10QSB 1 form10qsb.txt XA, INC. FORM 10 QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from to ---------- --------- Commission file number 000-32885 XA, INC. -------- (Exact name of small business issuer as specified in its charter) NEVADA 88-0471263 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 875 NORTH MICHIGAN AVENUE, SUITE 2626, CHICAGO, ILLINOIS 60611 -------------------------------------------------------------- (Address of principal executive offices) (312)397-9100 ------------- (Registrant's telephone number) N/A -------------- (Former name and address) Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 7, 2005, 3,683,750 shares of common stock of the issuer were outstanding, which number does not include 10,000 shares which were issued subsequent to November 7, 2005("Common Stock"). PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS September 30, 2005 and 2004 2005 2004 ------------ ----------- ASSETS Current Assets Cash $ 1,280,272 $2,166,524 Accounts receivable 924,268 891,892 Work in process at cost 1,331,540 286,452 Prepaid expenses 2,249 42,370 Prepaid employment contract 73,754 - Officer's loans receivable - - ------------ ----------- Total Current Assets 3,612,084 3,387,238 Fixed Assets Equipment 178,666 119,792 Furniture and fixtures 53,059 45,605 Leasehold improvements 40,735 20,549 ------------ ----------- 272,459 185,946 Less accumulated depreciation (146,235) (122,019) ------------ ----------- 126,224 63,927 Other Assets Discount on Convertible Notes Payable 210,653 362,773 Deferred taxes 525,000 - Prepaid employment bonus 130,277 72,122 Deposits 7,713 37,465 Goodwill 865,309 349,120 ------------ ----------- 1,738,952 821,480 ------------ ----------- $ 5,477,260 $4,272,645 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 339,671 $ 65,759 Accrued payroll 1,600 60,430 Withheld and accrued taxes 4,266 277,725 Accrued interest - 17,071 Unearned revenues 2,258,716 - Line of credit - - Current portion of long term debt 2,032,500 - ------------ ----------- Total Current Liabilities 4,636,754 420,985 Long-term Debt Note payable - 2,232,500 Stockholders' Equity Series A preferred stock - - Common stock 3,684 65,971 Additional paid in capital 2,203,742 1,656,049 Retained income (1,366,919) 269,640 Treasury stock - (372,500) ------------ ----------- 840,507 1,619,160 ------------ ----------- $ 5,477,260 $4,272,645 ============ ===========
See accompanying notes to financial statements.
XA, Inc. and Subsidiary CONSOLIDATED INCOME STATEMENT For the Quarters Ended September 30, 2005 and 2004 3rd Quarter Year-to-date 3rd Quarter Year-to-date 2005 2005 2004 2004 ------------ ------------ ----------- ------------ Revenues Sales $ 2,188,240 $ 7,270,693 $ 1,954,415 $ 7,415,082 Cost of goods sold Direct production costs 938,127 4,341,248 871,821 4,129,869 ------------ ------------ ----------- ------------ Gross profit 1,250,113 2,929,445 1,082,594 3,285,213 Administrative expense Administrative 1,167,642 2,759,130 1,027,692 2,754,604 ------------ ------------ ----------- ------------ Income from operations 82,472 170,315 54,902 530,609 Other income and expenses Other income 5,911 9,344 (18,101) 43,866 Other expenses (81,669) (246,087) 2,018 (7,450) ------------ ------------ ----------- ------------ (75,758) (236,743) ( 16,083) 36,416 ------------ ------------ ----------- ------------ Income before taxes 6,714 (66,428) 38,819 567,025 Tax provisions Tax provisions - - (11,989) 207,067 ------------ ------------ ----------- ------------ Net Income (Loss) $ 6,714 $ (66,428) $ 50,808 $ 359,958 ============ ============ =========== ============ Earnings per Share Average shares outstanding 3,568,750 3,540,981 Basic $ 0.00 $ (0.02)
See accompanying notes to financial statements.
XA, Inc. and Subsidiary CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Period from January 1, 2004 through September 30, 2005 Additional Stock Series A Preferred Stock Common Stock ---- Paid-in Retained Subscription Shares Amount Shares Amount Capital Deficit Receivable Total -------- -------- ------------ --------- ----------- ------------ ------------ --------- Balance January 1, 2004 - - 52,600,003 52,600 448,400 (90,318) (250,000) 160,682 Correction of shares outstanding - - 13 - - - - Cancellation of Stock Subscription agreement - - (1,000,000) (1,000) (499,000) - 250,000 (250,000) 1:20 reverse stock split December 2004 - - (49,020,008) (49,020) 49,020 - - - Renegotiated Subscription agreement - - 32,188 32 514,968 - - 515,000 Shares issue for services - - 633,862 634 141,731 - - 142,365 Sale of stock - - 8,750 9 349,991 - - 350,000 Additional paid in capital from Warrant sales - - - - 121,000 - - 121,000 Treasury stock acquired and shares cancelled - - (22,969) (23) 23 (372,500) - (372,500) Shares issued for acquisition August 2004 - - 40,000 40 335,960 - - 336,000 Shares issued upon conversion of Notes payable - - 94,411 94 467,406 - - 467,500 Write-off of Discount on Notes Payable converted - - - - (96,317) - - (96,317) Shares for acquisition December 2004 - - 150,000 150 337,350 - - 337,500 Issue of Series A Preferred 3 - - - - - - - Net loss - - - - - (838,017) - (838,017) ------- ------- ------------ --------- ----------- ------------ ------------ ---------- Balance December 31, 2004 3 - 3,516,250 3,516 2,170,532 (1,300,835) - 873,213 Net Income - - - - - 44,587 - 44,587 ------- ------- ------------ --------- ----------- ------------ ------------ ---------- Balance March 31, 2005 3 - 3,516,250 3,516 2,170,532 (1,256,248) - 917,800 Shares for services - - 52,500 53 18,375 - - 18,428 Net Loss - - - - - (117,385) - (117,385) ------- ------- ------------ --------- ----------- ------------ ------------ ---------- Balance June 30, 2005 3 $ - 3,568,750 $ 3,569 $ 2,188,907 $ (1,373,633) $ - $ 818,843 ======= ======= ============ ========= =========== ============ ============ ========== Shares for services 115,000 115 14,835 14,950 Net Income 6,714 6,714 Balance September 30, 2005 3 $ - 3,683,750 $ 3,684 $ 2,203,742 $ (1,366,919) $ - $ 840,507 ======= ======= ============ ========= =========== ============ ============ ==========
See accompanying notes to financial statements.
