PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pollard-Kelley Auditing Services, Inc.
Auditing Services
3250 West Market St, Suite 307, Fairlawn, OH 44333 330-836-2558
Report of Independent Certified Public Accountants
Board of Directors
XA, Inc. and Subsidiary
We have reviewed the accompanying consolidated balance sheets of XA, Inc. and
Subsidiary as of June 30, 2006 and 2005 and the related consolidated statements
of income, stockholders' equity, and cash flows for the three-month periods and
six month periods then ended. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board. A review of interim financial statements consists
principally of applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit in accordance with the standards of the Public Company
Accounting Oversight Board, the object of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles accepted in the United
States of America.
Pollard-Kelley Auditing Services, Inc.
Terance L Kelley
Certified Public Accountant
August 3, 2006
Fairlawn, Ohio
XA, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
June 30, 2006 and 2005
2006 2005
------------ ------------
ASSETS
Current Assets
Cash $ 530,065 $ 1,053,178
Accounts receivable 981,346 371,653
Work in process at cost 493,501 616,133
Prepaid expenses 35,721 9,427
Prepaid employment contract 45,893 83,041
------------ ------------
Total Current Assets 2,086,526 2,133,432
Fixed Assets
Equipment 221,726 177,044
Furniture and fixtures 59,753 53,059
Leasehold improvements 679,600 40,735
------------ ------------
961,080 270,838
Less accumulated depreciation (178,176) (139,621)
------------ ------------
782,904 131,217
Other Assets
Discount on Convertible Notes Payable 110,732 243,960
Deferred taxes 540,000 525,000
Prepaid employment bonus 75,000 173,055
Deposits 64,346 7,713
Goodwill 865,309 865,309
------------ ------------
1,655,387 1,815,037
------------ ------------
$ 4,524,817 $ 4,079,686
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 423,244 $ 238,446
Accrued payroll 8,500 -
Interest Payable 82,800
Withheld and accrued taxes 4,704 2,858
Unearned revenues 639,472 987,039
Line of credit 800,000 -
Current portion of long term debt 2,032,500 882,500
------------ ------------
Total Current Liabilities 3,991,221 2,110,843
Long-term Debt
Note payable - 1,150,000
Stockholders' Equity
Series A preferred stock - -
Common stock 3,777 3,569
Additional paid in capital 2,230,996 2,188,907
Retained income (1,701,177) (1,373,633)
Subscription receivable - -
------------ ------------
533,596 818,843
------------ ------------
$ 4,524,817 $ 4,079,686
============ ============
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See accompanying notes to financial statements.
XA, Inc. and Subsidiary
CONSOLIDATED INCOME STATEMENT
For the Quarters and Year to Date Ended June 30, 2006 and 2005
2nd Quarter Year-to-date 2nd Quarter Year-to-date
2006 2006 2005 2005
----------- ----------- ----------- -----------
Revenues
Sales $2,350,319 $5,391,070 $2,467,231 $5,131,953
Cost of goods sold
Direct production costs 1,316,218 3,152,348 1,517,673 3,452,622
----------- ----------- ----------- -----------
Gross profit 1,034,102 2,238,722 949,558 1,679,331
Administrative expense
Administrative 1,155,550 2,343,517 1,014,691 1,591,804
----------- ----------- ----------- -----------
Income from operations (121,448) (104,795) (65,133) 87,527
Other income and expenses
Other income 2,321 5,018 - 3,433
Other expenses (99,443) (183,419) (81,252) (164,102)
----------- ----------- ----------- -----------
(97,122) (178,401) (81,252) (160,669)
----------- ----------- ----------- -----------
Income before taxes (218,571) (283,196) (146,385) (73,142)
Tax provisions
Tax provisions - - (29,000) -
----------- ----------- ----------- -----------
Net (Loss) Income $ (218,571) $ (283,196) $ (117,385) $ (73,142)
=========== =========== =========== ===========
Loss per Share
Average shares outstanding 3,777,250 3,764,750
Basic $ (0.06) $ (0.08)
|
See accompanying notes to financial statements.
XA, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from January 1, 2005 through June 30, 2006
Series A Additional
Preferred Stock Common Stock -- Paid-in Retained
Shares Amount Shares Amount Capital Deficit Total
------- ------- --------- -------- ---------- ------------ ----------
Balance December 31, 2004 3 $ - 3,516,250 $ 3,516 $2,170,532 $(1,300,835) $ 873,213
Shares issued for services - - 202,500 203 42,625 42,828
Net Loss - - - - - (109,646) (109,646)
------- ------- --------- -------- ---------- ------------ ----------
Balance December 31, 2005 3 - 3,718,750 3,719 2,213,157 (1,410,481) 806,395
Shares issued for services 33,500 33 9,464 9,497
Net loss (64,625) (64,625)
---------------------------------------------------------------------------
Balance March 31, 2006 3 - 3,752,250 3,752 2,222,621 (1,475,106) 751,267
Purchase and retirement of
Preferred share (1) - - - - (7,500) (7,500)
Shares issued for services - - 25,000 25 8,375 - 8,400
Net Loss (218,571) (218,571)
------- ------- --------- -------- ---------- ------------ ----------
Balance June 30, 2006 2 $ - 3,777,250 $ 3,777 $2,230,996 $(1,701,177) $ 533,596
===========================================================================
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See accompanying notes to financial statements.
XA, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Quarters and Year to Date Ended June 30, 2006 and 2005
2nd Quarter Year to date 2nd Quarter Year to date
2006 2006 2005 2005
---------- ---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(218,571) $(283,196) $ (117,385) $ (73,142)
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Provision for deferred taxes - - - -
Depreciation 16,721 25,663 6,545 14,688
Amortization of Discounts on Notes Payable 33,307 66,614 33,307 66,614
Stock for services 8,400 17,897 18,428 18,428
Changes in Current assets and liabilities:
(Increase) Decrease in Accounts receivable (276,725) 233,147 219,661 87,376
(Increase) Decrease in Work in process 318,697 277,061 (214,430) (429,527)
(Increase) Decrease in Prepaid expenses (12,040) 1,204 (7,193) (6,693)
(Increase) Decrease in Officers loans - - - -
(Increase) in Prepaid employment contracts 21,787 43,574 27,065 (4,481)
(Decrease) Increase in Accounts payable 219,731 (22,742) 2,130 (7,336)
(Decrease) Increase in Accrued payroll 6,800 8,500 - (17,798)
(Decrease) Increase in Accrued interest 41,400 21,324 (41,400)
(Decrease) in Withheld and accrued taxes 1,111 233 (29,028) (1,348)
Increase (Decrease) in Unearned revenue (354,375) (582,757) 215,491 417,353
---------- ---------- ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (193,757) (193,478) 113,191 64,134
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Fixed assets (381,117) (672,795) (6,282) (21,465)
Purchase of Preferred stock (7,500) (7,500) - -
Increase in Goodwill - - - (57,075)
(Increase) Decrease in Deposits (500) 8,366 30,467 30,467
---------- ---------- ----------- -----------
NET CASH (USED) BY INVESTING
ACTIVITIES (389,117) (671,929) 24,185 (48,073)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock - - - -
Increase in Line of credit 500,000 800,000 - -
---------- ---------- ----------- -----------
NET CASH USED BY
FINANCING ACTIVITIES 500,000 800,000 - -
---------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (82,874) (65,407) 137,376 16,061
CASH ACQUIRED IN ACQUISITION - - - -
CASH AT BEGINNING OF PERIOD 612,939 595,472 915,802 1,037,117
CASH AT END OF PERIOD ---------- ---------- ----------- -----------
$ 530,065 $ 530,065 $1,053,178 $1,053,178
========== ========== =========== ===========
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See accompanying notes to financial statements.
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HISTORY
The Company was incorporated on August 29, 1991 as Goldstin/Mercola Productions,
Inc. in Illinois. On January 4, 1993 the name was changed to G/M Productions,
Inc. On December 4, 2003 the Company entered into an exchange agreement with
Synreal Services Corp a publicly traded Nevada corporation. The exchange
agreement resulted in the exchange of 1,769,231 newly issued shares of Synreal
common stock for all the outstanding shares of G/M Productions, Inc. In
addition the shareholder of G/M Productions entered into a stock purchase
agreement with the former officers and directors of Synreal whereby the
shareholder acquired 1,000,000 shares of Synreal common stock. Synreal was a
shell at the time of the acquisition and therefore the acquisition was treated
as a reverse merger whereby the acquired company is treated as the acquiring
company for accounting purposes. On December 9, 2003, the stockholders and
directors of the Company passed two resolutions changing the Company's name to
The Experiential Agency and authorizing a 13:1 forward stock split.
On May 26, 2005, the Company issued 52,500 shares of common stock for services.
The shares were valued at $18,428.
On September 15, 2005, the Company issued 115,000 shares of common stock for
services. The shares were valued at $14,950.
On November 9, 2005, the Company issued 10,000 shares of common stock for
services. The shares were valued at $2,700.
On December 31, 2005, the Company issued 25,000 shares of common stock for
services. The shares were valued at $6,750.
On February 6, 2006, the Company issued 33,500 shares of common stock for
services. The shares were valued at $9,497.
On March 31, 2006, the Company issued 25,000 shares of common stock for
services. The shares were valued at $8,400.
The consolidated financial statements include the accounts of XA, Inc and Fiori
XA, Inc. All significant inter-company accounts and transactions have been
eliminated in consolidation.
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company is a comprehensive event marketing, design and production firm with
full service offices in Chicago, New York and Los Angeles.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term debt securities three months or less to be cash equivalents.
Cash paid during the year for:
2006 2005
Interest $61,476 $ -0-
Income taxes $ -0- $ -0-
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Maintenance, repairs and renewals
are expensed as incurred. Depreciation of property and equipment is provided
for on the straight line and 200% declining balance basis over their estimated
useful lives as follows:
Equipment 5 years
Furniture and fixtures 7 years
Leaseholds 39 years
Depreciation expense for the quarter and year to date ended June 30, 2006 and
2005 were $16,721, $258,663 and $6,545, $14,688, respectively.
INCOME TAXES
Before December 4, 2003 the date of the share exchange with Synreal, the Company
had elected to be taxed under the provisions of Sub-chapter S of the Internal
Revenue Code. Under these provisions, the Company does not pay federal or state
corporation taxes on its taxable income. Instead, the shareholders are liable
for individual federal and state income taxes on the Company's taxable income.
