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EX-31.1 - SECTION 302 CERTIFICATION - OMNICANNA HEALTH SOLUTIONS, INC.ex31-1.txt
EX-32.1 - SECTION 906 CERTIFICATION - OMNICANNA HEALTH SOLUTIONS, INC.ex32-1.txt

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    Form 10-K
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(Mark one)
[X] Annual  Report Under Section 13 or 15(d) of The  Securities  Exchange
    Act of 1934

    For the fiscal year ended December 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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        Securities registered pursuant to Section 12 (b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock - $0.001 par value

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Indicate by check mark if the  registrant is a well known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]

Indicate by check mark whether the registrant has (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 the Company 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 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 during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post files). Yes [ ] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

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 [ ]

The  aggregate  market  value of voting and  non-voting  common  equity  held by
non-affiliates  as of April 15,  2010 was  approximately  $1,118,419  based upon
44,736,750  shares held by  non-affiliates  and a closing market price of $0.025
per share on April 14, 2010, as reported on www.bigcharts.com.

As of April 15, 2010, there were  136,089,746  shares of Common Stock issued and
outstanding.

THE X-CHANGE CORPORATION INDEX TO CONTENTS Page Number ----------- PART I Item 1 Business 3 Item 1A Risk Factors 6 Item 1B Uncleared Staff Comments 6 Item 2 Properties 6 Item 3 Legal Proceedings 6 Item 4 Submission of Matters to a Vote of Security Holders 6 PART II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 7 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A Quantitative and Qualitative Disclosures About Market Risk 14 Item 8 Financial Statements and Supplementary Data 14 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Item 9A Controls and Procedures 15 PART III Item 10 Directors, Executive Officers and Corporate Governance 16 Item 11 Executive Compensation 19 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 19 Item 13 Certain Relationships and Related Transactions, and Director Independence 20 Item 14 Principal Accountant Fees and Services 20 PART IV Item 15 Exhibits and Financial Statement Schedules 21 SIGNATURES 44 2
In this filing, the terms "we", "our", "us", "X-Change", and/or "Company" refer to the Registrant, The X-Change Corporation. CAUTION REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this annual 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; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; and other factors referenced in this and previous filings. Given these uncertainties, readers of this Form 10-K 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. PART I ITEM 1 - BUSINESS 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). 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. On February 17, 2010, the Company entered into a Contract of Sale with Nydia Del Valle to acquire 100% of the issued and outstanding stock of Connected Media Technologies, Inc. (Connected), a Delaware Corporation, in exchange for 400,000,000 shares of restricted, unregistered common stock of the Company. A copy of the Contract of Sale was filed as an Exhibit to a Current Report on Form 8-K filed on or about February 22, 2010. At the time, Connected represented that it owned 52% of Global Broadcasting Systems, LLC and 52% of Cinemania TV, LLC. 3
On March 10, 2010, we discovered certain improprieties in Connected Media Technologies, Inc.'s, its officers and directors' representations of its assets owned and other matters in the above proposed acquisition transaction and took the appropriate steps to remove the previously seated executive officers and directors affiliated with the acquisition target, Connected Media Technologies, Inc. We did not issue the aforementioned 400 million shares of its common stock for this transaction and will not be acquiring any assets from Connected Media Technologies, Inc. We are currently classified as a shell company as defined in Rule 405 under the Securities Act of 1933, or the Securities Act, and Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act. As a shell company, we have no operations and no or nominal assets. Our principal office is located at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243 and our telephone number is (972) 386-7350. Currently, the Company has no known exposures to any current or proposed climate change legislation which could negatively impact the Company's operations or require capital expenditures to become compliant. Our current business plan is discussed below. OUR IMMEDIATE PAST BUSINESS OPERATIONS Our former business plan was focused on furthering the success of our former wholly-owned subsidiary AirGATE Technologies, Inc. (AirGATE). AirGATE was a solution-based company specializing in wireless technologies including radio frequency identification ("RFID") for the business-to-business customer. AirGATE was focused on wireless products and services in vertical markets, primarily in the oil & gas industry, that differ from the more widely known RFID supply chain model. Our former business plan emphasized generating royalty payments and long-term transaction based revenues through its customers. The Company had designed and developed intellectual property and patents, for the manufacturing and oil and gas vertical markets. Most of AirGATE's products and other services were developed on behalf of its multi-billion dollar customers. AirGATE had developed a downhole radar tool for Hexion Specialty Chemicals, Inc.; an ultra-wide band traveling block solution to determine real-time measurement of drilling speed and depths; and a drill pipe and down -hole tool tagging system utilizing surface acoustic wave (SAW) technology. Former management was of the opinion that other potential clients included national and international oil and gas companies that manufacture down- hole products for oil wells such as drill collars, jars, stabilizers, mud motors, and other components. AirGATE products were designed to provide for asset tracking, including pedigree history of pipe/tools, and real time data analysis of down-hole and equipment conditions. AirGATE also developed SAW tags for a variety of other industries and applications. In November 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. On December 15, 2008, 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. had a security interest in the shares of stock of our then 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. Upon an event of default under the La Jolla Cove Investors, 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. La Jolla Cove has not requested the default rate or sent a notice of acceleration. 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, which was 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 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. 4
On May 28, 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 to the amended conversion features of the Convertible Promissory Note between the Company, AirGATE and Melissa CR 364, LTD., a portion of which was subsequently assigned to K & D. The issuance was originally approved by the Board in December 2008, but was not accepted by K & D until May 26, 2009. This issuance is reflected in the accompanying financial statements as of the effective date. OUR CURRENT BUSINESS PLAN 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 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 5
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. EMPLOYEES The Company currently has no employees. Management of the Company expects to use consultants, attorneys and accountants as necessary, and does not anticipate a need to engage any full-time employees until such time that the aforementioned business opportunities become successful. ITEM 1A - RISK FACTORS Not required. ITEM 1B - UNCLEARED STAFF COMMENTS None ITEM 2 - PROPERTIES We currently maintain a mailing address at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243. Our telephone number is (972) 386-7350. Other than this mailing address, we do not currently maintain any other office facilities, and does not anticipate the need for maintaining office facilities at any time in the foreseeable future as all of our officers and directors are employed full-time in other business ventures. We pay no rent or other fees for the use of the mailing address as these offices are used virtually full-time by other businesses of the Company's controlling stockholder. It is likely that the Company will not establish an office until it has completed a business acquisition transaction, but it is not possible to predict what arrangements will actually be made with respect to future office facilities. ITEM 3 - LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Reserved. 6
PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is currently quoted on the NASDAQ OTC Bulletin Board, under the trading symbol "XCHC." As of April 15, 2010, there were approximately 142 registered holders of record of the common stock. The following table sets forth the range of the high and low bid prices per share of our common stock as reported on www.bigcharts.com during the last two calendar years for the period indicated. High Low ------ ------ Year ended December 31, 2008 Quarter ended March 31 $0.25 $0.096 Quarter ended June 30 $0.135 $0.06 Quarter ended September 30 $0.09 $0.025 Quarter ended December 31 $0.03 $0.001 Year ended December 31, 2009 Quarter ended March 31 $0.002 $0.001 Quarter ended June 30 $0.013 $0.001 Quarter ended September 30 $0.09 $0.01 Quarter ended December 31 $0.06 $0.01 Year ended December 31, 2010 Quarter ended March 31 $0.029 $0.01 DIVIDENDS We have never paid any cash dividends on our common stock. We intend to retain and use any future earnings for the development and expansion of business and do not anticipate paying any cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES We believe that all of the following offerings and sales were exempt from the registration requirements of the Securities Act of 1933 under Section 4(2) thereunder. 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 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. 7