XA, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS For the Quarters Ended September 30, 2005 and 2004 3rd Quarter Year to date 3rd Quarter Year to date 2005 2005 2004 2004 ----------- ------------ ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $ 6,714 $ (66,428) $ 50,808 $ 359,958 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Provision for deferred taxes Depreciation 6,614 21,302 1,222 3,489 Amortization of Discounts on Notes Payable 33,307 99,921 33,252 33,252 Stock for services 14,950 33,399 8,787 14,727 Changes in Current assets and liabilities: (Increase) Decrease in Accounts receivable (552,615) (465,239) 397,677 (692,223) (Increase) in Work in process (715,407) (1,144,934) (240,522) (240,522) (Increase) Decrease in Prepaid expenses 7,178 485 (1,879) (1,879) (Increase) Decrease in Officers loans - - 30,740 (53,371) (Increase) in Prepaid employment contracts 52,065 47,584 - - (Decrease) Increase in Accounts payable 101,224 93,814 (287,943) (35,619) (Decrease) Increase in Accrued payroll 1,600 (16,198) (18,287) (7,816) (Decrease) Increase in Accrued interest - - 18,750 18,750 (Decrease) in Withheld and accrued taxes 1,409 60 (18,634) 208,583 Increase (Decrease) in Unearned revenue 1,271,677 1,689,030 - - ----------- ------------ ----------- ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 228,716 292,796 (26,029) (392,671) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Fixed assets (1,622) (23,086) (43,646) (60,532) Increase in Goodwill - (57,075) - - (Increase) Decrease in Deposits - 30,467 1,500 (37,465) ----------- ------------ ----------- ------------ NET CASH (USED) BY INVESTING ACTIVITIES (1,622) (49,694) (42,146) (97,997) CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock 53 - 615,000 Sale of Warrants - 121,000 (Increase) Decrease in Discounts on Convertible Notes (127,512) (393,525) Increase in Line of credit - - - - Payments on Line of credit (205,400) (205,400) Increase in Long - term debt - - 1,250,000 2,500,000 Payments on Long - term debt - - (251,276) (294,535) ----------- ------------ ----------- ------------ NET CASH USED BY FINANCING ACTIVITIES - 53 665,812 2,342,540 ----------- ------------ ----------- ------------ NET INCREASE (DECREASE) IN CASH 227,094 243,155 597,637 1,851,872 CASH ACQUIRED IN ACQUISITION - - 8,152 8,152 CASH AT BEGINNING OF PERIOD 1,053,178 1,037,117 1,560,735 306,500 ----------- ------------ ----------- ------------ CASH AT END OF PERIOD $ 1,280,272 $ 1,280,272 $ 2,166,524 $ 2,166,524 =========== ============ =========== ============
See accompanying notes to financial statements. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 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 February 24, 2004 the Company issued 1,150,000, pre-reverse split shares of common stock to two entities as a finder's fee in consideration for services provided to the Company in connection with the reverse merger. Also on that date the Company issued 4,790,000 shares to employees in consideration for services provided to the Company. On March 11, 2004 the Company cancelled 459,375, pre-reverse split shares which were returned to the Company in satisfaction of a shareholder receivable. The shares were valued at $372,500. On April 19, 2004 the Company entered into a stock subscription agreement for the sale of 175,000, pre-reverse shares for $350,000. On June 29, 2004, the Company secured a $2,500,000 financing commitment from five unrelated entities for the purchase of convertible promissory notes, and the issuance of Class A Warrants and Class B Warrants to purchase shares of the Company's common stock. The Company received $1,250,000 for the purchase of convertible promissory notes. The notes will convert into 500,000 shares of common stock, at the rate of $2.00 per share. The Class A Warrants are for 250,000 shares of common stock at $9.60 per share. The Warrants must be exercised within four years. The Class B Warrants are for 500,000 shares of common stock, at the rate of $5.00 per share. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ------------------------------------------------------------------------ The Class B warrants expired unexercised on September 3, 2005. The Warrants issued were valued at $121,000. On July 2, 2004, the Company issued 100,000 pre-reverse split shares of common stock for one year of filing services. The shares were valued by the Company's Board of Directors at $2,000. On August 2, 2004, the Company entered into an asset purchase agreement with a floral and event d'cor company. The Company purchased all the assets and assumed certain liabilities of the entity for 800,000 pre-reverse split shares of the Company's common stock.