There are no differences in accounting for tax and book. After December 4, 2003
the Company is taxed as a Sub-chapter C corporation under the Internal Revenue
Code.
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The estimated tax provision at June 30, 2006 and 2005 consists of the following:
Estimated Recoverable 2006 2005
Federal $ -0- $ -0-
State -0- -0-
$ -0- $ -0-
The Company has net loss carryforwards of approximately $1,679,000 that begin to
expire in 2020 for federal taxes and 2017 for state taxes.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISKS
During 2005 and 2004 and at December 31, 2005 and 2004, the Company had deposits
in banks in excess of the FDIC insurance limit.
NOTE 2 - DISCOUNT ON CONVERTIBLE NOTES PAYABLE
Discount on Convertible Notes Payable represents costs the Company incurred in
connection with the convertible promissory notes. These costs will be amortized
over the life of the notes (24 months) on a straight-line basis. The
amortization expenses for these costs were $33,307 for the quarters ending March
31, 2006 and 2005, respectively.
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 3 - NOTES PAYABLE
On August 12, 2004, the Company entered into a Line of Credit agreement with a
bank for $750,000. The note is due September 30, 2006. Interest varies at
0.25% over the Bank's prime rate. The Company's assets secure the note. The
draws are based on a borrowing base formula at 75% of eligible accounts
receivable less 90 days past due accounts. The agreement required the payment
of a $5,000 commitment fee. The balance outstanding under this agreement at
June 30, 2006 and 2005 was $800,000 and $0.
On June 29, 2004, the Company entered into a Convertible Promissory Note
agreement with 5 unrelated entities. The terms of the 5 notes are identical.
The interest rate is 6%. The notes are convertible into the Company's common
stock at a conversion rate of $2.00 per share. Conversion is at the Company's
option. However, if the Company requests conversion it must convert with
registered stock. The holder also received Class A and Class B Warrants (Note
4) and purchased an additional $1,250,000 of convertible promissory notes on
September 13, 2004.
On September 13, 2004, note holders with $267,500 due converted these notes into
1,076,693 pre-reverse split shares of the Company's common stock in accordance
with the note agreement. On November 1, 2004, note holders with $200,000 due
converted these notes into 811,533 pre-reverse split shares of the Company's
common stock in accordance with the note agreement. The balance due at June
30, 2006 and 2005 was $2,032,500 and $2,032.500, respectively.
Total Long-Term debt at June 30, 2006, is as follows:
2006
Long-term debt $2,032,500
Less Current portion ($2,032,500)
Long-term debt $ -0-
Maturities on long-term debt at June 30, 2006 are as follows:
Year ending December 31, 2006 $2,032,500
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 4 - EQUITY
PREFERRED STOCK
On December 27, 2004, the Board of Directors, with shareholder approval, issued
3 shares, of the authorized 10,000,000 shares of "blank check" preferred, as
Series A Preferred Shares. The Series A Preferred Shares have a par value of
$.001 per share, have no rights to dividends, no liquidation preference, no
conversion rights and no redemption rights. The holders thereof, voting as a
class, shall have the right to vote on all shareholder matters equal to
fifty-one percent of the total vote. On May 22, 2006, the Company purchased
and retired one share of preferred stock for $7,500. There were 2 shares
outstanding at June 30, 2006.
COMMON STOCK
On December 19, 2005 the shareholders of the Company increased the total
authorized shares of common stock to 20,000,000 with a par value of $.001 per
share. The Company had 3,777,250 and 3,568,750 shares outstanding at June 30,
2006 and 2005, respectively.
STOCK WARRANTS
On June 29, 2004, the holders of the Convertible Promissory Notes received Class
A Warrants and Class B Warrants.
Class A Warrants are to purchase 250,000 shares of the Company's common stock at
an exercise price of $9.60 per share. The warrants may be exercised at any time
before June 29, 2008.
Class B Warrants were to purchase 500,000 shares of the Company's common stock
at an exercise price of $5.00 per share. However, those Warrants expired
unexercised on September 3, 2005.
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6 - COMMITMENTS
On February 1, 2001, the Company entered into a seven-year lease agreement for
office space in Chicago. The lease terminates March 31, 2008. Lease payments
are on a sliding scale as follows:
Period Monthly Rent
Year 1 $11,032
Year 2 $11,319
Year 3 $11,614
Year 4 $11,918
Years 5 & 6 $12,231
Year 7 $12,886
The lease is secured by an irrevocable line of credit for $64,381, which expires
March 31, 2004. The lease was terminated by the Company in July of 2004.
On August 20, 2003, the Company entered into a five-year lease agreement for
shared office space in New York. The lease terminates August 1, 2008. The
lease calls for monthly payments of $1,250 per month.
On March 31, 2003, the Company entered into an equipment lease with a finance
company. The lease is for 36 months with monthly payments of $145.
On April 1, 2003, the Company entered into an equipment lease with a finance
company. The lease is for 60 months with monthly payments of $1,383.
On September 18, 2003, the Company entered into an equipment lease with a
finance company. The lease is for 36 months with monthly payments of $117.
On October 1, 2003, the Company entered into an equipment lease with a finance
company. The lease is for 36 months with monthly payments of $83.
On November 20, 2001, the Company entered into a vehicle lease with a finance
company. The lease is for 39 months with monthly payments of $1,099.
On May 30, 2002, the Company entered into a vehicle lease with a finance
company. The lease is for 36 months with monthly payments of $2,483.
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6 - COMMITMENTS - CONTINUED
On January 1, 2004, the Company entered into a sublease agreement for a portion
of its space in Chicago. The sublease lasts for one year with monthly income of
$1,250 a month.
On January 14, 2004, the Company entered into a vehicle lease with a finance
company. The lease is for 24 months with monthly payments of $1,965.
On January 15, 2004, the Company entered into a four year and seven month shared
office space agreement in Los Angeles. The lease begins May 1, 2004 and has an
option for one 60-month extension. The Company's portion of the monthly rent is
$1,820 per month.
On February 10, 2004, the Company entered into a vehicle lease with a finance
company. The lease is for 36 months with a monthly payment of $1,956.
On February 17, 2004, the Company entered into an equipment lease with a finance
company. The lease is for 60 months with monthly payments of $239.
On June 14, 2004, the Company entered into an equipment lease with a finance
company. The lease is for 60 months with monthly payments of $389.
On June 30, 2004 the Company entered into an eight-year lease for office space
in Chicago. The lease terminates June 30, 2012. Lease payments are on a
sliding scale as follows:
Period Monthly Rent Period Monthly Rent
Year 1 $ 9,590 Year 5 $11,508
Year 2 $10,069 Year 6 $11,987
Year 3 $10,549 Year 7 $12,466
Year 4 $11,028 Year 8 $12,946
On June 30, 2004, the Company entered into a five-year lease for retail/office
space in Chicago. The lease terminates August 31, 2008. Lease payments are on
a sliding scale as follows:
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6 - COMMITMENTS - CONTINUED
Period Monthly Rent
Year 1 $5,250
Year 2 $5,408
Year 3 $5,570
Year 4 $5,736
Year 5 $5,909
On August 1, 2004, the Company entered into an equipment lease with a finance
company. The lease is for 60 months with monthly payments of $613.
On December 23, 2005, the Company entered into a ten-year lease for office,
event and production space in New York City. The lease payments are $21,667 per
month and increase 3% per year each year after the first year.
On April 1, 2006, the Company entered into a three-year lease for warehouse
space in New Jersey. The lease payments are $4,037 per month the first year,
$4,238 per month the second year and $4,449 per month the third year. The lease
has a provision for a three year renewal.
Future minimum payments due under these lease agreements are as follows:
2006 $576,484
2007 $583,428
2008 $543,885
2009 $496,600
2010 $491,776
NOTE 7 - STOCK OPTIONS
On June 19, 2006, the Company's Board of Directors approved the issuance of
490,000 incentive stock options to employees. The options have an exercise
price of $0.34 per share. The options terminate if unexercised on June 19, 2016
and vest with the employee on June 19, 2009 unless terminated earlier pursuant
to the agreement. The options vest immediately upon the occurrence of a change
in control of the Company.
On August 2, 2006, the Company granted 850,000 common stock options to its Chief
Executive Office and 650,000 common stock options to its Chief Operation
Officer. The options have an exercise price of $0.75 per share. The options
terminate if unexercised on the fifth anniversary of the vesting date. The
options vest one third per year over a three year period beginning one year
after the Company's registration statement is declared effective. The options
vest immediately upon the occurrence of a change in control of the Company.
XA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 8 - EMPLOYMENT AGREEMENTS
On August 1, 2004, the Company entered into employment agreements with its Chief
Executive Officer, its Chief Operating Officer, President and Secretary, and its
Vice President of Operations and Treasurer. The agreements cover a 36 month
period, define annual compensation, paid days off, and severance pay. The
agreements also require the Company to maintain $1,000,000 of Directors and
Officers Liability insurance. In the case of two of the agreements it provides
as additional consideration 295,000 shares of the Company's common stock. These
shares are subject to the risk of forfeiture.
These agreements were terminated on August 1, 2006, with new agreements. The
new agreements are for the Company's Chief Executive Officer and Chief Operating
Officer. The agreements provide for the immediate vesting of all of the shares
held subject to forfeiture and are for a term of five years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB (THIS "FORM 10-QSB"),
CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL,
OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR
"ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF XA, INC. ("XA", "THE COMPANY", "WE", "US" OR "OUR") TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM
10-QSB, UNLESS ANOTHER DATE IS STATED, ARE TO JUNE 30, 2006.
BUSINESS HISTORY
XA, Inc., was originally incorporated in Nevada as Synreal Services Corp.
("Synreal") on August 28, 2000. The Company's business plan was to engage in the
business of providing due diligence and administrative services for real estate
syndications. Prior to entering into an Exchange Agreement, discussed below, and
the consummation of the transactions thereunder, the Company was considered a
development stage enterprise, as defined in Financial Accounting Standards Board
No. 7.
On December 4, 2003, Synreal, The Experiential Agency, Inc., formerly G/M
Productions, Inc., an Illinois corporation ("Experiential") and the former
Experiential shareholders entered into an Exchange Agreement (the "Exchange" or
"Acquisition") whereby Experiential became a wholly-owned subsidiary of the
Company and control of the Company shifted to the former Experiential
shareholders. In addition, Frank Goldstin, the Company's former Chief Executive
Officer and a former director of the Company, entered into a stock purchase
agreement with the Company's former officers and directors, Brian Chelin and
Jennifer Wallace. Synreal was considered a "shell" at the time of the
Acquisition; therefore, the transaction was treated as a reverse merger.