COMMON STOCK WARRANTS In conjunction with, and as a component of, certain debt issuances, the Company has issued an aggregate 15,819,352 and 46,033,638 warrants to purchase an equivalent number of shares of common stock at prices between $0.07 and $1.00 per share as of December 31, 2009 and 2008, respectively. Number of Weighted Warrant Average Shares Price ------ ----- Balance at January 1, 2008 16,780,002 $ 0.70 Issued 29,253,636 $ 0.16 Exercised -- -- Expired -- -- ------------ Balance at December 31, 2008 46,033,638 $ 0.36 Issued -- -- Exercised -- -- Surrendered at debt cancellation (30,214,286) $ 0.22 Expired -- -- ------------ Balance at December 31, 2009 15,819,352 $ 0.63 ============ As of December 31, 2009, the warrants break down as follows: # warrants exercise price ---------- -------------- 3,404,000 $ 0.07 630,000 $ 0.20 200,000 $ 0.40 3,860,351 $ 0.60 3,725,001 $ 0.84 4,000,000 $ 1.00 ------------ 15,819,352 $ 0.63 ============ # warrants expiring in ---------- ----------- 4,000,000 2010 569,350 2011 7,650,002 2012 630,000 2017 2,970,000 2018 ------------ 15,819,352 ============ On May 28, 2009, as previously discussed, 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). In this Agreement, approximately 30,214,286 warrants were cancelled on that date. REPURCHASES OF EQUITY SECURITIES We did not purchase any of our equity securities during 2009 or 2008. EQUITY COMPENSATION During 2009 and 2008, respectively, we issued -0- and 600,000 shares of our common stock to consultants, in the aggregate. These issuances were all in exchange for services rendered. These issuances were not approved by a vote of our security holders. We may from time to time issue additional shares to our consultants, employees or directors at the discretion of our board of directors. 8
During 2007, the Board of Directors approved and adopted the 2007 Stock Incentive Plan allowing for stock options to be issued to employees, directors and consultants of up to 6,000,000 shares in the aggregate. The Plan was not presented to nor approved by a vote of the Company's stockholders and provides for the issuance of incentive stock options and non-statutory options for common stock to the Company's employees, directors and consultants. The exercise price of each option may not be less than the trading price of the Company's stock on the date of the option grant. The options generally vest over a four year period and have a maximum term of ten years. Upon the foreclosure upon our operating subsidiary, AirGATE, all outstanding stock options were cancelled. No options were exercised from their initial issuance through December 31, 2008. COMMON STOCK Our authorized capital stock consists of 750,000,000 shares of $0.001 par value common stock and 75,000,000 shares of $0.001 par value preferred stock. Each share of common stock entitles a stockholder to one vote on all matters upon which stockholders are permitted to vote. No stockholder has any preemptive right or other similar right to purchase or subscribe for any additional securities issued by us, and no stockholder has any right to convert the common stock into other securities. No shares of common stock are subject to redemption or any sinking fund provisions. All the outstanding shares of our common stock are fully paid and non-assessable. Subject to the rights of the holders of the preferred stock, if any, our stockholders of common stock are entitled to dividends when, as and if declared by our board from funds legally available therefore and, upon liquidation, to a pro-rata share in any distribution to stockholders. We do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. Pursuant to our Articles of Incorporation, our board has the authority, without further stockholder approval, to provide for the issuance of up to 75,000,000 shares of our preferred stock in one or more series and to determine the dividend rights, conversion rights, voting rights, rights in terms of redemption, liquidation preferences, the number of shares constituting any such series and the designation of such series. Our board has the power to afford preferences, powers and rights (including voting rights) to the holders of any preferred stock preferences, such rights and preferences being senior to the rights of holders of common stock. No shares of our preferred stock are currently outstanding. Although we have no present intention to issue any shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rights to purchase such shares, may have the effect of delaying, deferring or preventing a change in control of our company. PROVISIONS HAVING A POSSIBLE ANTI-TAKEOVER EFFECT Our Articles of Incorporation and Bylaws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of our board and in the policies formulated by our board and to discourage certain types of transactions which may involve an actual or threatened change of our control. Our board is authorized to adopt, alter, amend and repeal our Bylaws or to adopt new Bylaws. In addition, our board has the authority, without further action by our stockholders, to issue up to 10 million shares of our preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The issuance of our preferred stock or additional shares of common stock could adversely affect the voting power of the holders of common stock and could have the effect of delaying, deferring or preventing a change in our control. PREFERRED STOCK The Company is authorized to issue up to a total of 75,000,000 shares of $0.001 par value Preferred Stock. The Company's Board of Directors has designated 5,000,000 shares as "Series A Convertible Preferred Stock". The Company is under no obligation to pay dividends or to redeem the Series A Convertible Preferred Stock. This series of stock is convertible into 10 shares of Common Stock at the option of the shareholder or upon automatic conversion. In the event of any liquidation, dissolution or winding-up of the Company, the holders of outstanding shares of Series A Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, before any payment shall be made to or set aside for holders of the Common Stock, at an amount of $1 per share. As of December 31, 2009 and 2008, respectively, there were no shares of preferred stock issued and outstanding. RESTRICTED SECURITIES As of December 31, 2009, we had approximately 83,573,345 shares of common stock which may be considered to meet the definition and requirements of "restricted securities" as defined in Rule 144. Generally, restricted securities can be resold under Rule 144 once they have been held for the required statutory period, provided that the securities satisfies the current public information requirements of the Rule. 9
TRANSFER AGENT Our independent stock transfer agent is Signature Stock Transfer, Inc. Their address is 2220 Coit Road, Suite 480, PMB 317, Plano, Texas 75075. Their contact numbers are (972) 612-4120 for voice calls and (972) 612-4122 for fax transmissions. REPORTS TO STOCKHOLDERS The Company intends to remain compliant with its obligations under the Exchange Act and, therefore, plans to furnish its stockholders with an annual report for each fiscal year ending December 31 containing financial statements audited by its registered independent public accounting firm. In the event the Company enters into a business combination with another company, it is the present intention of management to continue furnishing annual reports to stockholders. Additionally, the Company may, in its sole discretion, issue unaudited quarterly or other interim reports to its stockholders when it deems appropriate. The Company intends to maintain compliance with the periodic reporting requirements of the Exchange Act. ITEM 6 - SELECTED FINANCIAL DATA Not applicable ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1) CAUTION REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this annual 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; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; and other factors referenced in this and previous filings. Given these uncertainties, readers of this Form 10-K 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. 10
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). 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. 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. 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. (3) RESULTS OF OPERATIONS The Company had no separately earned revenue, except for nominal interest income, for either of the years ended December 31, 2009 or 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 each of the years ended December 31, 2009 and 2009 and 2008 were approximately $41,000 and $26,000, respectively. The increase in 2009 expenditures relate, principally, to 4th quarter 2009 expenses related to professional and consulting fees related to the preparation, audit and filing of the Company's financial statements and Annual Report on Form 10-K for the year ended December 31, 2008. The Company recognized interest accruals, amortization of debt financing fees and accretion of debt discounts of approximately $744,000 and $1,846,000 during each of the years ended December 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 the Notes to our Financial Statements contained elsewhere in this Annual Report on Form 10-K. 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). 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). 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. The Company recognized a gain on extinguishment of debt of approximately $465,000 as a result of these actions. 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. 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 years ended December 31, 2009 and 2008 were $(0.00) and $(0.07) 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. 11
(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 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 December 31, 2009 and 2008, respectively, the Company had a working capital of approximately $(1,071, 000) and $(1,626,000). Our business plan announced in March 2010 will require additional capital; however, our management team has not fully developed the projections necessary to disclose our future needs with an appropriate degree of accuracy at this time. However, there is no assurance that we will be successful in the development or operation of the business ventures we anticipate developing. 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. 12
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. 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. 13
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions. Interest rate risk is the risk that the Company's earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any. Financial risk is the risk that the Company's earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The required financial statements begin on page F-1 of this document. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 12, 2007, the Company dismissed its certifying accountant, Robison, Hill & Co. ("Robison, Hill"). Robison, Hill's reports on the financial statements for the years ended December 31, 2006 and 2005 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles other than with respect to a modification concerning the company continuing as a going concern. The decision to change its certifying accountant was approved by the Company's Board of Directors. During the years ended December 31, 2006 and 2005, and the subsequent interim period through April 12, 2007, the Company has not had any disagreements with Robison, Hill on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. Effective April 19, 2007, the Company's Board of Directors engaged KBA Group, LLP (KBA) as the Company's independent registered public accounting firm. During the two fiscal years ended December 31, 2006 and the subsequent interim period through April 19, 2007, we did not consult with KBA regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, nor did KBA provide written or oral advice to us that was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, or a reportable event. On June 26, 2009, KBA advised the Company's Board of Directors that they had resigned as the Company's independent registered public accounting firm. Effective June 1, 2009, KBA merged with the accounting firm of BKD, LLP. It is the Company's understanding that it did not meet BKD, LLP's audit client acceptance criteria. The audit report of KBA on the Company's financial statements for the year ended December 31, 2007 expressed an unqualified opinion and included an explanatory paragraph relating to the Company's ability to continue as a going concern due to significant recurring losses and other matters. Such audit report did not contain any other adverse opinion or disclaimer of opinion or qualification. The Company and KBA have not, during the Company's two most recent fiscal years or any subsequent period through the date of dismissal, had any disagreement on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to KBA's satisfaction, would have caused KBA to make reference to the subject matter of the disagreement in connection with its reports. On August 17, 2009, the Company engaged S. W. Hatfield, CPA of Dallas, Texas (SWHCPA) as the Company's registered independent public accounting firm to audit the Company's financial statements for the year ended December 31, 2008, and conduct audits and reviews for subsequent periods as required. The Company did not consult with SWHCPA at any time prior to August 17, 2009, including with regard to the Company's two most recent fiscal years ended December 31, 2007, and the subsequent interim periods through the date of this Report, with respect to the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, or any other matters or reportable events set forth in Item 304(a)(1)(v) of Regulation S-K. 14