Assets Acquired Cash $ 8,152 Accounts receivable 18,050 Inventories 45,930 Furniture 1,500 Goodwill 349,120 -------- Total $422,752 ======== Liabilities Assumed Accounts payable $67,132 Accrued payroll 11,205 Withheld and accrued taxes 3,015 Line of credit 5,400 ------- Total $86,752 =======
On August 9, 2004 the Company issued 125,000 pre-reverse split shares of common stock as a finder's fee for the convertible debt issued earlier in the year. The shares were valued by the Company's Board of Directors at $2,500. Also, on August 9, 2004, the Company issued 70,000 pre-reverse split shares of common stock for investor relations. The shares were valued by the Company's Board of Directors at $1,400. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ------------------------------------------------------------------------ On August 13, 2004, the Company issued 5,900,000 pre-reverse split shares of common stock as employment bonuses to two key officers. The employment agreements is for 36 months and the stock has forfeit rights if the employment should terminate before the end of the period. The shares were valued by the Company's Board of Directors at $118,000. This amount is being amortized on a straight line basis over the 36 month life of the employment agreements. Amortization expense in 2004 for these employment agreements was $16,385. On September 15, 2004, the Company converted $267,500 of Convertible debt into 1,076,693 pre-reverse split shares of the Company's common stock. On November 1, 2004, the Company converted $200,000 of Convertible debt into 811,533 pre-split shares of the Company's common stock. On December 8, 2004, the Company issued 542,235 pre-reverse split shares of common stock to employees in satisfaction of certain provisions of employment agreements. The shares were valued at $10,845. On December 3, 2004, the Board of Directors of the Company, with shareholder approval, authorized a 1:20 reverse split of the outstanding shares of the Company's common stock. Unless otherwise stated the shares in these financial statements have been adjusted to reflect this reverse split as if it had taken place at the beginning of the year. On December 3, 2004, the shareholders of the Company authorized changing the Company's name to XA, Inc. On December 29, 2004, the Board of Directors of the Company, with shareholder approval authorized the issue of 3 shares of Series A Preferred Stock. Also on December 29, 2004, the Company entered into an asset purchase agreement with an event d'cor company. The Company purchased certain assets and assumed certain liabilities of the entity for 150,000 shares of the Company's common stock.
Assets Acquired Equipment $ 6,961 Leasehold Improvements 20,186 Goodwill and other intangibles 310,353 ------- Total $337,500 ======== Liabilities Assumed None $ -0-
XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ------------------------------------------------------------------------ On May 26, 2005, the Company issued 52,500 shares of common stock for services. The shares were valued at $18,428. 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. 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 years for: 2005 2004 ---- ---- Interest $ -0- $19,391 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 quarters ended September 30, 2005 and 2004 was $6,614 and $1,222 respectively. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ------------------------------------------------------------------------ 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. The estimated tax provision at September 30, 2005 and 2004 consists of the following: Current Provision 2005 2004 ---- ---- Federal $ -0- $190,000 State -0- 17,067 ------- -------- $ -0- $207,067 ======= ======== The Company has net loss carryforwards of approximately $1,242,000 that 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 September 30, 2005 and 2004, the Company had deposits in banks in excess of the FDIC insurance limit. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 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 expense for these costs in the quarter and year-to-date ended September 30, 2005 and 2004, was $33,307 and $33,252 respectively. NOTE 3 - NOTES PAYABLE -------------------------- On December 1, 2003 the Company renewed its Line of Credit agreement with a bank. The note for $200,000 is due on demand, and if no demand is made, the outstanding balance is due April 4, 2004. Interest varies at 0.5% over the Prime Rate as published in the Wall Street Journal. The rate at December 31, 2003 was 4.5%. The note was paid in full on August 5, 2004. The balance of this note at September 30, 2005 and 2004 was $0 and $0 respectively. On May 1, 2002, the Company entered into a loan agreement with a local bank for $417,000. The initial interest rate on the loan was 5.25% that varies at 0.5% over the Wall Street Journal Prime Rate. The rate at December 31, 2003 was 4.5%. The loan calls for 60 monthly payments of $7,933 including interest. The loan is unsecured, however the bank has the right of offset in all the Company's accounts with the lender. The note was paid in full on August 5, 2004. The balance of this note at September 30, 2005 and 2004 was $0 and $0 respectively. On August 12, 2004, the Company entered into a Line of Credit agreement with a bank for $750,000. The note is due August 12, 2005. 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 September 30, 2005 was $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 holder'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. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 NOTE 3 - NOTES PAYABLE - CONTINUED ---------------------------------------- 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 September 30, 2005 and 2004 was $2,032,500 and $2,232.500 respectively. Total Long-Term debt at December 31, is as follows: 2005 2004 ---- ---- Long-term debt $2,032,500 $2,232,500 Less Current portion ($2.032,500) -0- ----------- ---------- Long-term debt $ -0- $2,232,500 =========== ========== Maturities on long-term debt at December 31, 2004 are as follows: Year ending December 31, 2004 $ -0- 2005 -0- 2006 2,032,500 2007 -0- 2008 -0- 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. There were 3 shares outstanding at September 30, 2005. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 NOTE 4 - EQUITY - CONTINUED -------------------------------- COMMON STOCK ------------- On December 3, 2004 the shareholder of the Company increased the total authorized shares of common stock to 200,000,000 with a par value of $.001 per share. The Company had 3,683,750 shares outstanding at September 30, 2005. STOCK SUBSCRIPTION RECEIVABLE ------------------------------- The exchange agreement with Synreal called for two subscription agreements to be executed by two entities for the purchase of 1,000,000 shares of the Company's common stock for $500,000. $250,000 was paid with the subscription agreements and the balance due in 35 days and was paid in full at September 30, 2005. TREASURY STOCK --------------- On March 11, 2004 the majority shareholder of the Company surrendered 465,625 shares of common stock in satisfaction of $372,500 of the officer''s receivable. 