Effective February 2, 2004, the Company declared a 13 to 1 forward stock split.
Effective December 9, 2004, the Company declared a 1 for 20 reverse stock split.
The effects of the stock splits have been retroactively reflected in this Form
10-QSB unless otherwise stated.
In June 2004, the Company entered into a Subscription Agreement with Alpha
Capital Aktiengesellschaft, Stonestreet Limited Partnership, Whalehaven Funds
Limited, Greenwich Growth Fund Limited and Genesis Microcap Inc. (collectively
the "6% Note Purchasers") to purchase convertible promissory notes having an
aggregate principal amount of $2,500,000, a 6% annual interest rate, and a
conversion price of $0.25 per share (the " 6% Notes"). Following the reverse
stock split on December 9, 2004, the conversion price of the 6% Notes would have
been $5.00 per share, however, the Company agreed to change the conversion price
of the 6% Notes to $2.00 per share.
Of the $2,500,000 in Convertible 6% Notes issued to the Note Holders, $467,500
in principal and $4,555.67 in interest were converted into a total of 94,412
post split shares, leaving $2,032,500 (not including any accrued interest) which
could be converted into approximately 1,016,250 shares of Common Stock as of
June 30, 2006. The Subscription Agreement also provided for the issuance of
warrants to purchase up to an aggregate of 250,000 shares of Common Stock, with
an exercise price of $9.60 per share (the "Class A Warrants"), and warrants to
purchase up to an aggregate of 500,000 shares of Common Stock, with an exercise
price of $5.00 per share (the "Class B Warrants"). The Company did not agree to
change the exercise price of the Class A Warrants or the exercise price of the
Class B Warrants. The Class A Warrants expire Four (4) years from the date they
were issued. The Class B Warrants have expired and no Class B Warrants were ever
exercised by the 6% Note Purchasers.
In the third quarter of 2005, we formed a wholly owned Nevada subsidiary, XA
Scenes, Inc. ("XA Scenes"). XA Scenes was formed as a special events venue
management firm. Our senior management team believes that there is a significant
opportunity for XA Scenes to capitalize on the synergies that exist between our
event marketing agency, The Experiential Agency, Inc., and selected joint
venture partners.
On or about May 23, 2006, XA, Inc. we entered into an agreement with our former
Chief Executive Officer and former Director, Frank Goldstin, whereby we agreed
to purchase one (1) share of Series A Preferred Stock from Mr. Goldstin ("Series
A Preferred Stock" and the "Preferred Stock Agreement"). Pursuant to the
Preferred Stock Agreement, we purchased Mr. Goldstin's share of Series A
Preferred Stock in consideration for $7,500, which share we have cancelled.
On or about May 22, 2006, our Chief Executive Officer and Director Joseph Wagner
and our Chief Operating Officer and Director Jean Wilson entered into a Voting
Agreement, to memorialize a verbal understanding that they had since January
2006, to vote together on all shareholder matters. The Voting Agreement provides
that until March 31, 2007, Mr. Wagner and Ms. Wilson agree to vote their shares
of Series A Preferred Stock together on all shareholder matters requiring
shareholder approval.
SUBSEQUENT EVENTS
On August 8, 2006 (the "Closing"), we entered into a Securities Purchase
Agreement (the "Purchase Agreement") with Sands Brothers Venture Capital LLC,
Sands Brothers Venture Capital II LLC, Sands Brothers Venture Capital III LLC,
Sands Brothers Venture Capital IV LLC, and Katie & Adam Bridge Partners, L.P.
(each a "Purchaser" and collectively the "Purchasers"), pursuant to which we
sold the Purchasers 11% Senior Subordinated Secured Convertible Promissory Notes
in the aggregate principal amount of $1,250,000 (collectively the "Senior
Notes") and five (5) year warrants to purchase an aggregate of one hundred and
seventy-five thousand (175,000) shares of our common stock at an exercise price
of $1.10 per share (the "Warrants" and collectively with the Senior Notes, the
"Securities" and the entire transaction is defined herein as the "Funding").
Our repayment of the Senior Notes and any accrued interest thereon is secured by
a security interest in substantially all of our assets, which we granted to the
Purchasers pursuant to a Security Agreement (the "Security Agreement"), which we
entered into with the Purchasers at the Closing. We also granted the
Purchasers, Venture and Mastodon (as defined below) registration rights in
connection with the shares of common stock issuable in connection with the
conversion of the Senior Notes and the exercise of the Warrants, the Mastodon
Warrants and the Venture Warrants (as defined below, collectively the
"Underlying Shares"), pursuant to our entry into a Registration Rights Agreement
(the "Registration Rights Agreement"), which we entered into at the Closing.
In connection with the Closing, we agreed to pay certain fees to the placement
agent of the funding, Laidlaw & Company (UK) Ltd. ("Laidlaw") and certain other
fees to the Purchasers, including $80,000 to the Purchasers in due diligence
fees and $35,000 in connection with legal expenses; and a finders fee to Laidlaw
in the amount of $80,000 in connection with the Funding, as well as various
attorney's fees of Laidlaw amounting to $5,500; and a five-year warrant to
purchase fifteen percent (15%) of all of the Underlying Shares, which have the
same rights as the Warrants.
Furthermore, pursuant to the Purchase Agreement, we agreed to grant the
Purchasers the right to appoint one Director to our Board of Directors (or a
Board Advisory Seat to observe at all board meetings). In the event the
Purchasers desire to exercise such right to appoint a Director, our Board of
Directors will be increased to five (5) members.
Prior to our entry into the Purchase Agreement, and the consummation of the
Funding, we received waivers from LaSalle Bank National Association to approve
the Funding, whom we currently owe $800,000 pursuant to a revolving line of
credit. Additionally, we received the waiver of the 6% Note Purchasers, ,who
purchased the 6% Convertible Notes in June and September 2004, to approve the
funding and waive our previous default under the 6% Convertible Notes (described
in greater detail below) pursuant to our entry into a Waiver of Rights Agreement
with the 6% Note Purchasers on July 17, 2006, with an effective date of June 30,
2006, which Waiver of Rights Agreement was later extended by the 6% Note
Purchasers until August 9, 2006.
We also agreed to issue an aggregate of 333,333 warrants to purchase shares of
our common stock at an exercise price of $0.30 per share to Sands Brothers
Venture Capital Funds ("Venture" and the "Venture Warrants") and 666,667
warrants to purchase shares of our common stock at an exercise price of $0.30
per share to Mastodon Ventures, Inc. ("Mastodon" and the "Mastodon Warrants") in
consulting fees, pursuant to the Purchaser Agreement. Both the Venture Warrants
and the Mastodon Warrants are exercisable for five (5) years from the date of
the Closing.
The Senior Notes, warrants, closing and related agreements are described in
greater detail in our Form 8-K filing, which will be filed subsequent to this
report.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, we agreed to register the
Underlying Shares on a Form SB-2 registration statement with the Securities and
Exchange Commission (the "Commission" and the "Registration Statement"). We
agreed that in the event that the Private Offering has not occurred within six
(6) months of the Closing, we will file the Registration Statement with the
Commission within forty-five days of the six (6) month anniversary of the
Closing, March 25, 2007, and that we would obtain effectiveness of the
Registration Statement no more than sixty (60) days after the date we are
required to file such Registration Statement, or May 24, 2007 (the "Mandatory
Filing Deadlines"). Provided that the Private Offering does occur within six
(6) months of the Closing, the Purchasers have demand registration rights
pursuant to the Registration Rights Agreement, whereby the holders of 50.1% of
the Senior Notes can demand that we file the Registration Statement at any time
beginning on the nine (9) month anniversary date of the Closing, May 8, 2007.
If the Purchasers demand that we file a Registration Statement, we are required
to file the Registration Statement with the Commission within forty-five days of
the date such demand is given, and we are required to obtain effectiveness of
the Registration Statement no more than sixty (60) days after the date we are
required to file such Registration Statement (collectively with the Mandatory
Filing Deadlines the "Registration Deadlines").
If we fail to file or obtain effectiveness of the Registration Statement by the
applicable Registration Deadlines or after such effectiveness the Purchasers are
unable to sell the Underlying Shares, we are obligated, pursuant to the
Registration Rights Agreement, to pay the Purchasers an amount in cash equal to
two (2%) of the total principal amount of the Senior Notes, for each thirty (30)
day period which the Registration Deadlines are not met or the Purchasers are
unable to sell the Underlying Shares. If we fail to pay such damages within
five (5) days of the date payable, we are required to pay interest on the amount
payable at the rate of eighteen percent (18%) per annum, accruing daily until
such amounts are paid in full.
We also agreed to provide the Purchasers piggy-back registration rights in
connection with any registration agreement we may choose to file prior to the
six (6) or nine (9) month anniversary of the Closing, when the Purchasers'
mandatory and demand registration rights kick in, respectively.
We immediately used $1,047,000 of the funds received through the Funding along
with approximately $40,000 in cash to repay the $1,086,486 amount owed under
our outstanding 6% Convertible Notes, which we sold to certain purchasers in
June and September 2004 (the "6% Notes" and the "6% Note Purchasers"). The 6%
Note Purchasers had originally purchased $2,500,000 in 6% Notes from us in two
tranches, one tranche of $1,250,000 on June 30, 2004 (the "June 2004" tranche")
and $1,250,000 on September 13, 2004 (the "September 2004" tranche"), however,
the 6% Purchasers previously converted a portion of the 6% Notes into shares of
our common stock, and as a result, only approximately $1,056,180 of principal
remained due under the June 2004 tranche of the 6% Notes on June 30, 2006, which
amount was not immediately paid when due. This amount would have accrued
interest at the default rate equal to 15% until paid, however our default was
waived by the 6% Note Purchasers pursuant to our entry into a Waiver of Rights
Agreement with the 6% Note Purchasers on July 17, 2006, with an effective date
of June 30, 2006, which Waiver of Rights Agreement was later extended by the 6%
Note Purchasers until August 9, 2006. As a result, the remaining balance under
the June 2004 portion of the 6% Notes was equal to $1,056,180 as of August 8,
2006, which amount was increased to $1,086,486 in connection with accrued and
unpaid interest at 6% per annum on the outstanding amount of the June 2004
portion of the 6% Notes and the September 2004 portion of the 6% Notes. We
still owe approximately $1,012,434 in principal on the September 2004 portion of
the 6% Notes, which we hope to repay prior to the September 13, 2006 due date in
connection with funds raised from the Subsequent Funding, as described above, of
which there can be no assurance.