ITEM 9A - CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES. Our management, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15 promulgated under the Exchange Act as of the end of the period covered by this Annual Report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are effective. 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 CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is defined under the Exchange Act as a process designed by, or under the supervision of, our CEO and CFO and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: - Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; - Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and - Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation. Management's assessment of the effectiveness of the Company's internal control over financial reporting is as of the year ended December 31, 2009. We are currently considered to be a shell company in as much as we have no specific business plans, no operations, revenues or employees. Because we have only one officer and director, the Company's internal controls are deficient for the following reasons, (1) there are no entity level controls because there is only one person serving in the dual capacity of sole officer and sole director, (2) there are no segregation of duties as that same person approves, enters, and pays the Company's bills, and (3) there is no separate audit committee. As a result, the Company's internal controls have an inherent weakness which may increase the risks of errors in financial reporting under current operations and accordingly are deficient as evaluated against the criteria set forth in the Internal Control - Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal controls over financial reporting were not effective as of December 31, 2009. This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this Annual Report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting which internal controls will remain deficient until such time as the Company completes a merger transaction or acquisition of an operating business at which time management will be able to implement effective controls and procedures. 15
PART III ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The directors and executive officers serving the Company are as follows: Name Age Position Held and Tenure ---- --- ------------------------ Haviland Wright 61 President, Chief Executive Officer Acting Chief Financial Officer and Director Fernando Antonio Gomez 51 Executive Vice President, Corporate Secretary and Director Richard T. Steele 62 Director Ron Vigdor 41 Corporate Treasurer and Director The directors named above will serve until the next annual meeting of the Company's stockholders or until any successors are duly elected and have qualified. Directors will be elected for one-year terms at the annual stockholders meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement, of which none currently exists or is contemplated. There is no arrangement or understanding between any of the directors or officers of the Company and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current directors to the Company's board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of the Company's affairs. The sole director and officer will devote his time to the Company's affairs on an as needed basis. There are no agreements or understandings for the officer or director to resign at the request of another person, and he is not acting on behalf of, and will not act at the direction of, any other person. BIOGRAPHICAL INFORMATION Haviland Wright, Ph.D., President & Chief Executive Officer Dr. Wright is an international technology consultant and investor who served as chief development officer for Profitability of Hawaii, a Honolulu-based software development firm. In addition, he is a director of Ventura-based software company, Elixir Technologies Corporation, where he was chairman from 2003 through 2006 and managed a successful turnaround. He also serves as an Independent Director of Boston-based Compass Group of Mutual Funds, managed by MFS, a wholly owned subsidiary of Sun Life of Canada. He was a director of LCD display developer Nano Loa, Inc., based in Kanagawa, Japan, which he founded with LCD pioneer Akihiro Mochizuki. Dr. Wright was formerly chairman and CEO of LCOS (liquid crystal on silicon) display manufacturer Displaytech, Inc. He served as chief scientist and senior vice president of Interleaf, Inc., following Interleaf's acquisition of Avalanche Development Company, an SGML pioneer that he founded in Boulder, Colorado. Dr. Wright received his B.A. degree from the University of Pennsylvania in mathematics and history; his M.B.A. and Ph.D. from the University of Pennsylvania, The Wharton School, where his areas of concentration were accounting and systems sciences. He completed the CPA and CMA accounting certifications, has held faculty positions at the University of Colorado and the University of Denver, and has authored numerous articles for research and industry publications. Fernando Antonio Gomez, Executive Vice President and Corporate Secretary Mr. Gomez is a senior sales and marketing executive with over twenty-five years of experience in broadcasting, cable television, and news media within the United States and international markets. His background includes strategic marketing planning and sales and affiliate relations work throughout his career with Maya Entertainment, Batanga.com, Starmedia/Wanadoo, MSN Latino, Prime Deportiva, C3D Digital, Bravo International, The Weather Channel Latin America, The Inspirational Network, Univision, and Galavision. 16
Richard T. Steele, Director Mr. Steele is President and Chief Executive of Network Distribution Group, Ltd., a Cable Television, Satellite, Broadcast, Media and Internet consulting company, which assists cable television networks with their respective network distribution onto cable television systems, broadcast stations, as well as satellite, and assists start-up internet/media companies with financial planning, funding and distribution. In the past four years, Mr. Steele has become involved with a number of Spanish-language media projects, including a children's cable television network, a cable television shopping channel, a web membership-based enterprise, and an online shopping venture. Ron Vigdor, Treasurer Mr. Vigdor is an entrepreneur and active member of his family's international trading and investment company, where he has worked from a young age. In the late 80's, Vigdor founded an ISP and long-distance calling-card company and gained telecommunications and trade-financing experience in South America and the Caribbean. Vigdor served as lead investor and founding Chairman of the Board of Fort Lauderdale-based Balize, Inc., an early-to-market social-networking venture. He has served in senior executive and directorial capacities at companies around the world. In the last several years, Vigdor has been active in several companies, including the Canadian e-commerce and auction processor Kyozou (www.kyozou.com), GPS vehicle locator system Skyewatch, and safe-baby-bottle manufacturer BornFree, Inc. (www.newbornfree.com). Vigdor is a US citizen, married with children and living in Boca Raton, Florida. INDEMNIFICATION OF OFFICERS AND DIRECTORS. We have the authority under the Nevada General Corporation Law to indemnify our directors and officers to the extent provided for in such statute. Set forth below is a discussion of Nevada law regarding indemnification which we believe discloses the material aspects of such law on this subject. The Nevada law provides, in part, that a corporation may indemnify a director or officer or other person who was, is or is threatened to be made a named defendant or respondent in a proceeding because such person is or was a director, officer, employee or agent of the corporation, if it is determined that such person: * conducted himself in good faith; * reasonably believed, in the case of conduct in his official capacity as a director or officer of the corporation, that his conduct was in the corporation's best interest and, in all other cases, that his conduct was at least not opposed to the corporation's best interests; and * in the case of any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. A corporation may indemnify a person under the Nevada law against judgments, penalties, including excise and similar taxes, fines, settlement, unreasonable expenses actually incurred by the person in connection with the proceeding. If the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification is limited to reasonable expenses actually incurred by the person in connection with the proceeding, and shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the corporation. The corporation may also pay or reimburse expenses incurred by a person in connection with his appearance as witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding. Our Articles of Incorporation provides that none of our directors shall be personally liable to us or our stockholders for monetary damages for an act or omission in such directors' capacity as a director; provided, however, that the liability of such director is not limited to the extent that such director is found liable for (a) a breach of the directors' duty of loyalty to us or our stockholders, (b) an act or omission not in good faith that constitutes a breach of duty of the director to us or an act or omission that involves intentional misconduct or a knowing violation of the law, (c) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, or (d) an act or omission for which the liability of the director is expressly provided under Nevada law. Limitations on liability provided for in our Articles of Incorporation do not restrict the availability of non-monetary remedies and do not affect a director's responsibility under any other law, such as the federal securities laws or state or federal environmental laws. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as executive officers and directors. The inclusion of these provisions in our Articles of Incorporation may have the effect of reducing a likelihood of derivative litigation against our directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of case, even though such an action, if successful, might otherwise have benefitted us or our stockholders. 17