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. NOTE 5 - RELATED PARTIES ---------------------------- The Company has from time to time made advances to its principal stockholder and Chief Executive Officer. The advances are unsecured, and bear no interest. The total outstanding under this informal arrangement was $-0- and $-0- at September 30, 2005 and 2004 respectively. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 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 September 30, 2005 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 $1,750 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 $1,264. 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: Period Monthly Rent Year 1 $5,250 Year 2 $5,408 Year 3 $5,570 On July 23, 2004, the Company entered into a five-year equipment lease with a financing company with a monthly payment of $613.00. XA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 NOTE 6 - COMMITMENTS - CONTINUED ------------------------------------- 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. Future minimum payments due under these lease agreements are as follows: 2004 $312,726 2005 $280,151 2006 $266,175 2007 $215,296 2008 $199,144 NOTE 7 - 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. NOTE 8 - SERVICE AGREEMENTS ------------------------------- On May 11, 2005, the Company entered into a service agreement with its General Counsel to provide services through December 31, 2005. The agreement calls for payments of $8,250 per month and the issuance of 75,000 shares of common stock. The shares are to vest as follows; 35,000 shares on April 30, 2005, with the balance vesting at the rate of 5,000 shares each month, at the end of each month, throughout 2005. On May 11, 2005, the Company entered into a service agreement with a company to provide electronic filing services with the United States Securities and Exchange Commission through May 31, 2006. The agreement calls for payment by the issuance of 40,000 shares of common stock. The shares vest at the rate of 17,060 on April 30, 2005, with the balance vesting at the rate of 3,077 shares per month through the end of the agreement. NOTE 9 - LEGAL PROCEEDINGS ----------------------------- Our wholly owned subsidiary, The Experiential Agency, Inc., formerly G/M! Productions, Inc., an Illinois corporation has a pending lawsuit, Erie West, L.L.C., v. G/M! Productions, Inc., No. 04 M1 137777, with one of our former landlords, in the Circuit Court of Cook County, Illinois. The lawsuit is in connection with office space we previously leased from Eire West, L.L.C. (the "Landlord"), at 308 West Erie Street, Chicago, Illinois. The Landlord in its First Amended Verified Complaint, alleged that we failed to provide the Landlord a cash deposit or new standby letter of credit when our previous letter of credit expired; and that the Landlord is owed money for unpaid rental fees, which it alleged we stopped paying under our lease with Landlord on July 1, 2004, which lease was to run until March 31, 2008. We filed an Answer and Affirmative Defenses to First Amended Verified Complaint to the Landlord's claims in the Circuit Court of Cook County, Illinois on May 31, 2005 (the "Answer"). In the Answer, we pleaded certain affirmative defenses, including that we have fully performed all conditions and covenants under the lease, and that we are therefore not in default; that we validly terminated the lease on June 30, 2004, after giving previous notice on several occasions to the Landlord, as a result of the fact that we were prevented the use and quiet enjoyment of the premises; and that the Landlord had the duty and obligation at all times to take reasonable steps to mitigate the damages sustained (the "Affirmative Defenses"). The Landlord subsequently filed a Second Amended Verified Complaint, alleging our failure to provide it with a security deposit, our failure to pay rent and the rent differential between the amount the Landlord was able to receive for rental of the property and what our lease stated we would pay. The total judgment prayed for in the Second Amended Verified Complaint was $361,064.58. As of the date of this filing, we have not responded to the Landlord's Second Amended Verified Complaint, and we plan to respond by asserting our Affirmative Defenses. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH ON THE FORWARD LOOKING STATEMENTS AS A RESULT OF THE RISKS SET FORTH IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, GENERAL ECONOMIC CONDITIONS, AND CHANGES IN THE ASSUMPTIONS USED IN MAKING SUCH FORWARD LOOKING STATEMENTS. BUSINESS DEVELOPMENT XA, Inc. (the "Company"), 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. Our principal executive offices are located at 875 North Michigan Avenue, Suite 2626, Chicago, Illinois 60611. Our telephone number is (312) 397-9100 and our fax number is (312) 573-1515. 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 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. On February 2, 2004, the Company affected a 13 to 1 forward stock split. On December 9, 2004, the Company affected 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 (the "Subscription Agreement") with Alpha Capital Aktiengesellschaft ("Alpha Capital"), Stonestreet Limited Partnership ("Stonestreet"), Whalehaven Funds Limited ("Whalehaven"), Greenwich Growth Fund Limited ("Greenwich") and Genesis Microcap Inc. ("Genesis") (collectively the "Note Holders") 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 "Convertible Notes" or "Notes"). Following the reverse stock split on December 9, 2004, the conversion price of the Notes would have been $5.00 per share, however, pursuant to a Waiver Agreement the Company and the Note Holders agreed to change the conversion price of the Notes to $2.00 per share. Of the $2,500,000 in Convertible Notes issued to the Note Holders, $467,500 in principal and $4,555.67 in interest have been converted into a total of 94,412 post split shares, leaving $2,032,500 (not including any accrued interest) which can be converted into approximately 1,016,250 shares of Common Stock. 