The remaining amount of the Funding equal to approximately $203,000 was paid to
Laidlaw, Venture and to Laidlaw's legal counsel in connection with attorney's
fees and finder's fees in connection with the Funding.
As a result of the funds paid to the 6% Note Purchasers and the funds paid in
finder's fees and attorney's fees, as well as the cash we paid to the 6% Note
Purchasers, the Funding cost us approximately $40,000 in cash; however, we were
able to repay the June 2004 tranche of funds due to the 6% Note Purchasers,
which funds we did not previously have, and which payment we would otherwise be
in default of. Additionally, as stated above, we anticipate receiving
approximately $1,250,000 in Subsequent Funding during August or September 2006,
which funds we will use to repay the September 2004 tranche of funds owed to the
6% Note Purchasers, of which there can be no assurance.
CONSULTING AND EMPLOYMENT AGREEMENTS
Joseph Wagner
In connection with the Closing, Joseph Wagner, our Chief Executive Officer,
President and Director entered into a Consulting Agreement with us effective
August 1, 2006, which Consulting Agreement replaced a prior Consulting Agreement
entered into between the parties with an effective date of August 1, 2004.
Pursuant to the Consulting Agreement, Mr. Wagner is to serve as our Chief
Executive Officer, President and Secretary for a period of sixty (60) months
from the effective date of the Consulting Agreement, August 1, 2006.
Jean Wilson
In connection with the Closing, Jean Wilson, our Chief Operating Officer,
Treasurer and Director entered into an Employment Agreement with us effective
August 1, 2006, which Employment Agreement replaced a prior Employment Agreement
entered into between the parties with an effective date of August 1, 2004.
Pursuant to the Employment Agreement, Ms. Wilson is to serve as our Chief
Operating Officer and Treasurer for a period of sixty (60) months from the
effective date of the Employment Agreement, August 1, 2006.
BUSINESS OPERATIONS
The Company, through its wholly-owned subsidiary, Experiential, is a
comprehensive event marketing, design and production services agency. With
full-service offices in Chicago and New York City as well as a sales office in
Los Angeles, and a venue in New York City, XA is a leading provider of event
services on an outsourced basis for corporations, associations and other
organizations in the United States and abroad. XA provides its clients with a
single source to their business communications and event planning needs.
For seventeen (17) years, XA has worked with clients around the globe to design
and produce strategic multidimensional, highly stylized and integrated event
programs. During the year ended December 31, 2005, XA planned and executed over
one hundred and fifty (150) events that were attended by more than an aggregate
of approximately thirty thousand (30,000) people in the United States and
foreign markets. XA's clients during the year ended December 31, 2005 included
L'Oreal USA, Barnes & Noble (NYSE:BKS), Cargo Magazine, VH1, W Hotels, Walt
Disney Co. (NYSE:DIS), ABN AMRO (NYSE:ABN), Finesse, Kenneth Cole (NYSE:KCP),
McDonald's Corporation (NYSE:MCD), Starbucks Corp. (NASDQ:SBUX), UNICEF, Royal
Caribbean (NYSE:RCL), discovery networks, British Telecom, Heineken Light and
the Wella Corporation. Additionally, XA planned Lennox Louis' wedding in Jamaica
during the year ended 2005. During the six months ended June 30, 2006, XA
planned approximately fifty (50) events, attended by over 25,500 people, for
clients including McDonald's Corporation (NYSE:MCD), HBO, VH1, the Wella
Corporation, the Ritz Carlton, Barnes and Noble, UNICEF, Discovery, Home &
Garden Magazine, GLAAD, Universal Pictures, Goldman Sachs and Sports
Illustrated.
XA focuses on strategic growth that includes, among other things, the
acquisition and development of targeted business communications and event
management companies in key regions throughout the United States. XA has
developed a vertically integrated infrastructure that it believes will enhance
its ability to continue to provide event services on a national basis. In order
to provide its clients with a single source solution to their event planning
needs, XA offers a wide range of services that encompass the event planning
process including general management, concept creation, content creation and
execution. XA believes that its vertically integrated organization, creative
talent, technological leadership and its willingness to commit capital to
acquire or develop proprietary exhibitions and special events are competitive
advantages in fragmented industry in which most vendors provide a limited set of
services on a local basis.
Industry and Market Overview
The events industry in the United States is highly fragmented with several local
and regional vendors that provide a limited range of services in two main
segments: 1) business communications and event management; and 2) meeting,
conferences and trade shows. The industry also consists of specialized vendors
such as production companies, meeting planning companies, and destination
logistics companies that may offer their services outside of the events
industry.
According to an event marketing study conducted by PROMO Magazine ("PROMO") in
2005, and published in its April 1, 2006 edition, marketers spent $171 billion
in event marketing in 2005, up 3% from the previous year. Additionally,
according to The George P. Johnson Co.'s annual survey, EventView '05/'06, as
reported by PROMO, 96% of marketing executives use events in their marketing
mix. Because of these trends, XA believes it is well positioned to gain a
greater share of the market for event production services and grow its
operations moving forward.
Principal Products and Services
XA offers a wide range of services that encompass the event planning process
including general management, concept creation, content creation, and execution.
XA earns most of its revenue from event services fees that it charges clients
regarding the following general service areas:
* Event Marketing;
* Design and production;
* Meetings, Conferences and Trade Shows;
* Entertainment and Show Production;
* Business Theater & General Sessions;
* Mobile Marketing;
* Audio/Visual Production;
* Public Relations;
* Destination Management;
* XA Interactive (Digital Marketing); and
* Venue Management.
XA earns a management fee when it provides general management services. XA earns
fees on a fee-for-services basis when it undertakes event marketing and business
communications projects.
General Management Services
XA offers general management services that provide its clients with centralized
coordination and execution of the overall event. In connection with providing
general management services, XA utilizes an executive producer responsible for
overseeing the production of an event or exhibition. The executive producer
coordinates the services that XA provides for the client. XA provides the
following general management services:
* Project oversight;
* Budget oversight;
* Quality assurance and control;
* Project funding and sponsorship development;
* Project control and accountability;
* Event promotion and marketing creation;
* Schedule management; and
* Fulfillment provider management.
Concept Creation
XA works with a client to craft the client's message, identify the best means of
communicating that message, and develop cost-effective creative solutions. XA
provides the following concept creation services:
* Joint determination of client needs and goals;
* Market research to support message creation and communication;
* Message content design;
* Media selection; and
* Initial project pricing and budgeting.
Content Creation
After the concept for an event is created, XA's professionals work to develop
and produce the client's message. XA provides the following content creation
services:
* Speech composition;
* Speaker support-graphics creation;
* Audio/Video production;
* Digital media creation;
* Collateral materials design and distribution;
* Entertainment and speaker scripting and booking; and
* Theme and staging design.
Execution
XA uses internal resources to execute an event. As the clients' needs dictate,
however, XA can structure its role so that it is transparent to attendants at
the event. XA provides the following execution services:
* On-site quality and logistics control;
* Hotel and venue coordination and buying;
* Transportation management;
* Security coordination;
* Telemarketing services for the sale of exhibition space;
* Hospitality management;
* Registration management;
* Cash and credit card payment management;
* Entertainment coordination;
* Tour program design;
* Permit and approval procurement; and
* Food and beverage management.
Fulfillment
Fulfillment is the last stage in the event process. It includes the actual
provision of services such as catering, registration, transportation rental,
audio and visual equipment rental, decoration rental and temporary on-site
labor. XA offers fulfillment services using either internal resources or
third-party vendors as determined on an event-by-event basis.
Full Service Offices
XA operates two full-service offices located in Chicago and New York City as
well as a sales office in Los Angeles and a venue in New York City. Chicago is
home to XA's headquarters, which serves as the centralized base for
administration and purchasing. XA opened the Los Angeles and New York City
offices during 2003. XA chose to open offices in New York City and Los Angeles
to better serve its national client base by providing existing clients with
local offices and staff to coordinate and provide ongoing integrated
communication services. In addition, by having local offices operating in New
York City and Los Angeles, XA is better able to acquire new clients and business
opportunities through aggressive local business development activities.
In December 2005, XA Scenes, entered into a lease on the ninth floor of 636-642
West 28th Street, New York, New York 10001, also known as the "Terminal
Warehouse". We plan to use the Property for office space, event and production
space and to host certain events in the future. Completed in June 2006, the
11,500 square foot multi-use facility consists of approximately 5,000 square
feet of design production/office space and 6,500 square feet of special event
space. The XA Scenes facility provides clients with spectacular views of the
Hudson River within a state of the art special events facility.
On March 6, 2006, The Experiential Agency, Inc., the Company's wholly owned
subsidiary ("Experiential"), entered into a Lease on Unit No. 2B in Building No.
2 of 1435 51st Street, in North Bergen, New Jersey. The lease commenced on
April 1, 2006, and ends on March 31, 2009. The monthly rent on the lease is
$4,037 from April 1, 2006 until March 31, 2007, $4,238 for the period from April
1, 2007 until March 31, 2008, and $4,449 for the period from April 1, 2008 until
March 31, 2009. Upon the expiration of the lease, Experiential has the option
to renew the lease for an additional three (3) year term. The monthly rental
fees during the additional three year term, will be $4,671 from April 1, 2009
and March 31, 2010, $4,904 from April 1, 2010 and March 31, 2011, and $5,149
from April 1, 2011 to March 31, 2012. The landlord has the right to terminate
the lease at any time after March 31, 2009, with six (6) months prior written
notice to Experiential. This space will be used by XA for production and
fabrication of d cor elements for events and storage of production inventory.
Growth Strategy
The major focus of XA's growth strategy over the next several years will be the
acquisition and development of targeted business communications and event
management companies in key regions throughout the United States. XA's
management has identified a number of targeted strategic acquisition
opportunities in the form of business communications and event management
companies in key regions throughout the United States. XA's targeted
acquisitions are intended to add geographic coverage to XA's existing businesses
as well as broaden XA's service offerings. The initial acquisitions will be
focused on business communications and event management companies which are
specialized in the on-site logistical aspects of the business communications and
event management industry, and are located in the Chicago, New York City and Los
Angeles areas.