Our Bylaws provide that we will indemnify our directors to the fullest extent provided by Nevada General Corporation Law and we may, if and to the extent authorized by our board of directors, so indemnify our officers and other persons whom we have the power to indemnify against liability, reasonable expense or other matters. Insofar as indemnification for liabilities arising under the Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by such director, officer, or controlling person in connection with the securities being registered, we will (unless in the opinion of our counsel the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of our common stock to file reports regarding ownership of and transactions in our securities with the Securities and Exchange Commissioner and to provide us with copies of those filings. Based solely on our inquiries and absence of any copies received by us and/or a written representation from certain reporting persons, we believe that during the fiscal year ended December 31, 2009 that all eligible persons were not in compliance with the requirements of Section 16(a). CONFLICTS OF INTEREST Our officers and directors are currently involved in other full-time ventures and, accordingly, at the present time, will not devote more than a small portion of his time to the affairs of the Company. There will be occasions when the time requirements of the Company's business may conflict with the demands of the officer's other business and investment activities. Such conflicts may require that the Company attempt to employ additional personnel. There is no assurance that the services of such persons will be available or that they can be obtained upon terms favorable to the Company. INVOLVEMENT ON CERTAIN MATERIAL LEGAL PROCEEDINGS DURING THE PAST FIVE (5) YEARS (1) No director, officer, significant employee or consultant has been convicted in a criminal proceeding, exclusive of traffic violations or is subject to any pending criminal proceeding. (2) No bankruptcy petitions have been filed by or against any business or property of any director, officer, significant employee or consultant of the Company nor has any bankruptcy petition been filed against a partnership or business association where these persons were general partners or executive officers. (3) No director, officer, significant employee or consultant has been permanently or temporarily enjoined, barred, suspended or otherwise limited from involvement in any type of business, securities or banking activities. (4) No director, officer or significant employee has been convicted of violating a federal or state securities or commodities law. (Remainder of this page left blank intentionally) 18
ITEM 11 - EXECUTIVE COMPENSATION The current management and oversight of the Company requires less than four (4) hours per month. As the Company's sole officer and director is engaged in other full-time income producing activities, the Company's sole officer or director has not received any compensation from the Company. In future periods, subsequent to the consummation of a business combination transaction, the Company anticipates that it will pay compensation to its officer(s) and/or director(s). See Certain Relationships and Related Transactions. SUMMARY COMPENSATION TABLE Change in Pension Value and Non-Equity Non-qualified Incentive Deferred All Name and Plan Compen- Other Principal Stock Option Compen- sation Compen- Position Year Salary($) Bonus($) Awards($) Awards($) sation($) Earnings($) sation($) Totals($) -------- ---- --------- -------- --------- --------- --------- ----------- --------- --------- Haviland Wright 2009 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0- President, CEO R. Wayne Duke 2009 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0- Former CEO 2008 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0- 2007 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0- As of December 31, 2009, the Company has no other Executive Compensation issues which would require the inclusion of other mandated table disclosures. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth, as of the date of this Annual Report, the number of shares of Common Stock owned of record and beneficially by executive officers, directors and persons who hold 5% or more of the outstanding Common Stock of the Company. Also included are the shares held by all executive officers and directors as a group. Number of shares Number of shares Beneficial Percent Name and address directly owned indirectly owned ownership of class ---------------- -------------- ---------------- --------- -------- K&D Equity Investment, Inc. (3) 51,000,000 -- 51,000,000 41.35% Midland Trading, Inc. (3) 7,196,429 -- 7,196,429 5.84% South Beach Live, Inc. (3) 7,196,429 -- 7,196,429 5.84% Officers and Directors as a group (4) -0- -- -0- 0.00% ---------- (1) On April 15, 2010, there were 136,089,746 shares of our common stock outstanding and no shares of preferred stock issued and outstanding. Under applicable SEC rules, a person is deemed the "beneficial owner" of a security with regard to which the person directly or indirectly, has or shares (a) the voting power, which includes the power to vote or direct the voting of the security, or (b) the investment power, which includes the power to dispose, or direct the disposition, of the security, in each case irrespective of the person's economic interest in the security. Under SEC rules, a person is deemed to beneficially own securities which the person has the right to acquire within 60 days through the exercise of any option or warrant or through the conversion of another security. (2) In determining the percent of voting stock owned by a person on December 31, 2009 (a) the numerator is the number of shares of common stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the total of (i) the 106,337,307 shares of common stock outstanding on December 31, 2008, and (ii) any shares of common stock which the person has the right to acquire within 60 days upon the exercise of options or 19
warrants or conversion of convertible securities (approximately 3,337,750 shares on the exercise of the LaJolla outstanding warrants and approximately 34,905,488 shares to be issued if there was total conversion of the LaJolla debenture at March 26, 2010, the date of the last debenture conversion notice) - approximately38,243,238 beneficial shares in total. As the Company's common stock is trading below $0.30 per share, LaJolla is not required to convert, nor is the Company obligated to accept any conversion notice. Accordingly, neither the numerator nor the denominator includes the La Jolla shares which may be issued upon the exercise of any options or warrants or the conversion of any other convertible securities in existence as of the date of this filing. (3) The contact address for the listed stockholder is 17120 N. Dallas Parkway, Suite 235, Dallas, TX 75248. (4) Our current sole officer and director does not own any of our equity securities. CHANGES IN CONTROL There are currently no arrangements which may result in a change in control of the Company. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE There are no relationships or transactions between us and any of our directors, officers and principal stockholders. We currently maintain a mailing address at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243. Our telephone number is (972) 386-7350. Other than this mailing address, we do not currently maintain any other office facilities, and does not anticipate the need for maintaining office facilities at any time in the foreseeable future as all of our officers and directors are employed full-time in other business ventures. We pay no rent or other fees for the use of the mailing address as these offices are used virtually full-time by other businesses of the Company's controlling stockholder. DIRECTOR INDEPENDENCE Pursuant to the Company's current structure, we believe that Mr. Steele and Mr. Vigdor meet the requirements of being "independent" as defined in Rule 4200(a)(15) of the NASDAQ Marketplace Rules. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company paid or accrued the following fees in each of the prior two fiscal years to its principal accountant, S. W. Hatfield, CPA (SWHCPA) of Dallas, Texas, KBA Group, LLP (KBA) of Dallas, Texas or Robison, Hill & Company (RHC) of Salt Lake City, UT. Year ended Year ended December 31, December 31, 2009 2008 ------- ------- 1. Audit fees SWH $12,500 $ -- KBA 15,000 83,000 RHC -- 4,800 2. Audit-related fees -- -- 3. Tax fees -- -- 4. All other fees -- -- ------- ------- Totals $27,500 $87,800 ======= ======= 1. Audit fees consist of amounts billed for professional services rendered for the audits of our financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Securities & Exchange Commission and related comfort letters and other services that are normally provided by Robison, Hill & Company or KBA Group LLP, both our former independent accountants, or S. W. Hatfield, CPA, our current independent auditors, in connection with statutory and regulatory filings or engagements. 2. Audit Related fees consist of fees billed for assurance and related services by our principal accountant that are related to the performance of the audit or review of our financial statements and are not reported under Audit Fees. 3. Tax fees consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions. 20