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 Class A Warrants and the Class B Warrants are collectively referred to herein as the "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 Company also agreed to extend the expiration date of the Class B Warrants through September 3, 2005, which Warrants have since expired unexercised. As part of the Company's growth strategy, the Company purchased all of the assets of Fiori, Inc. an event decor company ("Fiori"), in August 2004, in exchange for 40,000 restricted shares of the Company's Common Stock and the assumption of certain liabilities of Fiori. Included in the assets purchased by the Company were accounts receivable, floral inventory, and glassware. Excluded from the sale of assets were insurance policies, claims for tax refunds, employee plans, and all real estate held by Fiori or affiliated entities. Additionally, the Company agreed to assume certain liabilities of Fiori, including accounts payable, accrued payroll, and customer deposits. On January 3, 2005, in furtherance of the Company's growth through acquisition strategy, the Company entered into an Asset Acquisition Agreement to purchase certain assets of Musters & Company, Inc., a New York corporation ("Musters"), an event planning and decor company whose operations are located in the floral district in New York, in exchange for 150,000 restricted shares of the Company's Common Stock and the assumption of the leases of Musters. Entry into the Asset Acquisition Agreement was approved by the Company's board of directors on December 29, 2004. Included in the assets purchased by the Company were copyrights, contract rights, customer lists, goodwill, leasehold improvements, leases, permits, fixed assets, software, trademarks, trade names, trade secrets, internet domains, and phone numbers. Excluded from the sale of assets were accounts receivable, insurance policies, claims for tax refunds, employee benefit plans (or interests therein) and all real estate (excluding leasehold improvements) either held by Musters or an affiliated entity. BUSINESS OF THE COMPANY 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, 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 sixteen (16) years, XA has worked with clients around the globe to design and produce strategic multidimensional, highly stylized and integrated event programs. During the fiscal year ended December 31, 2004, XA planned and executed over one hundred (100) events that were attended by more than an aggregate of approximately twenty thousand (20,000) people in the United States and foreign markets. During the three months ended September 30, 2005, the Company planned and executed approximately 25 events for clients including L'Oreal USA, Barnes & Noble, Cargo Magazine, VH1, W Hotels and Disney. 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. 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 * Destination Management * XA Interactive (Digital Marking) 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. The following is a more detailed description of the services that XA provides through its vertically integrated infrastructure: 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 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. Significant Events During The First Three Quarters Of 2005 The Company generated new revenues and new client acquisitions through its two acquisitions, Fiori, Inc. an event decor company ("Fiori"), and its acquisition of the assets of Musters & Company, Inc., an event planning and decor company ("Musters"), which were completed in 2004 and 2005, respectively. XA created a new division of the Company, "XA Interactive," in the first quarter of 2005, which focuses on digital marketing client services. We hope to use our XA Interactive division to help us create and incorporate synergies with our current event marketing database. The Company also added a new business development team member in Los Angeles, California, in March 2005. Additionally, in February 2005, the Company's New York Creative Director, Mark Musters, was named one of New York's Top 10 Event Designers by BizBash Media. On October 18, 2005, the Company named Valerie Morel as the Executive Vice President of Marking and International Development of its wholly owned subsidiary, The Experiential Agency, Inc., an Illinois corporation. COMPARISON OF OPERATING RESULTS THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004 Sales revenue for the three months ended September 30, 2005, increased $233,825 or 12.0%, to $2,188,240, as compared to $1,954,415 for the three months ended September 30, 2004. The increase in sales revenue for the three months ended September 30, 2005, was due to our addition of two business development account managers in 2005, which business development account managers were added prior to the three month period ended September 30, 2005. Cost of goods sold as a percentage of sales for the three months ended September 30, 2005 decreased to 42.9% of gross revenue as compared to 44.6% of gross revenue for the three months ended September 30, 2004. Costs of goods sold increased $66,306 or 7.6%, to $938,127 for the three months ended September 30, 2005, compared to $871,821 for the three months ended September 30, 2004. The increase in cost of goods sold was due to various factors including the increased cost of key vendors associated with our projects, increased travel expenses, and the negotiated use of certain budget factors and vendors by our clients, which caused us to have lower margins on some of our events. The decrease in cost of goods sold as a percentage of revenue was due to the greater focus of our management on increasing our margins and decreasing our costs of good sold. Gross profit as a percentage of sales ("gross profit margin") increased to 57.1% for the three months ended September 30, 2005 from 55.4% for the three months ended September 30, 2004. The increase in gross profit margin was due to the decrease of 1.7% in costs of good sold coupled with the 12% increase in revenues. Gross profit increased $167,519 or 15.5%, to $1,250,113 for the three months ended September 30, 2005, compared to gross profit of $1,082,594 for the three months ended September 30, 2004. Administrative expenses increased $125,000 or 13.6% to $1,167,642 for the three months ended September 30, 2005, compared to $1,027,692 for the three months ended September 30, 2004. The increase in administrative expenses was principally attributed to our two new business development employees, as well as the increased expenses related to our acquisitions of Fiori and Muster's during the year ended 2004 and 2005, respectively. The Company had income from operations of $82,472 for the three months ended September 30, 2005, compared to income from operations of $54,902 for the three months ended September 30, 2004, an increase of $27,570 or 50.2% from the prior period. This was mainly attributable to the Company's decrease in costs of good sold as a percentage of sales and increase in sales revenues from the prior period. Other income and expenses was ($75,758) for the three months ended September 30, 2005, consisting of ($81,669) of other expenses and $5,911 of other income, compared to ($16,083) of other income and expenses for the three months ended September 30, 2004, which consisted of ($18,101) of other income and $2,018 of other expenses. The Company had net income of $6,714 for the three months ended September 30, 2005 as compared to net income of $50,808 for the three months ended September 30, 2004, a decrease from the prior period of $44,094 or 86.8%. The decrease in net income was principally attributed to the 371% increase in other income and expenses from the prior period and the 13.6% increase in administrative expenses. NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 Sales revenue for the nine months ended September 30, 2005, decreased $144,389 or 1.9%, to $7,270,693, as compared to $7,415,082 for the fiscal nine months ended September 30, 2004. The decrease in sales revenue for the nine months ended