XA will also fuel growth through a broader, carefully designed growth strategy
that includes extending relationships with existing clients, building new client
relationships, expanding its international client base, making selected
infrastructure acquisitions, and expanding its media services. The Company is
currently performing due diligence on a number of potential acquisitions, but
has not entered into a formal Letter of Intent with any potential acquisition
targets.
XA believes that substantial opportunities exist to expand relationships with
existing clients by cross-selling the full range of XA's services, building out
its national office network and expanding XA's service offerings, particularly
with respect to XA events, multimedia and corporate branding capabilities. XA
seeks to capitalize on the services provided to one division or operation of a
client by selling its services to other divisions or operations, including their
foreign operations. XA initiated advertising and public relations programs to
enhance its brand recognition in the marketplace.
As organizations focus on their core competencies and seek to improve the
professionalism, creativity and cost-efficiency of their events, XA believes
they will continue to outsource the management of events. XA believes that many
opportunities exist to add new clients with large-scale business communications
and event management needs. XA seeks relationship-building opportunities through
client referrals and its internal sales force.
XA believes that multinational organizations headquartered both inside and
outside of the United States are increasingly interested in building
relationships with business communications and event management firms and owners
of events who can provide their services on a worldwide basis. XA's
international client base continues to grow and in order to better serve these
organizations, XA plans to aggressively expand its international client base
over the next 12 to 24 months.
XA believes that as the event industry continues to consolidate there will be
many domestic and international acquisition opportunities. XA may acquire or
affiliate with select additional companies to expand its client base, further
build out its infrastructure, add new service applications or provide additional
operating efficiencies and synergies.
XA currently provides digital communications and multimedia services to clients
in such areas as exhibition promotion, training programs and Internet home
pages. XA designs and develops websites, CD-ROM / DVD-ROM materials, promotional
videos, targeted marketing presentations and other multimedia products. XA
believes that continued technological advances, coupled with the growing need of
organizations to more effectively tailor their messages, will create
opportunities for XA to develop new services for clients, particularly for
business communications and event management services.
Creative Talent
A primary value that XA brings to its clients is the creative talent, energy and
commitment of its employees. XA seeks to attract and retain the best personnel
by developing attractive compensation, benefits and training programs and
providing long-term career opportunities that its smaller competitors cannot
duplicate. XA has forty (40) employees, of whom thirty (30) are full-time
employees.
XA compliments its staff with a pool of over 100 professionals hired on a
project-by-project basis who have distinguished themselves through prior
experience with XA. XA is not a party to any collective bargaining agreement
with a union. From time to time, however, XA does independently contract with,
or hire, union personnel during the production of a particular meeting or event.
XA considers itself to have good relations with its employees and independent
contractors.
Today, corporations are searching for new ways to motivate, excite and impart a
message to their audience. XA is able to help them accomplish these goals by
designing a creative platform from which to communicate. For instance, most
companies do not realize they can afford to do a concert event with headline
talent because it has never been presented to them as a marketing tool. Most of
XA's programs are more in line with the standard format of events (i.e.,
meetings and business theater).
Breaking the traditional mold can be a hard sell to a conservative client, but
when XA's team can demonstrate how hosting one large, memorable event can save
$250,000 from the marketing budget, and, most importantly, have a greater impact
on attendees, the client understands the value of XA marketing.
To execute XA's expansion plans, XA has also recruited a number of senior
executives with broad and diverse experience managing rapidly growing national
and international businesses.
Centralized Administration and Purchasing
XA has centralized its administrative and purchasing functions to enhance cost
efficiency and quality control. The corporate headquarters in Chicago are the
center for administration, MIS, finance, accounting and human resources. XA has
a national client base. XA oftentimes plans and executes multiple events for
different national clients in a single geographic location. XA negotiates
through the Chicago office with local vendors in these geographic locations for
the provision of services to its national clients. XA repeatedly uses the same
vendors in these local markets. XA believes that it enjoys purchasing power and
economies of scale greater than that available to its local competitors.
Technological Capabilities
XA believes that it can invest more in technology than its local competitors and
thereby become a leader in utilizing advanced technologies. XA is able to
allocate its investment in technology over its large national event base,
whereas a local competitor that does not have a national event base may not be
willing to invest heavily in advanced technology. XA currently uses advanced
communications technologies such as digitized presentations and multimedia
applications to provide high quality customer service. In addition, XA is
creating business communication applications using media, such as DVD
technology, plasma screens, interactive video and the satellite communications.
MARKETING STRATEGY
The Company believes that there is an increasing trend on the part of
associations, historically the largest owners and operators of exhibitions, to
outsource the operational management and often the ownership of exhibitions as
they focus on their core missions and seek to improve efficiencies.
The Company believes that the events industry revolves on a competitive axis
based on service breadth and quality, creativity, responsiveness, geographic
proximity to clients, and price. Most vendors of outsourced event services are
small, local companies that cannot provide the wide range of services,
international coverage, creative talent, purchasing power and technological
capabilities required by large corporations and associations. As a vertically
integrated service provider, the Company believes that it will be able to offer
a comprehensive solution to these organizations with the assurance of a high
quality of service and the opportunity to form a long-term relationship.
The Company differentiates itself from its competitors by offering a single
source solution to the market for business communication and event management
services on a national basis, employing creative, energetic professionals,
centralizing its administration and purchasing functions.
COMPARISON OF OPERATING RESULTS
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2005
We had sales of $2,350,319 for the three months ended June 30, 2006, compared to
sales of $2,467,231 for the three months ended June 30, 2005, a decrease in
sales from the prior period of $116,912 or 4.7%. The decrease in sales was due
to the fact that we had less projects during the three months ended June 30,
2006, compared to the three months ended June 30, 2005, and because our revenues
are booked on a project basis and several of our clients chose to delay the
timing of the their events during the three months ended June 30, 2006, compared
to the three months ended June 30, 2005, which had the effect of postponing
those sales.
We had cost of goods sold relating to direct production costs of $1,316,218 for
the three months ended June 30, 2006, compared to cost of goods sold relating to
direct production costs of $1,517,673 for the three months ended June 30, 2005,
a decrease in cost of goods sold from the prior period of $201,455 or 13.3%.
This decrease was mainly attributable to the greater focus of our management on
increasing our margins and decreasing our direct production costs and was also
directly related to our 4.7% decrease in sales during the three months ended
June 30, 2006, compared to the prior period.
Cost of goods sold as a percentage of sales was 56% for the three months ended
June 30, 2006, compared to 61.5% for the three months ended June 30, 2005, a
decrease in costs of goods sold as a percentage of sales of 5.5% from the prior
period. This decrease was mainly attributable to the greater focus of our
management on increasing our margins and decreasing our direct production costs.
We had gross profit of $1,034,102 for the three months ended June 30, 2006,
compared to gross profit of $949,558 for the three months ended June 30, 2005,
an increase in gross profit of $84,544 or 8.9% from the prior period. The
increase in gross profit was due to the 13.3% decrease in cost of goods sold,
coupled with only a 4.7% decrease in sales.
We had administrative expenses of $1,155,550 for the three months ended June 30,
2006, compared to administrative expenses of $1,014,691 for the three months
ended June 30, 2005, an increase in administrative expenses of $140,859 or 13.9%
from the prior period. The increase in administrative expenses was due to
additional costs associated with our two new business development employees,
which were added during the fourth quarter of fiscal 2005, as well as the
increased expenses related to New York venue operations.
We had a loss from operations of $121,448 for the three months ended June 30,
2006, compared to a loss from operations of $65,133 for the three months ended
June 30, 2005, an increase in loss from operations of $56,315 or 86.5% from the
prior period. The increase in loss from operations was mainly attributable to
the 13.9% increase in administrative expenses for the three months ended June
30, 2006, compared to the prior period.
We had other expenses for the three months ended June 30, 2006 of $97,122,
compared to other expenses of $81,252 for the three months ended June 30, 2005,
an increase in other expenses of $15,870 or 19.5% from the prior period.
We had a loss before taxes of $218,571 for the three months ended June 30, 2006,
compared to a loss before taxes of $146,385, an increase in loss before taxes of
$72,186 or 49.3% from the prior period.
We had tax provisions of $-0- for the three months ended June 30, 2006, compared
to tax provisions of $29,000 for the three months ended June 30, 2005.
We had a net loss of $218,571 for the three months ended June 30, 2006, compared
to a net loss of $117,385 for the three months ended June 30, 2005, an increase
in net loss of $101,186 or 86.2% from the prior period. The increase in net loss
was mainly attributable to the 13.9% increase in administrative expenses, the
19.5% increase in other expenses and the 4.7% decrease in sales, which was not
sufficiently offset by the 13.3% decrease in direct production costs for the
three months ended June 30, 2006, compared to the three months ended June 30,
2005.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005
We had sales of $5,391,070 for the six months ended June 30, 2006, compared to
sales of $5,131,953 for the six months ended June 30, 2005, an increase in sales
from the prior period of $259,117 or 5%. The increase in sales was due to
increased business development activities during the six months ended June 30,
2006, as well as the efforts of our two additional business development
employees, who were added during the year ended December 31, 2005.
We had cost of goods sold relating to direct production costs of $3,152,348 for
the six months ended June 30, 2006, compared to cost of goods sold relating to
direct production costs of $3,452,622 for the six months ended June 30, 2005, a
decrease in cost of goods sold from the prior period of $300,274 or 8.7%. This
decrease was mainly attributable to the greater focus of our management on
increasing our margins and decreasing our direct production costs.
Cost of goods sold as a percentage of sales was 58.5% for the six months ended
June 30, 2006, compared to 67.3% for the six months ended June 30, 2005, a
decrease in costs of goods sold as a percentage of sales of 8.8% from the prior
period. This decrease was mainly attributable to the greater focus of our
management on increasing our margins and decreasing our direct production costs.
We had gross profit of $2,238,722 for the six months ended June 30, 2006,
compared to gross profit of $1,679,331 for the six months ended June 30, 2005,
an increase in gross profit of $559,391 or 33.3% from the prior period. The
increase in gross profit was due to the 5% increase in sales coupled with the
8.7% decrease in direct production costs.
We had administrative expenses of $2,343,517 for the six months ended June 30,
2006, compared to administrative expenses of $1,591,804 for the six months ended
June 30, 2005, an increase in administrative expenses of $751,713 or 47.2% from
the prior period. The increase in administrative expenses was due to additional
costs associated with our two new business development employees, which were
added during the fourth quarter of 2005, as well as the increased expenses
related to our launch of XA Scenes and our New York venue.