We have considered whether the provision of any non-audit services, currently, in the past or in the future, is compatible with either Robison, Hill & Company, KBA Group, LLC or S. W. Hatfield, CPA maintaining their respective independence and have determined that these services do not compromise their independence. Financial Information System Design and Implementation: Neither Robison, Hill & Company, KBA Group, LLC or S. W. Hatfield, CPA charged the Company any fees for financial information system design and implementation fees. The Company has no formal audit committee. However, the entire Board of Directors (Board) is the Company's defacto audit committee. In discharging its oversight responsibility as to the audit process, the Board obtained from the independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors' independence as required by the appropriate Professional Standards issued by the Public Company Accounting Oversight Board, the U. S. Securities and Exchange Commission and/or the American Institute of Certified Public Accountants. The Board discussed with the auditors any relationships that may impact their objectivity and independence, including fees for non-audit services, and satisfied itself as to the auditors' independence. The Board also discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Company's internal controls. The Company's principal accountants, S. W. Hatfield, CPA, did not engage any other persons or firms other than the principal accountant's full-time, permanent employees. ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES 3.1 Articles of Incorporation. Incorporated herein by reference to Exhibit 3.01(i) on Form 8-K filed on January 23,2008. 3.2 Amended and Restated Bylaws of The X-Change Corporation. Incorporated herein by reference to Exhibit 3.01(ii) on Form 8-K filed on January 23, 2008. 10.1 Promissory Note, dated August 15, 2006, between the X-Change Corporation and Melissa CR 364 Ltd. Incorporated herein by reference to Exhibit 10.01 included with our Current Report on Form 8-K filed with the SEC on August 21, 2006. 10.2 Promissory note, dated August 15, 2008, between the X-Change Corporation and Melissa CR 364 Ltd. Incorporated herein by reference to Exhibit 10.02 included with our Current Report on Form 8-K filed with the SEC on August 21, 2008. 10.3 Securities Purchase Agreement, dated December 4, 2007, by and among X-Change, AirGATE, and Samson Investment Company, Ironman PI Fund (QP), LP, and John Thomas Bridge & Opportunity Fund, LP. Incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on December 10, 2007. 10.4 Securities Purchase Agreement, dated December 4, 2007, by and among X-Change, AirGATE, and Samson Investment Company, Ironman PI Fund (QP), LP, and John Thomas Bridge & Opportunity Fund, LP. Incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on December 10, 2007. 10.5 Form of Senior Secured Convertible Term Note--Tranche A, dated December 4, 2007, by and among X-Change and Samson Investment Company, Ironman PI Fund (QP), LP, and John Thomas Bridge & Opportunity Fund, LP. Incorporated herein by reference to Exhibit 4.2 on Form 8-K filed on December 10, 2007. 10.6 Form of Tranche A Warrant dated December 4, 2007, by and among X-Change and Samson Investment Company, Ironman PI Fund (QP), LP, and John Thomas Bridge & Opportunity Fund, LP. Incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on December 10, 2007. 10.7 Registration Rights Agreement dated December 4, 2007, by and among X-Change and Samson Investment Company, Ironman PI Fund (QP), LP, and John Thomas Bridge & Opportunity Fund, LP, and Tejas Securities Group, Inc. Incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on December 10, 2007. 10.8 Security and Guaranty Agreements dated December 4, 2007 by and among X-Change, AirGATE and Samson Investment Company, Ironman PI Fund (QP), LP, and John Thomas Bridge & Opportunity Fund, LP. Incorporated herein by reference to Exhibits 10.3 and 10.4 respectively on Form 8-K filed on December 10, 2007. 10.9 Amendment No. 1 to the Securities Purchase Agreement, dated July 10, 2008, by and among The X-Change Corporation, a Nevada corporation, and AirGATE Technologies, Inc., a Texas corporation), and Samson Investment Company, a Nevada corporation, Ironman PI Fund (QP), L.P., a Texas limited partnership, and John Thomas Bridge and Opportunity Fund, LP, a Delaware limited partnership. Incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on July 16, 2008. 10.10 Form of Amended and Restated Senior Secured Convertible Term Note - Tranche A, effective December 4, 2007, by and among The X-Change Corporation, a Nevada corporation, and AirGATE Technologies, Inc., a Texas corporation), and Samson Investment Company, a Nevada corporation, Ironman PI Fund (QP), L.P., a Texas limited partnership, and John Thomas Bridge and Opportunity Fund, LP, a Delaware limited partnership. Incorporated herein by reference to Exhibit 4.2 on Form 8-K filed on July 16, 2008. 21
10.11 Form of Senior Secured Convertible Term Note - Tranche B, dated July 10, 2008, by and among The X-Change Corporation, a Nevada corporation, and AirGATE Technologies, Inc., a Texas corporation), and Samson Investment Company, a Nevada corporation, Ironman PI Fund (QP), L.P., a Texas limited partnership, and John Thomas Bridge and Opportunity Fund, LP, a Delaware limited partnership. Incorporated herein by reference to Exhibit 4.3 on Form 8-K filed on July 16, 2008. 10.12 Form of Amended and Restated Tranche A Warrant effective December 4, 2007, by and among The X-Change Corporation, a Nevada corporation, and AirGATE Technologies, Inc., a Texas corporation), and Samson Investment Company, a Nevada corporation, Ironman PI Fund (QP), L.P., a Texas limited partnership, and John Thomas Bridge and Opportunity Fund, LP, a Delaware limited partnership. Incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on July 16, 2008. 10.13 Form of Tranche B Warrant dated July 10, 2008, by and among The X-Change Corporation, a Nevada corporation, and AirGATE Technologies, Inc., a Texas corporation), and Samson Investment Company, a Nevada corporation, Ironman PI Fund (QP), L.P., a Texas limited partnership, and John Thomas Bridge and Opportunity Fund, LP, a Delaware limited partnership. Incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on July 16, 2008. 10.14 Amendment No. 1 to the Registration Rights Agreement dated July 10, 2008, by and among The X-Change Corporation, a Nevada corporation, and AirGATE Technologies, Inc., a Texas corporation), and Samson Investment Company, a Nevada corporation, Ironman PI Fund (QP), L.P., a Texas limited partnership, and John Thomas Bridge and Opportunity Fund, LP, a Delaware limited partnership and Tejas Securities Group, Inc., a Texas corporation. Incorporated herein by reference to Exhibit 10.3 on Form 8-K filed on July 16, 2008. 10.15 Voting Agreement entered into on July 10, 2008, by and among The X-Change Corporation, a Nevada corporation, and AirGATE Technologies, Inc., a Texas corporation), and Samson Investment Company, a Nevada corporation, Ironman PI Fund (QP), L.P., a Texas limited partnership, and John Thomas Bridge and Opportunity Fund, LP, a Delaware limited partnership and certain of The X-Change Corporation's shareholders. Incorporated herein by reference to Exhibit 10.4 on Form 8-K filed on July 16, 2008. 10.16 Amendment to Convertible Promissory Note, dated as of August 22, 2008, by and among The X-Change Corporation, AirGATE Technologies, Inc. and Melissa CR 364 Ltd. Incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on August 28, 2008. 21.1 List of subsidiaries - Not applicable as of December 31, 2009 31.1 Certification of Chief Executive and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Financial Statements follow beginning on page F-1) 22
THE X-CHANGE CORPORATION INDEX TO FINANCIAL STATEMENTS Page ---- REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM F-2 FINANCIAL STATEMENTS Balance Sheets as of December 31, 2009 and 2008 F-3 Statements of Operations and Comprehensive Loss for the years ended December 31, 2009 and 2008 F-4 Statement of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2009 and 2008 F-5 Statements of Cash Flows for the years ended December 31 2009 and 2008 F-6 Notes to Financial Statements F-7 F-1
LETTERHEAD OF S. W. HATFIELD, CPA REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders The X-Change Corporation We have audited the accompanying balance sheet of The X-Change Corporation (a Nevada corporation) as of December 31, 2009 and 2008 and the related statements of operations and comprehensive loss, changes in stockholders' equity (deficit) and cash flows for each of the years ended December 31, 2009 and 2008, respectively. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements referred to above, in our opinion, present fairly, in all material respects, the financial position of The X-Change Corporation as of December 31, 2008 and the results of its operations and cash flows for each of the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note C to the financial statements, the Company has no operations or significant assets and is dependent upon significant stockholders to provide sufficient working capital to maintain the integrity of the corporate entity. These circumstances create substantial doubt about the Company's ability to continue as a going concern and Management's plans in regard to these matters are also described in Note C. The financial statements do not contain any adjustments that might result from the outcome of these uncertainties. /s/ S. W. Hatfield, CPA ------------------------------- S. W. HATFIELD, CPA Dallas, Texas March 31, 2010 (except for Note O as to which the date is April 20, 2010) F-2
THE X-CHANGE CORPORATION BALANCE SHEETS December 31, 2009 and 2008 December 31, December 31, 2009 2008 ------------ ------------ ASSETS CURRENT ASSETS Cash on hand and in bank $ 1,080 $ 18,503 ------------ ------------ TOTAL CURRENT ASSETS 1,080 18,503 ------------ ------------ OTHER ASSETS Prepaid debt financing fees, net of accumulated amortization of approximately $21,332 and $168,507 8,001 914,880 ------------ ------------ TOTAL OTHER ASSETS 8,001 914,880 ------------ ------------ TOTAL ASSETS $ 9,081 $ 933,383 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Convertible debenture payable, net of unamortized discount $ 249,532 $ 137,750 Convertible notes payable, net of unamortized discount -- 834,343 Notes payable to shareholder 723,926 668,239 Accounts payable - trade 1,245 -- Accrued interest payable 97,134 4,600 ------------ ------------ TOTAL CURRENT LIABILITIES 1,071,837 1,644,932 ------------ ------------ TOTAL LIABILITIES 1,071,837 1,644,932 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' 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 (18,898,653) (18,545,328) ------------ ------------ TOTAL STOCKHOLDERS' DEFICIT (1,062,756) (711,549) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,081 $ 933,383 ============ ============ The accompanying notes are an integral part of these financial statements. F-3
THE X-CHANGE CORPORATION STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Years ended December 31, 2009 and 2008 Year ended Year ended December 31, December 31, 2009 2008 ------------ ------------ REVENUES - net of returns and allowances $ -- $ -- COST OF SALES -- -- ------------ ------------ GROSS PROFIT -- -- ------------ ------------ OPERATING EXPENSES General and administrative expenses 40,852 25,832 ------------ ------------ TOTAL OPERATING EXPENSES 40,852 25,832 ------------ ------------ LOSS FROM OPERATIONS (40,852) (25,832) OTHER INCOME (EXPENSE) Interest income -- 3,559 Interest expense (211,503) (725,722) Amortization of financing fees and note discounts (532,445) (1,120,241) Gain on forgiveness of debt 464,975 -- Other -- (4,807) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (278,973) (1,847,211) ------------ ------------ LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES (319,825) (1,873,043) PROVISION FOR INCOME TAXES -- -- ------------ ------------ LOSS FROM CONTINUING OPERATIONS (319,825) (1,873,043) DISCONTINUED OPERATIONS, NET OF INCOME TAXES Loss from discontinued operations, net of provision for income taxes of $-0- and $-0-, respectively -- (1,140,199) Loss on disposition of discontinued operations, net of provision for income taxes of $-0- and $-0-, respectively (33,500) (101,021) ------------ ------------ LOSS FROM DISCONTINUED OPERATIONS (33,500) (1,241,220) ------------ ------------ OTHER COMPREHENSIVE INCOME -- -- ------------ ------------ COMPREHENSIVE LOSS $ (353,325) $ (3,114,263) ============ ============ Net loss per weighted-average share of common stock outstanding, calculated on Net Loss - basic and fully diluted From continuing operations $ (0.00) $ (0.04) From discontinued operations (0.00) (0.03) ------------ ------------ TOTAL $ (0.00) $ (0.07) ============ ============ Weighted-average number of shares of common stock outstanding 106,259,007 43,567,672 ============ ============ The accompanying notes are an integral part of these financial statements. F-4