September 30, 2005, was partly due to a system mandating more frequent management attention to the analysis of matching of revenues and costs. While more frequent management attention is now applied to the matching of revenues and costs, the Company has not made any changes in its accounting policy. The result of this better matching was that there was an increase in identification of revenues classified as unearned until all necessary steps including the incurring of matching cost have been completed. Cost of goods sold as a percentage of sales for the nine months ended September 30, 2005 increased to 59.7% of gross revenue as compared to 55.7% of gross revenue for the nine months ended September 30, 2004. Cost of goods sold increased $211,379 or 5.1%, to $4,341,248 for the nine months ended September 30, 2005, compared to $4,129,869 for the nine months ended September 30, 2004. The increase in cost of goods sold and the increase in cost of goods sold as a percentage of revenue was due to various factors including the increased cost of key vendors associated with our projects, increased travel expenses, and the negotiated use of certain budget factors and vendors by our clients, which caused us to have lower margins on some of our events. Gross profit as a percentage of sales ("gross profit margin") decreased to 40.3% for the nine months ended September 30, 2005 from 44.3% for the nine months ended September 30, 2004. The decrease in gross profit margin was due to increases in our costs of good sold of 5.1% and decreases in our sale revenue of 1.9% for the nine months ended September 30, 2005. Gross profit decreased $355,768 or 10.8%, to $2,929,445 for the nine months ended September 30, 2005, compared to gross profit of $3,285,213 for the nine months ended September 30, 2004. Administrative expenses increased $4,526 to $2,759,130 for the nine months ended September 30, 2005, compared to $2,754,604 for the nine months ended September 30, 2004. The Company had income from operations of $170,315 for the nine months ended September 30, 2005, compared to income from operations of $530,609 for the nine months ended September 30, 2004, a decrease of $360,294 or 67.9% from the prior period. This was mainly attributable to the Company's decreased sales and increased costs of good sold. Other income and expenses was ($236,743) for the nine months ended September 30, 2005, which consisted of $9,344 of other income and ($246,087) of other expenses compared to $36,416 of other income and expenses for the nine months ended September 30, 2004, consisting of $43,866 of other income and ($7,450) of other expenses, which represents a $273,159 or 750% decrease in other income and expenses from the prior period. The Company had a net loss of $66,428 for the nine months ended September 30, 2005 as compared to net income of $359,958 for the nine months ended September 30, 2004, a decrease from the prior period of $426,386 or 118.5%. The decrease in net income was principally attributed to an increase of 5.1% in the Company's cost of good sold, a decrease of 1.9% in sales revenue and a 750% decrease in other income and expenses and increases, compared to the prior period, as well as our better matching of revenues and costs as described by GAAP and the resulting increase in our unearned revenues for the nine months ended September 30, 2005. LIQUIDITY AND CAPITAL RESOURCES The Company had total assets of $5,477,260 as of September 30, 2005, which consisted of current assets of $3,612,084, fixed assets of $126,224, and other assets of $1,738,952. As of September 30, 2005, the Company's total current assets were $3,612,084, which consisted of $1,280,272 of cash, $924,268 of accounts receivable, $1,331,540 of work in process at cost, $2,249 of prepaid expenses, and $73,754 of prepaid employment contract. 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 the remaining 150,000 are subject to a risk of forfeiture, with 75,500 shares becoming fully vested as of each December 31, 2005 and December 31, 2006, if Mr. Wagner's employment is not terminated prior to those dates (unless his employment is terminated for good reason by Mr. Wagner, terminated without cause by the Company, or terminated with the mutual consent of both Mr. Wagner and the Company). Of Ms. Wilson's 70,000 restricted shares, 25,000 became fully vested as of December 31, 2004, and the remaining 45,000 are subject to a risk of forfeiture, with 22,500 shares becoming fully vested as of each December 31, 2005 and December 31, 2006, if Ms. Wilson's employment is not terminated prior to those dates (unless her employment is terminated for good reason by Ms. Wilson or terminated without cause by the Company). The Company had working capital of $1,024,670 and a ratio of current assets to current liabilities of 0.78. The Company had fixed assets of $126,224 as of September 30, 2005, which consisted of equipment of $178,666, furniture and fixtures of $53,059, and leasehold improvements of $40,735, offset by ($146,235) in accumulated depreciation. The Company had other assets of $1,738,952 as of September 30, 2005, which consisted of $210,653 discount on convertible notes payable, $525,000 of deferred taxes, $130,277 of prepaid employment bonus, $7,713 of deposits and $865,309 of goodwill. The prepaid employment bonus consisted of prepaid employment bonuses with the Company's senior management. The Company had total liabilities, consisting solely of current liabilities of $4,636,754 as of September 30, 2005, which consisted of $339,671 of accounts payable, $4,266 of withheld and accrued taxes, $2,258,716 of unearned revenues and $2,032,500 of current portion of long term debt ("Note"). Note payable consists of Convertible Notes held by five (5) unrelated parties. Each Note accrues interest at 6% per year and is convertible into the Company's Common Stock at $2.00 per share. The Notes can therefore be converted into 1,016,250 shares of the Company's Common Stock as of September 30, 2005. The $2,258,716 of unearned revenue was in connection with the Company better matching its revenues and costs as described by GAAP and the resulting increase in unearned revenues as of September 30, 2005. The Company had net cash provided by operating activities of $228,716 for the three months ended September 30, 2005, which consisted of net income of $6,714, depreciation of $6,614, amortization of discounts on note payable of $33,307, stock for services of $14,950, increase in accounts receivable of $552,615, increase in work in progress of $715,407, decrease in prepaid expenses of $7,178, decrease in prepaid employment contracts of $52,065, increase in accounts payable of $101,224, increase in accrued payroll of $1,600, increase in withheld and accrued taxes of $1,409 and increase in unearned revenue of $1,271,677. The Company had net cash used by investing activities of $1,622 for the three months ended September 30, 2005, which consisted of ($1,622) of purchase of fixed assets. The Company had $-0- of net cash used by financing activities for the three months ended September 30, 2005. The Company had net cash provided by operating