On September 8, 2010, the Company abandoned this business plan. On August 16, 2010, the Company announced the pending acquisition of IPTV World, a company based in Los Angeles with hosting facilities in the One Wilshire carrier hotel. This acquisition was subject to the execution of a definitive agreement and the completion of appropriate due diligence by all parties On September 8, 2010, the Company announced the pending acquisition of Genesis Key, Inc., based in Washington, DC. This acquisition was subject to the execution of a definitive agreement and the completion of appropriate due diligence by all parties. On September 20, 2010, the Company announced that the Company has signed an agreement to acquire Cybertel USA, Inc., based in Los Angeles, California, for $800,000 cash payable to the shareholders of Cybertel USA in exchange for 100% of the issued and outstanding stock of Cybertel USA, Inc. The closing of this transaction remains subject to the completion of appropriate due diligence by all parties. On October 7, 2010, the Company announced that it was unable to conclude definitive agreements in all previously announced acquisitions of IPTV World, Genesis Key, Inc. and Cybertel USA and will not be acquiring these companies. On October 7, 2010, the Company announced that it has signed an agreement in principle to acquire 21-Century Silicon, Inc., based in Richardson, Texas (21-Century Silicon). The terms of the acquisition is anticipated to involve a change in control of the Company and the appointment of new directors. As of the date of this report, this transaction remains subject to the completion of all appropriate due diligence and has not closed. On November 8, 2010, 21-Century executed a note payable to the Company in the amount of approximately $28,500, bearing interest at 10.0% for working capital advances made by the Company on 21-Century's behalf. (Remainder of this page left blank intentionally) 6 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2010 and December 31, 2009 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, 2009. 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, 2010. NOTE C - GOING CONCERN UNCERTAINTY As of September 30, 2010, the Company has no operations, limited cash on hand, no operating assets and has 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 intends to locate and combine with an existing, privately-held company which is profitable or, in management's view, has growth potential, irrespective of the industry in which it is engaged. Such combination may be structured as a merger, consolidation, exchange of the Company's common stock for stock or assets or any other form which will result in the combined enterprise's becoming a publicly-held corporation. 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. 7 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2010 and December 31, 2009 NOTE C - GOING CONCERN UNCERTAINTY - CONTINUED 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 3,750,000 shares of preferred stock and 37,500,000 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. 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. 8 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2010 and December 31, 2009 NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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. The Company uses the asset and liability method of accounting for income taxes. At September 30, 2010 and December 31, 2009, 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). 9 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2010 and December 31, 2009 7. Income (Loss) per share - continued 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 September 30, 2010 and 2009, 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 September 30, 2010, South Beach or its affiliates have advanced an aggregate of approximately $116,600 against this note. NOTE F - INCOME TAXES The components of income tax (benefit) expense for each of nine months ended September 30, 2010 and 2009, respectively, are as follows: Nine months Nine months ended ended September 30, September 30, 2010 2009 ------- ------- Federal: Current $ -- $ -- Deferred -- -- ------- ------- -- -- ------- ------- State: Current -- -- Deferred -- -- ------- ------- -- -- ------- ------- Total $ -- $ -- ======= ======= As of September 30, 2010, the Company has a net operating loss carryforward(s) of approximately $4,000,000 to offset future taxable income. The amount and availability of any net operating loss carryforwards will be subject to the limitations set forth in the Internal Revenue Code. Such factors as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of any net operating loss carryforward(s). 10 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 2010 and December 31, 2009 NOTE F - INCOME TAXES - CONTINUED The Company's income tax expense for each of the nine month periods ended September 30, 2010 and 2009, respectively, are as follows:
Nine months Nine months ended ended September 30, September 30, 2010 2009 ----------- ----------- Statutory rate applied to income before income taxes $ (100,000) $ (95,000) Increase (decrease) in income taxes resulting from: State income taxes -- -- Non-deductible conversion discounts 23,000 171,000 Gain on extinguishment of debt -- 1,019,000 Other, including reserve for deferred tax asset and application of net operating loss carryforward 77,000 (1,095,000) ----------- ----------- Income tax expense $ -- $ -- =========== ===========
The Company's only temporary difference as of September 30, 2010 and December 31, 2009, respectively, relates to the Company's net operating loss pursuant to the applicable Federal Tax Law. As of September 30, 2010 and December 31, 2009, respectively, the deferred tax asset is as follows:
September 30, December 31, 2010 2009 ----------- ----------- Deferred tax assets Net operating loss carryforwards $ 1,349,000 $ 1,272,000 Less valuation allowance (1,349,000) (1,272,000) ----------- ----------- Net Deferred Tax Asset $ -- $ -- =========== ===========
During the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively, the valuation allowance against the deferred tax asset increased (decreased) by approximately $77,000 and $(1,025,000). NOTE G - COMMON STOCK TRANSACTIONS Stock split Effective August 9, 2010, Company's Board of Directors declared a 1-for-20 reverse split of the issued and outstanding shares of common stock. The reverse stock split was implemented by adjusting the stockholders' book entry accounts to reflect the number of shares held by each stockholder following the split. No fractional shares were issued in connection with the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share. The reverse stock split reduced the number of the Company's issued and outstanding shares of common stock from 136,089,746 to approximately 5,513,000. The effect of this action is reflected in the accompanying financial statements as of the first day of the first period presented. Stock issuances In January 2009, the Company issued an aggregate 2,118,506 shares of restricted, unregistered common stock (approximately 105,925 post-reverse split shares) 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. 11 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 2010 and December 31, 2009 NOTE G - COMMON STOCK TRANSACTIONS Stock issuances - continued 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 (approximately 195,122 post-reverse split 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 September 30, 2010. In conjunction with conversions from 2008 through 2010, a continued disagreement exists between LCII and the Company's management over the requirements of the contractual mandatory exercise of approximately 475,500 warrants related to the conversion of an aggregate $45,500 of the debenture balance. The disputed balance on this transaction is approximately $475,500 due to the Company on contractually exercisable warrants by LCII. 