We had a loss from operations of $104,795 for the six months ended June 30,
2006, compared to income from operations of $87,527 for the six months ended
June 30, 2005, a decrease in income from operations of $192,322 or 219.7% from
the prior period. The decrease in income from operations was mainly attributable
to the 47.2% increase in administrative expenses for the six months ended June
30, 2006, compared to the prior period.
We had other expenses for the six months ended June 30, 2006, of $178,401,
compared to other expenses of $160,669 for the six months ended June 30, 2005,
an increase in other expenses of $17,732 or 11% from the prior period.
We had a loss before taxes of $283,196 for the six months ended June 30, 2006,
compared to a loss before taxes of $73,142, an increase in loss before taxes of
$210,054 or 287.2% from the prior period.
We had a net loss of $283,196 for the six months ended June 30, 2006, compared
to a net loss of $73,142 for the six months ended June 30, 2005, a decrease in
net income of $210,196 or 287.2% from the prior period. The decease in net
income was mainly attributable to the 47.2% increase in administrative expenses
and the 287.2% increase in other expenses, which was not sufficiently offset by
the 5% increase in sales and 8.7% decrease in direct production costs for the
six months ended June 30, 2006, compared to the six months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
We had total current assets of $2,086,526 as of June 30, 2006, which included
cash of $530,065; accounts receivable of $981,346; work in process at cost of
$493,501; prepaid expenses of $35,721; and prepaid employment contract of
$45,893. This represented a decrease in current assets of $46,906 or 2.2% from
current assets of $2,133,432 as of June 30, 2005. The prepaid employment
contract consisted of 225,000 shares of the Company's Common Stock which were
issued to the Company's Chief Executive Officer, Joseph Wagner and 70,000 shares
of the Company's restricted Common Stock which were issued to the Company's
Chief Operating Officer, Jean Wilson, in August 2004, in consideration of their
services to the Company. Of Mr. Wagner's 225,000 restricted shares, 75,000
became fully vested as of December 31, 2004, and 75,000 shares became fully
vested as of December 31, 2005. The remaining 75,000 shares vested immediately
on August 1, 2006, in connection with our entry into a Consulting Agreement with
Mr. Wagner, which Consulting Agreement replaced his previous Consulting
Agreement with us. Of Ms. Wilson's 70,000 restricted shares, 25,000 became fully
vested as of December 31, 2004, and 22,500 shares became fully vested as of
December 31, 2005. The remaining 22,500 shares vested immediately on August 1,
2006, in connection with our entry into an Employment Agreement with Ms. Wilson,
which Employment Agreement replaced her previous Employment Agreement with us.
The main factor leading to the decrease in current assets as of June 30, 2006,
compared to current assets as of June 30, 2005 was a $523,113 or 49.7% decrease
in cash and a $122,632 or 19.9% decrease in work in process at cost due to
certain of our clients pushing back the planned dates of their events during the
three months ended June 30, 2006, which resulted in a decrease of our work in
progress as of June 30, 2006, which was offset by a $609,693 or 164% increase
in accounts receivable due to our increased sales for the six months ended June
30, 2006, compared to the six months ended June 30, 2005, as detailed above.
We had total fixed assets of $961,080 as of June 30, 2006, which included
equipment of $221,726; furniture and fixtures of $59,753; and leasehold
improvements of $679,000; which was offset by $178,176 of accumulated
deprecation for net total fixed assets of $782,904. This represented an increase
in fixed assets of $651,687 or 496.6% from total fixed assets of $131,217 as of
June 30, 2005. The main reason for the increase in fixed assets from the prior
year was a $638,865 or 1,568.4% increase in leasehold improvements, which
increase was mainly due to the acquisition of and improvements on our XA Scenes
office space and venue rental in New York and a $4,682 or 25% increase in
equipment, which increase in equipment was in connection with the purchase of
equipment in connection with the XA Scenes venue.
We had other assets of $1,655,387 as of June 30, 2006, which included $110,732
of discount on convertible notes payable; $540,000 of deferred taxes; $75,000 of
prepaid employment bonus; $64,346 of deposit; and $865,309 of goodwill, which
represented a decrease in other assets of $159,650 or 8.8% from other assets of
$1,815,037 as of June 30, 2005. The main reason for the decrease in other assets
was a $133,228 or 54.6% decrease in discount on convertible notes payable and a
$98,055 or 56.7% decrease in prepaid employment bonus. The prepaid employment
bonus consisted of prepaid employment bonuses in the form of common stock with
the Company's senior management, which shares became fully vested on August 1,
2006, in connection with the Company's entry into a new Employment Agreement
with the Company's Chief Operating Officer, Jean Wilson and a new Consulting
Agreement with the Company's Chief Executive Officer, Joseph Wagner, which
agreements superseded the prior agreements with those individuals and provided
that all shares of common stock subject to forfeiture would be immediately
earned and not subject to forfeiture (as described above).
We had total assets of $4,524,817 as of June 30, 2006, compared to total assets
of $4,079,686 as of June 30, 2005, an increase in total assets of $445,131 or
10.9% from the prior period, which increase was mainly due to the increase in
accounts receivable and the increase in leasehold improvements as explained
above.
We had total current liabilities of $3,991,221 as of June 30, 2006, which
included $423,244 of accounts payable; $8,500 of accrued payroll; $82,800 of
interest payable, which represents accrued and unpaid interest on the 6% Notes;
$4,704 of withheld and accrued taxes; $639,472 of unearned revenues which were
attributable to us better matching our revenues and costs according to GAAP,
which caused a corresponding increase in unearned revenues for the three months
ended June 30, 2006; $800,000 of line of credit; and $2,032,500 of current
portion of long term debt in connection with amounts owed to the 6% Note
Purchasers under the 6% Notes (described below). This represented a $1,880,378
or 89.1% increase in current liabilities from current liabilities of $2,110,843
as of June 30, 2005. The main reasons for the increase in current liabilities
were the addition of the $1,150,000 in current portion of long term debt, which
moved from long-term debt as of June 30, 2005 to a current liability as of June
30, 2006, due to the fact that the convertible notes were due and payable in
June and September 2006 and the addition of $800,000 under our line of credit.
We had negative working capital of $1,904,695 as of June 30, 2006, compared to
positive working capital of $22,589 as of June 30, 2005. The change from
positive working capital to negative working capital was mainly due to the
$2,032,500 in 6% Notes becoming a current liability and the $800,000 owed
pursuant to our line of credit.
We had net cash used by operating activities of $193,478 for the six months
ended June 30, 2006, which was mainly due to a $582,757 decrease in unearned
revenues and $283,196 of net loss offset by a decrease of $277,061 in work in
progress and a $233,147 decrease in accounts receivable.
We had $671,929 of net cash used by investing activities for the six months
ended June 30, 2006, which was due to $672,795 of purchase of fixed assets and a
$7,500 purchase of preferred stock offset by an $8,366 of decrease in deposits.
We had $800,000 of net cash used by financing activities during the six months
ended June 30, 2006, which included an increase in our line of credit of
$800,000. The Company has a line of credit agreement which it entered into on
August 12, 2004, with a bank for $750,000 (the "Line of Credit"). The Line of
Credit was due August 12, 2005, and the interest varies at 0.25% over the prime
rate (currently 8.5%, with the prime rate at 8.25% as of August 2, 2006). The
Company's assets secure the Line of Credit. Prior to the expiration of the Line
of Credit, the line of credit was renewed for another year and increased to
$800,000, which Line of Credit currently has a due date of December 1, 2007. The
Company borrowed $500,000 pursuant to this Line of Credit during the three
months ended June 30, 2006, and the balance outstanding under this Line of
Credit at June 30, 2006, was $800,000.
On June 1, 2006, we entered into a business loan for a loan of up to $750,000
with LaSalle Bank National Association ("LaSalle"), which loan bears interest at
the prime rate plus 0.25% until paid, currently equal to 8.5%, with the prime
rate at 8.25% as of August 2, 2006. We have borrowed $0 in funds pursuant to
the business loan with LaSalle to date. Any amounts borrowed under the business
loan are due and payable on June 30, 2007.
On August 8, 2006 (the "Closing"), we entered into a Securities Purchase
Agreement (the "Purchase Agreement") with various "Purchasers," pursuant to
which we sold the Purchasers 11% Senior Subordinated Secured Convertible
Promissory Notes in the aggregate principal amount of $1,250,000 (the "Senior
Note") and five (5) year warrants to purchase an aggregate of one hundred and
seventy-five thousand (175,000) shares of our common stock at an exercise price
of $1.10 per share (the "Warrants"). Our repayment of the Senior Notes and any
accrued interest thereon is secured by a security interest in substantially all
of our assets, which we granted to the Purchasers pursuant to a Security
Agreement (the "Security Agreement"), which we entered into with the Purchasers
at the Closing. We also granted the Purchasers, Venture and Mastodon (as
defined above) registration rights in connection with the shares of common stock
issuable in connection with the conversion of the Senior Notes and the exercise
of the Warrants, the Mastodon Warrants and the Venture Warrants (as defined
above, collectively the "Underlying Shares"), pursuant to our entry into a
Registration Rights Agreement (the "Registration Rights Agreement"), which we
entered into at the Closing.
We immediately used $1,047,000 of the funds received through the Funding along
with approximately $40,000 in cash on hand to repay the $1,086,486 amount owed
under our outstanding 6% Convertible Notes, which we sold to certain purchasers
in June and September 2004 (the "6% Notes" and the "6% Note Purchasers"). The
6% Note Purchasers had originally purchased $2,500,000 in 6% Notes from us in
two tranches, one tranche of $1,250,000 on June 30, 2004 (the "June 2004"
tranche") and $1,250,000 on September 13, 2004 (the "September 2004" tranche"),
however, the 6% Purchasers previously converted a portion of the 6% Notes into
shares of our common stock, and as a result, only approximately $1,056,180 of
principal remained due under the June 2004 tranche of the 6% Notes on June 30,
2006, which amount was not immediately paid when due. This amount would have
accrued interest at the default rate equal to 15% until paid, however our
default was waived by the 6% Note Purchasers pursuant to our entry into a Waiver
of Rights Agreement with the 6% Note Purchasers on July 17, 2006, with an
effective date of June 30, 2006, which Waiver of Rights Agreement was later
extended by the 6% Note Purchasers until August 9, 2006. As a result, the
remaining balance under the June 2004 portion of the 6% Notes was equal to
$1,056,180 as of August 8, 2006, which amount was increased to $1,086,486 in
connection with accrued and unpaid interest at 6% per annum on the outstanding
amount of the June 2004 portion of the 6% Notes and the September 2004 portion
of the 6% Notes. We still owe approximately $1,012,434 in principal on the
September 2004 portion of the 6% Notes, which we hope to repay prior to the
September 13, 2006 due date in connection with funds raised from the Subsequent
Funding, as described above, of which there can be no assurance.