activities of $292,796 for the nine months ended September 30, 2005, which consisted of a net loss of $66,428, depreciation of $21,302, amortization of discounts on note payable of $99,921, stock for services of $33,399, increase in accounts receivable of $465,239, increase in work in progress of $1,144,934, decrease in prepaid expenses of $485, decrease in prepaid employment contracts of $47,584, increase in accounts payable of $93,814, decrease in accrued payroll of 16,198, increase in withheld and accrued taxes of $60 and increase in unearned revenue of $1,689,030. The Company had net cash used by investing activities of $49,694 for the nine months ended September 30, 2005, which consisted of ($23,086) of purchase of fixed assets, ($57,075) of increase in goodwill, which was offset by $30,467 in deposits. The Company had $53 of net cash used by financing activities for the nine months ended September 30, 2005, which consisted of $53 of sale of common stock. The Company requires $1 to $5 million of financing to support strategic acquisitions and the current expansion plan for the next 18 to 24 months. This financing is in addition to $2.5 million already raised. The Company received an aggregate of $2.5 million of Convertible Note financing from five (5) unrelated parties. In connection with the Convertible Note financing, we issued Class A Warrants to purchase 250,000 shares of our Common Stock at an exercise price of $9.60 per share and Class B Warrants to purchase 500,000 shares of our Common Stock at an exercise price of $5.00 per share. The Class B Warrants expired unexercised on September 3, 2005. There is currently $2,032,500 remaining under the principal amounts of the Notes (not including any accrued and unpaid interest), of which approximately one-half is due in June 2006 and one-half is due in September 2006. Currently the Company does not have enough cash on hand to pay the amounts due on the Notes. A substantial portion of the Company's investment capital 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. As of the date of this Report, the Note Holders have purchased, and the Company has issued, all of the Convertible Notes having an aggregate principal amount of $2,500,000. Of the $2,500,000 that the Company owed, the Note Holders converted $467,500 of principal and $4,562.33 of accrued interest into 94,154 post split shares of Common Stock as of the date of this filing, leaving $2,032,500 still owed to the Note Holders as of the date of this filing, not including any accrued and unpaid interest. The Company has a line of credit agreement which it entered into on August 12, 2004, with a bank for $750,000. The note was due August 12, 2005, and the interest varies at 0.25% over the bank's prime rate. The Company's assets secure the note. The balance outstanding under this line of credit at September 30, 2005 was $0. On August 12, 2005, the line of credit agreement was automatically renewed for another year under the same terms and conditions. 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. The Company is currently performing due diligence on a number of potential acquisitions, but has not entered into any Letter of Intents for any potential acquisitions. The capital requirements as stated will be sufficient to complete the Company's initial acquisition and expansion phase over the next 18 to 24 months. The Company may require additional investment capital in the future to support additional strategic acquisitions and further expansion initiatives. 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. Without additional financing, 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 repay the Notes. 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. RISK FACTORS ---------------------------- RISKS RELATING TO THE COMPANY WE HAVE A PRESENT NEED FOR CAPITAL IN ADDITION TO $2.5 MILLION ALREADY RAISED. It is imperative that we raise $1 to $5 million of financing to pursue addtional acquisitions if the opportunity arises, which is in addition to $2.5 million already raised, and $2,032,500 which we still owe to the Note Holders. During 2004, we received an aggregate of $2.5 million of Convertible Note financing from five (5) unrelated parties. In connection with the Convertible Note financing, we issued Class A Warrants to purchase 250,000 shares of our Common Stock at an exercise price of $9.60 per share and Class B Warrants to purchase 500,000 shares of our Common Stock at an exercise price of $5.00 per share, which have since expired. 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. 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 consulting agreement with the Company and 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 Financial Officer, Chief Operating Officer, Treasurer and as a director of the Company pursuant to an employment agreement with the Company. 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. 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 $361,065 IN DAMAGES. Our former landlord, Eire West, L.L.C. (the "Landlord"), filed a lawsuit against us (described in greater detail under "Legal Proceedings," below) claiming approximately $361,065 in damages and alleging that we failed to provide the Landlord a cash deposit or new standby letter of credit when our previous letter of credit expired; and 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 an answer to the Landlord's allegations, denying certain allegations and asserting affirmative defenses to others. If we are forced to pay the approximately $361,065 in alleged damages and/or additional amounts in attorney's fees and interest, 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 54.9% OF OUR COMMON STOCK AND CAN EXERCISE CONTROL OVER CORPORATE DECISIONS. Joseph Wagner and Jean Wilson can vote an aggregate of 4,125,752 shares (or 54.9%) of our outstanding Common Stock which includes 2,556,072 votes due to their aggregate ownership of two shares of Series A Preferred Stock. Frank Goldstin, our 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 1,584,032 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 three 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. 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 three 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. 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 three 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. OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE COMMISSION WHICH LIMITS THE TRADING MARKET IN OUR COMMON STOCK, MAKES TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR COMMON STOCK. Our Common Stock is considered a "penny stock" as defined in Rule 3a51-1 promulgated by Commission under the Securities Exchange Act of 1934. In general, a security which is not quoted on NASDAQ or has a market price of less than $5 per share where the issuer does not have in excess of $2,000,000 in net tangible assets is considered a penny stock. The Commission's Rule 15g-9 regarding penny stocks impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Thus, the rules affect the ability of broker-dealers to sell our Common Stock should they wish to do so because of the adverse effect that the rules have upon liquidity of penny stocks. Unless the transaction is exempt under the rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account. As a result of the penny stock rules the market liquidity for our Common Stock may be adversely affected by limiting the ability of broker-dealers to sell our Common Stock and the ability of purchasers to resell our Common Stock. 