THE X-CHANGE CORPORATION STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT Years ended December 31, 2009 and 2008 Common Stock Additional --------------------- paid-in Accumulated Shares Amount capital deficit Total ------ ------ ------- ------- ----- Common stock issued for Financing fees 17,202,139 $ 17,202 $ 448,727 $ -- $ 465,929 Services 600,000 600 24,900 -- 25,500 Debenture conversion 3,812,161 3,812 32,705 -- 36,517 Foreclosure on and conversion of subsidiary debt 51,000,000 51,000 459,000 -- 510,000 Stock based compensation earned -- -- 130,299 -- 130,299 Stock based compensation forfeited at foreclosure -- -- (618,816) -- (618,816) Debt discount on convertible notes and debentures payable -- -- 713,599 -- 713,599 Warrants issued for financing fees -- -- 790,163 -- 790,163 Balancing of issued and outstanding stock to transfer agent and historical corporate records (95,128) (95) 95 -- -- Net loss for the year -- -- -- (3,114,263) (3,114,263) ------------ -------- ----------- ------------ ----------- BALANCES AT DECEMBER 31, 2008 104,108,673 104,109 17,729,670 (18,545,328) (711,549) Common stock issued for Debenture conversion 2,118,506 2,118 -- -- 2,118 Balancing of issued and outstanding stock to transfer agent and historical corporate records 110,128 110 (110) -- -- Net loss for the year -- -- -- (353,325) (353,325) ------------ -------- ----------- ------------ ----------- BALANCES AT DECEMBER 31, 2009 106,337,307 $106,337 $17,729,560 $(18,898,653) $(1,062,756) ============ ======== =========== ============ =========== The accompanying notes are an integral part of these financial statements. F-5
THE X-CHANGE CORPORATION STATEMENTS OF CASH FLOWS Years ended December 31, 2009 and 2008 Year ended Year ended December 31, December 31, 2009 2008 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the year $ (353,325) $(3,114,263) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 532,443 1,108,499 Gain on forgiveness of debt (464,975) -- Equity in loss of foreclosed subsidiary -- 1,140,199 Expenses paid with common stock -- 25,500 Interest expense capitalized as principal 118,400 217,758 Interest expense paid with common stock 568 481,517 Loss on foreclosure of subsidiary 101,021 Net cash used by foreclosed subsidiary -- (104,619) (Increase) Decrease in Deferred financing fees and other prepaid expenses -- (258,801) Increase (Decrease) in Accounts payable - trade 1,245 -- Accrued interest payable 92,534 (2,952) ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (73,110) (406,141) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Cash advanced to foreclosed subsidiary -- (2,049,000) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES -- (2,049,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received on sale of common stock -- -- Cash received on notes payable, net of fees paid -- 1,800,000 Cash paid on related party notes payable 55,687 -- Cash paid on convertible debenture principal -- (66,225) ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES 55,687 1,733,775 ----------- ----------- INCREASE (DECREASE) IN CASH (17,423) (721,366) Cash at beginning of period 18,503 739,869 ----------- ----------- CASH AT END OF PERIOD $ 1,080 $ 18,503 =========== =========== SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID Interest paid for the period $ -- $ 4,454 =========== =========== Income taxes paid for the period $ -- $ -- =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Convertible debenture converted to common stock $ 1,550 $ -- =========== =========== The accompanying notes are an integral part of these financial statements. F-6
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 2009 and 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, the Company has disposed of all operating 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 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. For segment reporting purposes, the Company operated in only one industry segment during the periods represented in the accompanying financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole. These financial statements reflect the books and records of the Company as of and for years ended December 31, 2009 and 2008, respectively. Due to the foreclosure on the Company's former subsidiary as of December 31, 2008, there were no intercompany transactions to eliminate in consolidation. F-7
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE C - GOING CONCERN UNCERTAINTY As of December 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. F-8
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 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. Property and Equipment Property and equipment were recorded at cost. Depreciation was calculated on a straight-line basis over the estimated useful lives of five years. Maintenance and repairs are charged to operations as incurred. The Company recorded impairment losses on long-lived assets used in operations when events and circumstances indicate assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. The amount of impairment loss recognized is the amount by which the carrying amounts of the assets exceed the estimated fair values. 3. 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. 4. 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. Revenue Recognition The Company generated revenues through its foreclosed AirGATE subsidiary in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104). Revenue included amounts earned from collaborative agreements and feasibility studies and was comprised of reimbursed research and development costs as well as upfront and milestone payments. Revenue from the sale of products was recognized at the time the product was shipped and the title transferred to customers, provided no continuing obligation existed and there was reasonable assurance of collection. Non-refundable upfront payments received upon execution of collaborative agreements were recorded as deferred revenue and were recognized over the term of the collaborative agreement. Such period generally represented the research and development period set forth in the work plan defined in the respective agreements between the Company and its third-party collaborators. Milestone payments were recognized as revenue upon achievement of the "at risk" milestone events which represent the culmination of the earnings process related to that milestone. These events were generally acknowledged by the customer in a sign-off process. Revenues pursuant to servicing or support agreements were recognized over the term of those contracts and were generally separate from research and development agreements or product delivery agreements. F-9
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 6. 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. 7. Research and Development Research and development costs were expensed as incurred. 8. 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 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. 9. 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. F-10
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 9. Income (Loss) per share - continued 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 December 31, 2009 and 2008, and subsequent thereto, the Company's outstanding stock options, warrants, and convertible debentures are considered to be anti-dilutive due to the Company's net operating loss. 10. 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 - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions. Interest rate risk is the risk that the Company's earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any. Financial risk is the risk that the Company's earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any. NOTE F - CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject us to a concentration of risk, include cash and, in prior periods, accounts receivable. The customers of our former subsidiary, AirGATE, were based in the United States and we were not subject to exchange risk for accounts receivable. The Company maintains its cash in domestic financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, the Company is entitled to aggregate coverage as defined by Federal regulation per account type per separate legal entity per financial institution. During the years ended December 31, 2009 and 2008, and subsequent thereto, respectively, the Company may have, from time-to-time, had deposits in a financial institution with credit risk exposures in excess of statutory FDIC coverage. The Company has incurred no losses as a result of any unsecured credit risk exposures. F-11
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE G - DISCONTINUED OPERATIONS On August 15, 2006, the Company executed a long-term Promissory Note (Melissa Note) with Melissa CR 364 Ltd., a Texas limited partnership (Melissa Ltd.) providing a $1,000,000 line of credit. Melissa Ltd. is managed by a former officer and shareholder of the Company. The Melissa Note had an initial term of 24 months with interest accruing at 10% per annum. Accrued interest under the note was payable quarterly beginning November 1, 2006, and the principal and any remaining accrued interest was due at maturity on August 14, 2008. The Company pledged 100% of the issued and outstanding common stock of AirGATE as collateral for the note. At the discretion of Melissa Ltd, the Melissa Note may be converted into restricted common stock of the Company at any time at an agreed upon conversion rate of $0.825 per share. In addition, the Melissa Note may be prepaid at any time without penalty. At maturity, the Company failed to make the required payment of the entire outstanding principal and accrued interest due under the Melissa Note. On August 22, 2008, the Company, AirGATE and the Melissa Ltd. entered into an Amendment to Promissory Note (the Amendment) amending the Melissa Note. The Amendment extended the maturity date of the Note to December 15, 2008. In connection with the Amendment, AirGATE paid Melissa Ltd. (i) $100,000 to be applied against the outstanding principal of the Melissa Note, (ii) all interest on the Note accrued through August 15, 2008, and (iii) $4,500, representing Melissa Ltd's attorneys' fees and costs in connection with the Amendment. In December 2008, Melissa Ltd. began foreclosure proceedings against its collateral, which included 100% of the Company's holdings in AirGATE, and the right to convert the Melissa Note into restricted, unregistered shares of the Company's common stock. The foreclosure proceeding was consummated on January 16, 2009 and the Company's holdings in AirGATE were forfeited. As the foreclosure was in progress at December 31, 2008 and the ultimate outcome of the action was complete within a determinable period prior to the release of the Company's financial statements; the effect of this foreclosure is reflected in the accompanying financial statements as of December 31, 2008. As of December 31, 2008, the Company has no significant assets or operations. The results of AirGATE's operations for the respective periods presented are reported as a component of discontinued operations in the statements of operations. Additionally, the respective gain or loss incurred on the sale of the Company's operations are also presented separately as a component of discontinued operations. Summarized results of operations for the disposed operations for the period ended December 31, 2008 is as follows: December 31, 2008 ----------- Net sales $ 386,755 =========== Operating income (loss) $(1,076,181) =========== Loss from discontinued operations $(1,140,199) =========== NOTE H - DEFERRED COSTS During Calendar 2008 and prior periods, significant costs were incurred in arranging and placement of various debt financings. The amounts recorded include commissions, underwriter fees, legal fees and an estimated value of warrants issued for services rendered in connection with debt issuances. The valuation techniques used in applying the warrant valuation 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 warrants issued have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the warrant valuations do not necessarily provide a reliable single measure of their fair value. Aggregate net debt issuance costs of approximately $76,694 and $914,880 remained capitalized as of December 31, 2009 and 2008, respectively, inclusive of approximately $68,693 and $531,599 relating to warrants issued in connection with debt. F-12