The remaining amount of the Funding equal to approximately $203,000 was paid to
Laidlaw, Venture and to Laidlaw's legal counsel in connection with attorney's
fees and finder's fees in connection with the Funding.
As a result of the funds paid to the 6% Note Purchasers and the funds paid in
finder's fees and attorney's fees, as well as the cash we paid to the 6% Note
Purchasers, the Funding cost us approximately $40,000 in cash; however, we were
able to repay the June 2004 tranche of funds due to the 6% Note Purchasers,
which funds we did not previously have, and which payment we would otherwise be
in default of. Additionally, as stated above, we anticipate receiving
approximately $1,250,000 in Subsequent Funding during August or September 2006,
which funds we will use to repay the $1,024,750 owed under the September 2004
tranche of funds, which is due on September 13, 2006, of which there can be no
assurance.
In addition to the additional funding we will require prior to September 13,
2006, to repay the September 2004 tranche of funding, as well as approximately
$800,000 which we owe under the Line of Credit, which amount is due on December
1, 2007, we anticipate the need for approximately $1 to $5 million of additional
financing to support strategic acquisitions and our current expansion plan for
the next 18 to 24 months.
A substantial portion of the Company's investment capital, other than those
amounts used to repay the September 2004 tranche of funds owed to the 6% Note
Purchasers and the amounts owed under our Line of Credit will be used to finance
the expansion of the Company's business in accordance with its acquisition
strategy. To the extent that the proceeds are not used for acquisitions, such
proceeds will be used for general corporate purposes and for working capital
needs. The amount and timing of such uses will vary depending on the
availability of acquisition opportunities. Pending such uses, the net proceeds
will be invested in short-term investment grade securities.
While the Company is not currently a party to any agreements with respect to any
acquisitions, it is possible that an agreement in principle or a definitive
agreement as to one or more acquisitions will be executed prior to the
completion of the current capital raising efforts. It is likely that the closing
of any acquisition would require the Company to raise additional funds, which
there can be no assurance will be available on favorable terms, if at all.
At this time, no additional financing has been secured. The Company has no
commitments from officers, directors or affiliates to provide funding. Our
growth and continued operations could be impaired by limitations on our access
to the capital markets as well as penalties we may be forced to pay to the Note
holders if we are unable to repay the September 2004 tranche of 6% Notes when
due and/or the Senior Notes when due, if such notes are not converted into
shares of our common stock. Without additional financing, we believe we can
continue our operations. However, if we are unable to obtain additional
financing upon terms that management deems sufficiently favorable, or at all, it
would have a material adverse impact upon our ability to pursue our expansion
strategy and/or repay the remaining amount of the 6% Notes and/or the Senior
Notes when due. There can be no assurance that capital from outside sources will
be available, or if such financing is available, it may involve issuing
securities senior to our Common Stock or equity financings which are dilutive to
holders of our Common Stock. In addition, in the event we do not raise
additional capital from conventional sources, it is likely that our growth will
be restricted and we may need to scale back or curtail implementing our business
plan.
We currently have a commitment from Laidlaw to arrange for additional purchasers
to purchase an additional $1,500,000 in a Funding similar to our August 8, 2006,
Funding transaction, which funds, assuming they are received will be used to
repay the September 2004 tranche of the 6% Notes, which we anticipate closing in
August or September 2006; however we can provide no assurances that such
financing will close prior to the September 13, 2006 due date of the 6% Notes,
if at all. Additionally, assuming the outstanding Warrants are exercised, we
will receive $192,500 in additional funds in connection with such exercise and
if the Venture Warrants and Mastodon Warrants are exercised, we will receive
$300,000 in additional funds; however there is no assurance that such warrants
will be exercised prior the due date of the 6% Notes, the Senior Notes, and/or
the Line of Credit.
RISK FACTORS
RISKS RELATING TO THE COMPANY
WE HAVE A PRESENT NEED FOR CAPITAL IN ADDITION TO $1.25 MILLION ALREADY RAISED
IN AUGUST 2006.
It is imperative that we raise $1 to $5 million of financing to pursue
additional acquisitions if the opportunity arises, which is in addition to $1.25
million already raised in August 2006, and the $1,024,750, not including any
accrued or unpaid interest, which we still owe to the 6% Note holders, which
amount is due on September 13, 2006. Furthermore, the currently outstanding
$1,250,000 Senior Notes are due on November 8, 2007, if such Senior Notes are
not converted into shares of our common stock prior to such due date and we have
approximately $800,000 which is due on December 1, 2007, pursuant to our Line of
Credit. At this time, no additional financing has been secured. Our growth and
continued operations could be impaired by limitations on our access to the
capital markets. There can be no assurance that capital from outside sources
will be available, or if such financing is available, that it will be on terms
that management deems sufficiently favorable. If we are unable to obtain
additional financing upon terms that management deems sufficiently favorable, or
at all, it would have a material adverse impact upon our ability to continue our
business operations and pursue our expansion strategy. We need to raise
additional capital to repay the 6% Note Purchasers, the Senior Note holders and
the Line of Credit, as a result, we may seek to enter into acquisitions or
mergers in the future, which could result in a restructuring, change of control
and/or a change in our business focus, as well as potential dilution to then
current shareholders. In the event we do not raise additional capital from
conventional sources, there is every likelihood that we may need to scale back
or curtail implementing our business plan.
WE HEAVILY DEPEND ON JOSEPH WAGNER AND JEAN WILSON.
The success of the Company depends heavily upon the personal efforts and
abilities of Joseph Wagner and Jean Wilson. Joseph Wagner entered into a sixty
(60) month Consulting Agreement with the Company effective August 1, 2006,
pursuant to which Mr. Wagner serves as the Company's, Chief Executive Officer,
President and Secretary. Mr. Wagner is also a director of the Company. Mr.
Wagner may engage in business activities or interests outside of the Company
which are not adverse or competitive to the Company. Jean Wilson serves as the
Company's Chief Operating Officer, Treasurer and as a director of the Company
pursuant to a sixty (60) month Employment Agreement she entered into with the
Company, with an effective date of August 1, 2006. Mr. Wagner and Ms. Wilson may
voluntarily terminate their employment at any time. The loss of Mr. Wagner, Ms.
Wilson or other key employees could have a material adverse effect on our
business, results of operations or financial condition. In addition, the absence
of Mr. Wagner or Ms. Wilson may force us to seek a replacement who may have less
experience or who may not understand our business as well, or we may not be able
to find a suitable replacement.
OUR ABILITY TO OPERATE SUCCESSFULLY AND MANAGE OUR POTENTIAL GROWTH DEPENDS ON
OUR ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED TECHNICAL, MANAGERIAL, SALES,
MARKETING AND FINANCIAL PERSONNEL.
The Company's success heavily depends upon its ability to attract and retain
highly qualified technical, managerial, sales, marketing and financial
personnel. The Company faces competition for qualified personnel in these areas.
The Company cannot be certain that it will be able to attract and retain
qualified personnel. The Company's inability to hire and retain additional
qualified personnel in the future could have a material adverse effect on our
business, results of operations or financial condition.
THE SENIOR NOTES ARE SECURED BY A SECURITY INTEREST IN SUBSTANTIALLY ALL OF OUR
ASSETS.
In August 2006, we sold $1,250,000 in 11% Senior Secured Convertible Notes to
certain Purchasers. The Senior Notes and interest on such notes are convertible
into shares of our common stock, however, if we fail to register the shares
which the Senior Notes are convertible into or such registration statement
ceases to be effective or if the Purchasers fail to convert the outstanding
amount of the Senior Notes into shares of our common stock, we will be obligated
to repay up to $1,250,000, not including any accrued interest, on the due date
of such Senior Notes, November 8, 2007. If we default in our repayment of the
Senior Notes when due, the Purchasers can take control of substantially all of
our assets due to the fact that the repayment of the Senior Notes are secured by
a Security Agreement, pursuant to which we granted the Purchasers a security
interests in substantially all of our assets. As a result, if we default in the
repayment of the Senior Notes, the Purchasers may take control of substantially
all of our assets, which could force us to curtail or abandon our business
operations, and any investment in us could become worthless.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
The event production industry is highly competitive and fragmented. The Company
expects competition to intensify in the future. The Company competes in each of
its markets with numerous national, regional and local event production
companies, many of which have substantially greater financial, managerial and
other resources than those presently available to the Company. Numerous
well-established companies are focusing significant resources on providing event
marketing, design and production services that will compete with the Company's
services. No assurance can be given that the Company will be able to effectively
compete with these other companies or that competitive pressures, including
possible downward pressure on the prices it charges for its products and
services, will not arise. In the event that the Company cannot effectively
compete on a continuing basis or competitive pressures arise, such inability to
compete or competitive pressures will have a material adverse effect on the
companies business, results of operations and financial condition.
WE CURRENTLY HAVE A PENDING LAWSUIT WITH ONE OF OUR FORMER LANDLORDS, WHICH
LANDLORD ALLEGED APPROXIMATELY $309,710 IN DAMAGES AS WELL AS A LAWSUIT WITH A
FORMER EMPLOYEE WHO ALLEGES APPROXIMATELY $133,329 IN DAMAGES.
Our former landlord, Erie West, L.L.C. (the "Landlord"), filed a lawsuit against
us (described in greater detail under "Legal Proceedings," below) claiming
approximately $309,710 in damages and alleging that the Landlord is owed money
for unpaid rental fees, which it alleged we stopped paying rent under on July 1,
2004, which lease was to run until March 31, 2008. We filed answers to the
Landlord's allegations, denying certain allegations and asserting affirmative
defenses to others. Our former employee, Lara Shipp filed a lawsuit against us
(described in greater detail under "Legal Proceedings," below) claiming
approximately $133,329 in damages, plus punitive damages, which amount may
increase after the discovery phase of the trial, if any. If we are forced to pay
the approximately $309,710 in alleged damages and/or additional amounts in
attorney's fees and interest owed to our former landlord, and/or if we are
forced to pay the $133,329 or more which our former employee alleges she is due,
our cash on hand would be severely impacted and our business could be adversely
affected.