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. NOTE H - 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. 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). 12 THE X-CHANGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 2010 and December 31, 2009 NOTE H - CONTINGENCIES - CONTINUED 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 pre-split shares of the Company's common stock held by Samson, 7,196,429 pre-split shares of the Company's common stock held by Ironman and 2,321,428 pre-split 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 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 (approximately 2,550,000 post-reverse split shares) of its 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 I - SUBSEQUENT EVENTS On October 7, 2010, the Company announced that it has signed an agreement in principle to acquire 21-Century Silicon, Inc., based in Richardson, Texas (21-Century Silicon). As of the date of this report, this transaction remains subject to the completion of all appropriate due diligence items and has not closed. On November 8, 2010, 21-Century executed a note payable to the Company in the amount of approximately $28,500, bearing interest at 10.0% for working capital advances made by the Company on 21-Century's behalf. Management has evaluated all other activity of the Company through November 22, 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. 13 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", "aims" 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. A portion of the note balance and accrued, and unpaid, interest was converted to 51,000,000 pre-split shares (approximately 2,550,000 post-split 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 pre-split shares of the Company's common stock held by Samson, 7,196,429 pre-split shares of the Company's common stock held by Ironman and pre-split 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; 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, 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. 14 (3) PLAN OF BUSINESS On August 16, 2010, the Company announced the pending acquisition of IPTV World, a company based in Los Angeles with hosting facilities in the One Wilshire carrier hotel. This acquisition was subject to the execution of a definitive agreement and the completion of appropriate due diligence by all parties On September 8, 2010, the Company announced the pending acquisition of Genesis Key, Inc., based in Washington, DC. This acquisition was subject to the execution of a definitive agreement and the completion of appropriate due diligence by all parties. On September 20, 2010, the Company announced that the Company has signed an agreement to acquire Cybertel USA, Inc., based in Los Angeles, California, for $800,000 cash payable to the shareholders of Cybertel USA in exchange for 100% of the issued and outstanding stock of Cybertel USA, Inc. The closing of this transaction remains subject to the completion of appropriate due diligence by all parties. On October 7, 2010, the Company announced that it was unable to conclude definitive agreements in all previously announced acquisitions of IPTV World, Genesis Key, Inc. and Cybertel USA and will not be acquiring these companies. On October 7, 2010, the Company announced that it has signed an agreement in principle to acquire 21-Century Silicon, Inc., based in Richardson, Texas (21-Century Silicon). The terms of the acquisition is anticipated to involve a change in control of the Company and the appointment of new directors. As of the date of this report, this transaction remains subject to the completion of all appropriate due diligence and has not closed. On November 8, 2010, 21-Century executed a note payable to the Company in the amount of approximately $28,500, bearing interest at 10.0% for working capital advances made by the Company on 21-Century's behalf. (4) RESULTS OF OPERATIONS The Company had no revenue for either of the nine or three month periods ended September 30, 2010 or 2009, respectively. General and administrative expenses for the nine months ended September 30, 2010 and 2009 were approximately $93,000 and 15,000, respectively. The increase in the 2010 expenditures over the 2009 costs was due to the Company's effort to become and remain current with its reporting requirements under the Securities Exchange Act of 1934, as amended. Since the 1st quarter of Calendar 2009, the Company has been virtually dormant due to the foreclosure of the Company's former wholly-owned subsidiary, AirGATE Technologies, Inc. Subsequent to that date, management has focused on having the Company remain current with its reporting obligations under the Securities Exchange Act of 1934, as amended. The Company recognized interest accruals, amortization of debt financing fees and accretion of debt discounts of approximately $77,000 and $695,000 during the nine months ended September 30, 2010 and 2009, respectively. The Company's convertible debenture with La Jolla Cove Investors, Inc. matured in August 2010. This debenture is discussed more fully in our Annual Report on Form 10-K for the year ended December 31, 2009. 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 nine month periods ended September 30, 2010 and 2009 were $(0.05) and $(0.05) based on the weighted-average shares issued and outstanding at the end of each respective period as adjusted for the August 2010 1-for-20 reverse stock split. 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. (5) LIQUIDITY AND CAPITAL RESOURCES At September 30, 2010 and December 31, 2009, respectively, the Company had a working capital of approximately $(1,268,000) and $(1,071,000). 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 15 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 3,750,000 shares of preferred stock and 37,500,000 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. 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. 16 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 As of September 30, 2010, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (Certifying Officers), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15 promulgated under the Exchange Act. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Certifying Officers concluded that as of September 30, 2010, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in our reports is recorded, processed, summarized and reported within the time periods specified by the SEC due to a inherent weakness in our internal controls over financial reporting due to our status as a shell corporation and having a sole officer and director. However, our Certifying Officers believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the respective periods presented. (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 September 30, 2010 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 1A - RISK FACTORS Not applicable 17 ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None ITEM 3 - DEFAULTS ON SENIOR SECURITIES None. ITEM 4 - (REMOVED AND RESERVED) 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. Dated: November 22, 2010 By: /s/ Haviland Wright ---------------------------------- Haviland Wright Chairman, Chief Executive Officer, Acting Chief Financial Officer and Director 18