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE I - DEBT FINANCING ARRANGEMENTS Melissa Note On August 15, 2006, the Company executed a long-term Promissory Note (Melissa Note) with Melissa CR 364 Ltd., a Texas limited partnership (Melissa Ltd.) providing a $1,000,000 line of credit. Melissa Ltd. is managed by a former officer and shareholder of the Company. The Melissa Note had an initial term of 24 months with interest accruing at 10% per annum. Accrued interest under the note was payable quarterly beginning November 1, 2006, and the principal and any remaining accrued interest was due at maturity on August 14, 2008. The Company pledged 100% of the issued and outstanding common stock of AirGATE as collateral for the note. At the discretion of Melissa Ltd, the Melissa Note may be converted into restricted common stock of the Company at any time at an agreed upon conversion rate of $0.825 per share. In addition, the Melissa Note may be prepaid at any time without penalty. The Company valued and recorded an embedded beneficial conversion feature in connection with the Melissa Note of $756,950, and is amortized this amount over the initial two year life of the note resulting in non-cash charges to earnings included in interest expense over a two year period. The amortization expense related to this feature for the year ending December 31, 2008 and 2007 was approximately $243,039 and $386,292, respectively. At maturity, the Company failed to make the required payment of the entire outstanding principal and accrued interest due under the Melissa Note. On August 22, 2008, the Company, AirGATE and the Melissa Ltd. entered into an Amendment to Promissory Note (the Amendment) amending the Melissa Note. The Amendment extended the maturity date of the Note to December 15, 2008 and, in a supplemental Board action, changed the conversion rate to par value ($0.001 per share). In connection with the Amendment, AirGATE paid Melissa Ltd. (i) $100,000 to be applied against the outstanding principal of the Melissa Note, (ii) all interest on the Note accrued through August 15, 2008, and (iii) $4,500, representing Melissa Ltd's attorneys' fees and costs in connection with the Amendment. After the application of the $100,000 principal payment against the outstanding principal under the Note, the outstanding principal owed under the Note was $697,794. Interest payments were due on the 15th of each month beginning September 15, 2008. If either the Company and/or AirGATE completes a corporate financing transaction before December 15, 2008, whereby either the Company and/or AirGATE receives in excess of $300,000 through the issuance of debt or equity or a combination thereof, the Company and/or AirGATE agreed to remit to Melissa Ltd. in payment of the obligations under the Melissa Note, the entire net proceeds of such transaction, or such smaller amount of net proceeds as is necessary to pay the entire outstanding principal amount of the Melissa Note, plus all accrued interest. In December 2008, Melissa Ltd. began foreclosure proceedings against its collateral, which included 100% of the Company's holdings in AirGATE, and the right to convert the Melissa Note into restricted, unregistered shares of the Company's common stock. The foreclosure proceeding was consummated on January 16, 2009 and the Company's holdings in AirGATE were forfeited. Additionally, Melissa Ltd. converted approximately $51,000 of principal on the Melissa Note to 51,000,000 shares of the Company's common stock, concurrent with the maturity date of December 15, 2008. As of December 31, 2009 and 2008, respectively, the outstanding balance on the Melissa Note is approximately $668,239, inclusive of capitalized accrued interest through December 31, 2008. As of December 31, 2009, the Company has accrued interest payable of approximately $71,000 on this note. Interest will continue to accrue at 10% per annum subsequent thereto. South Beach Live, Ltd. Note 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. F-13
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE I - DEBT FINANCING ARRANGEMENTS LCII Debentures During the quarter ending September 30, 2007, the Company entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. ("LCII") providing for two convertible debentures totaling $400,000 with two corresponding sets of non-detachable warrants totaling 4,000,000 shares with an exercise price of $1.00. The convertible debentures accrue interest at 6-1/4% until converted or the expiration of their three year term. The debentures and warrants have mandatory conversion features. These conversion features becomes effective in the first full calendar month after the common stock underlying the debenture is either i) registered under the Securities Act of 1933 (the "Act"), which is at the Company's option, or ii) available by LCII to be resold pursuant to Rule 144 of the Act. If the conversion feature becomes effective, LCII is obliged to convert an average of 10% of the face value of the debenture each calendar month into a variable number of shares of the Company's common stock. The number of shares is determined by a formula where the dollar amount of the debenture being converted is multiplied by eleven, from which the product of the conversion price and ten times the dollar amount of the debenture being converted is then subtracted, all of which is then divided by the conversion price. The conversion price is equal to the lesser of (i) $1.00, or (ii) 80% of the average of the 3 lowest volume weighted average prices during the twenty trading days prior to the conversion election. The Company can prevent conversion if the trading price falls below $0.30 per share on the date LCII elects to convert. Under certain provisions, if LCII does not convert an average of at least 5% of the face value of the debenture, the Company may prepay portions of the debenture. As contractually linked, if LCII converts a portion of the debenture, LCII must also exercise a proportionate amount of the warrants. In the event that the entire $400,000 of the convertible debentures is converted in conjunction with the required exercise of warrants, the Company will receive a total of $4.4 million from LCII. The aggregate number of shares issuable to LCII in this event is dependent on the trading price of the Company's common stock over the term of the conversion process. The Company allocated the proceeds from the debentures between the warrants and the debt based on the estimated relative fair value of the warrants and the debt. The value of the warrants was calculated at $273,634 using the Black-Scholes model and the following assumptions: discount rate of 4.1%, volatility of 156% and expected term of three years. The Company also calculated a beneficial conversion feature totaling $126,366. The Company is amortizing both the warrant value and value attributed to the beneficial conversion feature (total $400,000) over the term of the debentures. This non-cash charge to income is included in interest expense. At December 31, 2009 and 2008, respectively, the outstanding principal amount of convertible debentures totaled approximately $318,225 and $319,775. As of December 31, 2009, a disagreement between LCII and the Company's management over the requirements of the contractual mandatory exercise of approximately 155,500 warrants related to the conversion of approximately $15,500 of the debenture balance into common stock during the period from October 2008 through January 2009. The disputed balance is approximately $1,555,000 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. SIJ Financing On December 4, 2007, the Company entered into a Securities Purchase Agreement ("SPA") with Samson Investment Company ("Samson"), Ironman PI Fund (QP), LP ("Ironman"), and John Thomas Bridge & Opportunity Fund, LP ("Opportunity Fund") ("SIJ Investors"). In addition to the SPA, with each of the SIJ Investors the Company also entered into a Senior Secured Convertible Term Note--Tranche A ("Tranche A Notes") and a Tranche A Warrant ("Tranche A Warrants"). The Company, the SIJ Investors and Tejas Securities Group, Inc. ("Tejas") also executed a Registration Rights Agreement ("RRA"). Finally, the Company and the Investors executed a Security Agreement and a Guaranty Agreement. F-14
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE I - DEBT FINANCING ARRANGEMENTS - CONTINUED SIJ Financing - continued The SPA provides the terms on which the SIJ Investors provided the Company with $1.8 million in cash and the Company in return issuing the Tranche A Notes, Tranche A Warrants and providing certain registration obligations as set forth in the RRA. The SPA also affords the SIJ Investors with preemptive rights. A second, Tranche B, financing is addressed in the SPA and occurred during Calendar 2008 pursuant to the defined terms and conditions. The SIJ Investors provided an additional $1.8 million in cash and the Company issued Tranche B documents substantially similar to the Tranche A Notes and Tranche A Warrants. The Tranche A & B Notes obligate the Company to repay to the SIJ Investors the aggregate principal amount of $1.8 million, together with interest at 8% per annum. Principal on these notes is due five years after issuance. Interest on the notes accrues and is payable quarterly, although the Company has the option to add accrued and unpaid interest to the outstanding principal amount of the notes. The Tranche A & B Notes are convertible at the option of the Investors at a conversion price of $0.20. An automatic conversion feature also exists at this same conversion price, and is applicable upon the Company's achieving certain commercialization milestones. Due to the loss of the Company's operating subsidiary to foreclosure, the commercialization milestones triggering conversion have become moot. As additional consideration for the aggregate $3.6 million cash, the Company issued the SIJ Investors Tranche A & Tranche B Warrants that are exercisable into an aggregate 16,608,929 million shares of the Company's common stock at exercise prices between $0.07 and $0.50 per share. Each issue of warrants is exercisable for a period of five years from the issue date. All shares of the Company's common stock issuable upon conversion of the Tranche A &B Notes and exercise of the Tranche A &B Warrants, as well as shares issuable to Tejas upon exercise of their warrant rights are subject to the RRA. Pursuant to the RRA, the Company agreed to register, at its expense, all such shares upon request of an SIJ Investor, provided that no demand may be made within 180 days of the date of the closing. The obligations of the Company under the Tranche A & B Notes are secured by a lien on and security interest in all of AirGATE Technology Inc.'s assets. The Company allocated the proceeds from the debentures between the warrants and the debt based on the estimated relative fair value of the warrants and the debt. The value of the warrants issued in Calendar 2008 and 2007, respectively, was calculated at approximately $1,025,012 and $740,404 using the Black-Scholes model. The following assumptions were used in these calculations Tranche A Tranche B 2007 2008 -------- -------- Discount rate 3.28% 3.10% Volatility 154.0% 162.0% Expected term 5 years 5 years The Company also calculated a beneficial conversion feature totaling approximately $767,868 and $1,059,596, respectively for the Tranche B Notes issued during 2008 and the Tranche A Notes issued during 2007. The Company is amortizing both the warrant value and value attributed to the beneficial conversion feature over the respective term of the debentures. Additionally, accrued interest is being capitalized to the note on a quarterly basis. As the accrued interest itself is convertible into common shares, additional beneficial conversion amounts are being calculated each quarter and amortized over the remaining term of the debentures. The non-cash charge to income for amortization of both warrant allocation and all beneficial conversion amounts is included in interest expense. F-15