OUR GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.
The Company's growth is expected to place a significant strain on the Company's
managerial, operational and financial resources as Joseph Wagner and Jean Wilson
are our only officers. The Company has limited employees in addition to its
small number of officers. Furthermore, as the Company receives contracts, the
Company will be required to manage multiple relationships with various customers
and other third parties. These requirements will be exacerbated in the event of
further growth of the Company or in the number of its contracts. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company will be able to achieve the
rapid execution necessary to successfully offer its services and implement its
business plan. The Company's future operating results will also depend on its
ability to add additional personnel commensurate with the growth of its
business. If the Company is unable to manage growth effectively, the Company's
business, results of operations and financial condition will be adversely
affected.
JOSEPH WAGNER AND JEAN WILSON CAN VOTE AN AGGREGATE OF 71.2% OF OUR COMMON STOCK
AND CAN EXERCISE CONTROL OVER CORPORATE DECISIONS.
Joseph Wagner and Jean Wilson can vote an aggregate of 5,527,125 shares (or
71.2%) of our outstanding voting shares which includes 3,957,444 votes due to
their aggregate ownership of two shares of Series A Preferred Stock. Frank
Goldstin, our former Director and former Chief Executive Officer entered into
voting agreements with Joseph Wagner and Jean Wilson with respect to a total of
1,088,480 shares of Common Stock owned by Mr. Goldstin. The general affect of
the voting agreements is that Mr. Wagner and Ms. Wilson can vote 544,240 and
544,240 shares, respectively, out of approximately 1,485,282 shares of Common
Stock owned by Mr. Goldstin in addition to Common Stock that Mr. Wagner and Ms.
Wilson otherwise respectively own. Additionally, on December 28, 2004, the
Company's Board of Directors approved the issuance of Three (3) shares of Series
A Preferred Stock, One (1) each to Frank Goldstin, Jean Wilson, and Joseph
Wagner for services rendered. The Preferred Stock share issued to Mr. Goldstin
was subsequently returned to the Company and cancelled. The two remaining
shares of Series A Preferred Stock have the right, voting in aggregate, to vote
on all shareholder matters equal to fifty-one percent (51%) of the total vote.
Accordingly, Joseph Wagner and Jean Wilson will exercise control in determining
the outcome of all corporate transactions or other matters, including the
election of directors, mergers, consolidations, the sale of all or substantially
all of our assets, and also the power to prevent or cause a change in control.
The interests of Mr. Wagner and Ms. Wilson may differ from the interests of the
other stockholders and thus result in corporate decisions that are adverse to
other shareholders.
ASSUMING THE CANCELLATION OF THE OUTSTANDING SHARES OF SERIES A PREFERRED STOCK,
OUR OFFICERS AND DIRECTORS WILL NOT EXERCISE MAJORITY VOTING CONTROL OVER US AND
AS SUCH, WE MAY FACE A CHANGE IN CONTROL.
Assuming the closing of the Subsequent Funding and the cancellation of our two
outstanding shares of Series A Preferred Stock, which can vote in aggregate 51%
of our outstanding common stock, our Chief Executive Officer and Director Joseph
Wagner and our Chief Operation Officer, Jean Wilson, will not exercise majority
voting control over us. As a result, our shareholders who are not officers and
Directors of us will be able to obtain a majority of voting shares, which will
allow such shareholders, should they so choose, to re-elect new Directors who
may then appoint different individuals as officers of us. Because of this, Mr.
Wagner, Ms. Wilson or Mr. Spencer, may not be reappointed by our shareholders
when they are up for re-election and/or may be replaced by other individuals. If
that were to happen, our new management could affect a change in our business
focus and/or curtail or abandon our business operations, which in turn could
cause the value of our securities, to decline or become worthless.
RISKS RELATING TO OUR COMMON STOCK
THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN VOLATILE.
The market price of our Common Stock historically has fluctuated significantly
based on, but not limited to, such factors as general stock market trends,
announcements of developments related to our business, actual or anticipated
variations in our operating results, our ability or inability to generate new
revenues, conditions and trends in the event production industry and in the
industries in which our customers are engaged.
Our Common Stock is traded on the OTCBB under the symbol XAIN. In recent years,
the stock market in general has experienced extreme price fluctuations that have
oftentimes been unrelated to the operating performance of the affected
companies. Similarly, the market price of our Common Stock may fluctuate
significantly based upon factors unrelated or disproportionate to our operating
performance. These market fluctuations, as well as general economic, political
and market conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price of our Common Stock.
THE COMPANY HAS ESTABLISHED PREFERRED STOCK WHICH CAN BE DESIGNATED BY THE
COMPANY'S BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL AND HAS ESTABLISHED
SERIES A PREFERRED STOCK, WHICH GIVES THE HOLDERS MAJORITY VOTING POWER OVER THE
COMPANY.
The Company has 500,000 shares of preferred stock authorized. The shares of
preferred stock of the Company may be issued from time to time in one or more
series, each of which shall have distinctive designation or title as shall be
determined by the Board of Directors of the Company ("Board of Directors") prior
to the issuance of any shares thereof. The preferred stock shall have such
voting powers, full or limited, or no voting powers, and such preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof as adopted by the Board of
Directors. On December 28, 2004, the Company's Board of Directors approved the
issuance of Three (3) shares of Series A Preferred Stock, One (1) each to Frank
Goldstin, Jean Wilson, and Joseph Wagner for services rendered. The Preferred
Stock share issued to Mr. Goldstin was subsequently returned to the Company and
cancelled. The two remaining shares of Series A Preferred Stock, which we have
agreed to cancel for nominal consideration assuming the closing of the
Subsequent Funding, have the right, voting in aggregate, to vote on all
shareholder matters equal to fifty-one percent (51%) of the total vote. For
example, if there are 10,000,000 shares of the Company's common stock issued and
outstanding at the time of a shareholder vote, the holders of Series A Preferred
Stock, voting separately as a class, will have the right to vote an aggregate of
10,400,000 shares, out of a total number of 20,400,000 shares voting. Because
the Board of Directors is able to designate the powers and preferences of the
preferred stock without the vote of a majority of the Company's shareholders,
shareholders of the Company will have no control over what designations and
preferences the Company's preferred stock will have. Because of the shares of
Series A Preferred Stock, the holders of the two shares of Series A Preferred
Stock will exercise voting control over the Company. As a result of this, the
Company's shareholders will have less control over the designations and
preferences of the preferred stock and as a result the operations of the
Company.
THE CONVERSION OF THE SENIOR NOTES AND THE EXERCISE OF THE WARRANTS, MASTODON
WARRANTS AND VENTURE WARRANTS WILL CAUSE SUBSTANTIAL DILUTION TO OUR EXISTING
SHAREHOLDERS.
We had 3,802,250 shares of common stock outstanding as of August 8, 2006.
Assuming a conversion price of $0.75 per share (which conversion price and
therefore the number of shares issuable in connection with the conversion of the
Senior Notes is subject to adjustment as provided in the Senior Notes), the
principal amount of the Senior Notes will convert into 1,666,667 shares of
common stock and the outstanding Warrants, Mastodon Warrants and Venture
Warrants can be exercised for 1,175,000 shares of common stock. As such, the
conversion of the Senior Notes and exercise of the Warrants, Venture Warrants
and Mastodon Warrants will cause substantial dilution to our existing
shareholders.
INVESTORS MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK
DUE TO FEDERAL REGULATIONS OF PENNY STOCKS.
Our Common Stock will be subject to the requirements of Rule 15(g)9, promulgated
under the Securities Exchange Act as long as the price of our Common Stock is
below $4.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
additional disclosure in connection with any trades involving a stock defined as
a penny stock. Generally, the Commission defines a penny stock as any equity
security not traded on an exchange or quoted on NASDAQ that has a market price
of less than $4.00 per share. The required penny stock disclosures include the
delivery, prior to any transaction, of a disclosure schedule explaining the
penny stock market and the risks associated with it. Such requirements could
severely limit the market liquidity of the securities and the ability of
purchasers to sell their securities in the secondary market.
In addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in the Common Stock may have their
ability to sell their shares of the Common Stock impaired.
THE COMPANY HAS NOT PAID ANY CASH DIVIDENDS.
The Company has paid no cash dividends on its Common Stock to date and it is not
anticipated that any cash dividends will be paid to holders of the Company's
Common Stock in the foreseeable future. While the Company's dividend policy will
be based on the operating results and capital needs of the business, it is
anticipated that any earnings will be retained to finance the future expansion
of the Company.
OUR ARTICLES OF INCORPORATION, AS AMENDED, AND BYLAWS LIMIT THE LIABILITY OF,
AND PROVIDE INDEMNIFICATION FOR, OUR OFFICERS AND DIRECTORS.
Our Articles of Incorporation, as amended, generally limit our officers' and
directors' personal liability to the Company and its stockholders for breach of
fiduciary duty as an officer or director except for breach of the duty of
loyalty or acts or omissions not made in good faith or which involve intentional
misconduct or a knowing violation of law. Our Articles of Incorporation, as
amended, and Bylaws provide indemnification for our officers and directors to
the fullest extent authorized by the Nevada General Corporation Law against all
expense, liability, and loss, including attorney's fees, judgments, fines excise
taxes or penalties and amounts to be paid in settlement reasonably incurred or
suffered by an officer or director in connection with any action, suit or
proceeding, whether civil or criminal, administrative or investigative
(hereinafter a "Proceeding") to which the officer or director is made a party or
is threatened to be made a party, or in which the officer or director is
involved by reason of the fact that he or she is or was an officer or director
of the Company, or is or was serving at the request of the Company as an officer
or director of another corporation or of a partnership, joint venture, trust or
other enterprise whether the basis of the Proceeding is alleged action in an
official capacity as an officer or director, or in any other capacity while
serving as an officer or director. Thus, the Company may be prevented from
recovering damages for certain alleged errors or omissions by the officers and
directors for liabilities incurred in connection with their good faith acts for
the Company. Such an indemnification payment might deplete the Company's assets.
Stockholders who have questions respecting the fiduciary obligations of the
officers and directors of the Company should consult with independent legal
counsel. It is the position of the Securities and Exchange Commission that
exculpation from and indemnification for liabilities arising under the 1933 Act
and the rules and regulations thereunder is against public policy and therefore
unenforceable.
IF WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
Pursuant to new Over-The-Counter Bulletin Bo |