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE I - DEBT FINANCING ARRANGEMENTS - CONTINUED SIJ Financing - continued 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, described above. As a result of the various transactions effected under the Agreement, SIJ surrendered all of their shares in the Company; cancelled and 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. At December 31, 2009 and 2008, the principal amount of these convertible debentures outstanding totaled $-0- and $3,839,358, respectively. The Company incurred debt issuance costs in connection with the SIJ Financing which were recorded at approximately $489,881 and $579,315 during Calendar 2008 and 2007, respectively, including the value of warrants issued in connection with debt placement. NOTE J - INCOME TAXES The components of income tax (benefit) expense for each of the years ended December 31, 2009 and 2008, respectively, are as follows: Year ended Year ended December 31, December 31, 2009 2008 ------- ------- Federal: Current $ -- $ -- Deferred -- -- ------- ------- -- -- ------- ------- State: Current -- -- Deferred -- -- ------- ------- -- -- ------- ------- Total $ -- $ -- ======= ======= F-16
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE J - INCOME TAXES - CONTINUED The Company has a cumulative net operating loss carryforward of approximately $3,700,000 as of December 31, 2009 to offset future taxable income. Subject to current regulations, components of this cumulative carryforward will begin to expire at the end of each fiscal year starting in 2023. The amount and availability of the net operating loss carryforwards may be subject to limitations set forth by the Internal Revenue Code. Factors such 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 the carryforwards. The Company's income tax expense (benefit) for the years ended December 31, 2009 and 2008, respectively, differed from the statutory federal rate of 34 percent as follows: Year ended Year ended December 31, December 31, 2009 2008 ----------- ----------- Statutory rate applied to loss before income taxes $ (120,000) $(1,059,000) Increase (decrease) in income taxes resulting from: State income taxes -- -- Unconsolidated equity in loss of foreclosed subsidiary -- 554,000 Amortization of nondeductible debt discount 160,000 318,000 Stock based compensation -- (166,000) Tax basis gain on forgiveness of debt 1,019,000 -- Other, including use of net operating loss carryforward and reserve for deferred tax asset (1,059,000) 353,000 ----------- ----------- Income tax expense $ -- $ -- =========== =========== Temporary differences due to statutory requirements in the recognition of assets and liabilities for tax and financial reporting purposes, generally including such items as organizational costs, accumulated depreciation and amortization, allowance for doubtful accounts, organizational and start-up costs and vacation accruals. These differences give rise to the financial statement carrying amounts and tax bases of assets and liabilities causing either deferred tax assets or liabilities, as necessary, as of December 31, 2009 and 2008, respectively: December 31, December 31, 2009 2008 ----------- ----------- Deferred tax assets Net operating loss carryforwards $ 1,272,000 $ 1,797,000 Stock based compensation -- -- Debt discount amortization 634,000 474,000 Other -- -- ----------- ----------- 1,906,000 2,271,000 Less valuation allowance (1,906,000) (2,271,000) ----------- ----------- Net Deferred Tax Asset $ -- $ -- =========== =========== During the years ended December 31, 2009 and 2008, respectively, the valuation allowance for the deferred tax asset increased (decreased) by approximately $(365,000) and $469,000, respectively. NOTE K - PREFERRED STOCK The Company is authorized to issue up to a total of 75,000,000 shares of $0.001 par value Preferred Stock. The Company's Board of Directors has designated 5,000,000 shares as "Series A Convertible Preferred Stock". F-17
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE K - PREFERRED STOCK - CONTINUED The Company is under no obligation to pay dividends or to redeem the Series A Convertible Preferred Stock. This series of stock is convertible into 10 shares of Common Stock at the option of the shareholder or upon automatic conversion. In the event of any liquidation, dissolution or winding-up of the Company, the holders of outstanding shares of Series A Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, before any payment shall be made to or set aside for holders of the Common Stock, at an amount of $1 per share. As of December 31, 2009 and 2008, respectively, there were no shares of preferred stock issued and outstanding. NOTE L - COMMON STOCK 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. (Remainder of this page left blank intentionally) F-18
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE M - COMMON STOCK WARRANTS In conjunction with, and as a component of, certain debt issuances, the Company has issued an aggregate 15,819,352 and 46,033,638 warrants to purchase an equivalent number of shares of common stock at prices between $0.07 and $1.00 per share as of December 31, 2009 and 2008, respectively. Number of Weighted Warrant Average Shares Price ------ ----- Balance at January 1, 2008 16,780,002 $ 0.70 Issued 29,253,636 $ 0.16 Exercised -- -- Expired -- -- ------------ Balance at December 31, 2008 46,033,638 $ 0.36 Issued -- -- Exercised -- -- Surrendered at debt cancellation (30,214,286) $ 0.22 Expired -- -- ------------ Balance at December 31, 2009 15,819,352 $ 0.63 ============ As of December 31, 2009, the warrants break down as follows: # warrants exercise price ---------- -------------- 3,404,000 $ 0.07 630,000 $ 0.20 200,000 $ 0.40 3,860,351 $ 0.60 3,725,001 $ 0.84 4,000,000 $ 1.00 ------------ 15,819,352 $ 0.63 ============ # warrants expiring in ---------- ----------- 4,000,000 2010 569,350 2011 7,650,002 2012 630,000 2017 2,970,000 2018 ------------ 15,819,352 ============ NOTE N - STOCK OPTIONS In June 2007, the Board of Directors approved and adopted the 2007 Stock Incentive Plan ("2007 Plan"). The 2007 Plan provides for the issuance of incentive stock options and non-statutory stock options to the Company's employees, directors and consultants. Under the 2007 Plan, the Company may grant up to 6,000,000 shares of common stock to its employees or directors. The exercise price of each option may not be less than the market price of the Company's stock on the date of grant and an option's maximum term is ten years. The options generally vest over a four year service period. The Plan was not submitted for a vote of the Company's stockholders. The Company had no stock options or stock option plans in effect for periods prior to 2007. F-19
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE N - STOCK OPTIONS - CONTINUED The following table summarizes stock options outstanding and changes during years ended December 31, 2008 and 2007. Weighted Weighted Average Average Aggregate Number of Exercise Remaining Intrinsic Options Price Term Value ------- ----- ---- ----- Options outstanding at January 1, 2008 4,475,000 $ 0.21 9.5 $ 134,250 Granted -- Exercised -- Forfeited (4,475,000) $ 0.21 ---------- Options outstanding at December 31, 2008 -- Granted -- Exercised -- Forfeited -- ---------- Options outstanding at December 31, 2009 -- ========== Options exercisable at December 31, 2009 -- ========== Options available for grant at December 31, 2009 6,000,000 ========== The following table summarizes non-cash stock-based compensation expense recorded under SFAS 123(R) for the years ended December 31, 2009 and 2008. Year ended Year ended December 31, December 31, 2009 2008 --------- --------- Loss from discontinued operations Stock based compensation earned $ -- $ 130,299 Stock based compensation forfeited upon foreclosure of operating subsidiary -- (618,816) --------- --------- $ -- $(488,517) ========= ========= The fair values of option awards granted during 2007 were estimated at the date of grant using a Black-Scholes option-pricing model which utilizes a number of assumptions as indicated below: Weighted average assumptions used Volatility 157.77% Expected option term (years) 6 years Risk-free interest rate 4.60% Expected dividend yield 0.00% The Company's assumption of expected volatility was based on the historical volatility of the Company's stock price subsequent to purchasing AirGATE Technologies, Inc. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life at the date of grant. The expected dividend yield is zero because the Company has not made any dividend payments in its history and does not plan to pay dividends in the foreseeable future. F-20
THE X-CHANGE CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2009 and 2008 NOTE N - STOCK OPTIONS - CONTINUED The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee 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 employee stock options. NOTE O - 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. 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. F-21
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE X-CHANGE CORPORATION Dated: April 20, 2010 /s/ Haviland Wright -------------- ----------------------------------- Haviland Wright President, Chief Executive Officer Acting Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates as indicated. Dated: April 20, 2010 /s/ Haviland Wright -------------- ----------------------------------- Haviland Wright President, Chief Executive Officer Acting Chief Financial Officer and Director Dated: April 20, 2010 /s/ Fernando Antonio Gomez -------------- ----------------------------------- Fernando Antonio Gomez Executive Vice President, Corporate Secretary and Director Dated: April 20, 2010 /s/ Ron Vigdor -------------- ----------------------------------- Ron Vigdor Corporate Treasurer and Director Dated: April 20, 2010 /s/ Richard T. Steele -------------- ----------------------------------- Richard T. Steele Director 4