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. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations is based upon our audited financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivable, investment values, income taxes, the recapitalization and contingencies. We base our estimates on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. ITEM 3. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by our last Annual Report on Form 10-KSB and up to and including the end of the period covered by this Quarterly Report on Form 10-QSB (the "Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Changes in internal control over financial reporting. There were no significant changes in our internal control over financial reporting during the last fiscal year and/or up to and including the date of this filing that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Our wholly owned subsidiary, The Experiential Agency, Inc., formerly G/M! Productions, Inc., an Illinois corporation has a pending lawsuit, Erie West, L.L.C., v. G/M! Productions, Inc., No. 04 M1 137777, with one of our former landlords, in the Circuit Court of Cook County, Illinois. The lawsuit is in connection with office space we previously leased from Eire West, L.L.C. (the "Landlord"), at 308 West Erie Street, Chicago, Illinois. The Landlord in its First Amended Verified Complaint, alleged that we failed to provide the Landlord a cash deposit or new standby letter of credit when our previous letter of credit expired; and that the Landlord is owed money for unpaid rental fees, which it alleged we stopped paying under our lease with Landlord on July 1, 2004, which lease was to run until March 31, 2008. We filed an Answer and Affirmative Defenses to First Amended Verified Complaint to the Landlord's claims in the Circuit Court of Cook County, Illinois on May 31, 2005 (the "Answer"). In the Answer, we pleaded certain affirmative defenses, including that we have fully performed all conditions and covenants under the lease, and that we are therefore not in default; that we validly terminated the lease on June 30, 2004, after giving previous notice on several occasions to the Landlord, as a result of the fact that we were prevented the use and quiet enjoyment of the premises; and that the Landlord had the duty and obligation at all times to take reasonable steps to mitigate the damages sustained (the "Affirmative Defenses"). The Landlord subsequently filed a Second Amended Verified Complaint, alleging our failure to provide it with a security deposit, our failure to pay rent and the rent differential between the amount the Landlord was able to receive for rental of the property and what our lease stated we would pay. The total judgment prayed for in the Second Amended Verified Complaint was $361,064.58. As of the date of this filing, we have not responded to the Landlord's Second Amended Verified Complaint, and we plan to respond by asserting our Affirmative Defenses. The Company is not aware of any pending legal proceeding other than the one described above, to which it is a party which is material to its business operations. ITEM 2. CHANGES IN SECURITIES The Company entered into an Agreement with its attorney, David M. Loev, Attorney at Law ("Attorney") in January 2005, whereby Attorney agreed to perform legal services for the Company until December 2005, for the payment of $8,250 per month plus reimbursement for expenses and 65,000 shares of the Company's Common Stock, which the Company agreed to register pursuant to an S-8 Registration Statement. In May 2005, Attorney agreed to modify that agreement for consideration of an additional 10,000 shares, with an effective date of April 1, 2005. The amended agreement calls for Attorney to be paid $8,250 per month and a total of 75,000 S-8 registered shares, for legal services to the Company. The 75,000 shares will vest to attorney on the last day of each month covered by the amended agreement. Attorney vested 35,000 shares on April 30, 2005, which amount included the 10,000 shares given to Attorney in consideration for Attorney modifying the Agreement, and Attorney will continue to vest one- eighth (1/8) of the remaining shares, or 5,000 per month, on the last day of each month covered by the amended agreement. As of September 30, 2005, Attorney had vested an aggregate of 60,000 shares of the Company's Common Stock. Attorney was issued the full amount of the 75,000 shares in September 2005, pursuant to a Form S-8 registration statement. In June 2004, the Company entered into a Consulting Agreement with Loev Corporate Filings, Inc. ("Filings") for Edgar filing services for one year in exchange for 5,000 S-8 registered shares of Common Stock, which was subsequently revised in January 2005, to include the Company's Edgar filing services until May 2006, for an additional 30,000 S-8 registered shares of the Company's Common Stock. The agreement with Filings was revised in May 2005, with an effective date of April 1, 2005, for additional consideration of 10,000 shares to be paid to Filings. The new agreement provides for Filings to vest a portion of the 40,000 shares on the last day of each month covered by the new agreement. Filings vested 17,060 shares on April 30, 2005 (1,765 shares for each month January to April 2005, and 10,000 shares as consideration for entering into the new agreement), pursuant to the new agreement and will continue to vest one-seventeenth (1/17) of the remaining shares, or 1,765 shares, at the end of each month covered by the new agreement. As of September 30, 2005, Filings had vested an aggregate of 25,885 shares of the Company's Common Stock. Filings was issued the full amount of the 40,000 shares in September 2005, pursuant to a Form S-8 Registration Statement. The President of Filings is the wife Attorney. UNREGISTERED SALES OF SECURITIES SUBSEQUENT TO THE THREE MONTHS ENDED SEPTEMBER 30, 2005 In November 2005, we issued 10,000 shares of our restricted common stock to an employee, Valerie Morel, in consideration for services rendered. We claim an exemption from registration afforded by Section 4(2) of the Act since the issuance did not involve a public offering, the recipient took the shares for investment and not resale and we took appropriate measures to restrict transfer. No underwriters or agents were involved in the issuance and no underwriting discounts or commissions were paid by us. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit No. Description --------------- ------------------- 3.1(1) Certificate of Designations for Series A Preferred Stock 10.1(2) Asset Acquisition Agreement with Musters & Company, Inc. 10.2(2) Waiver Agreement 10.3(3) Frank Goldstin Employment Agreement 10.4(3) Agreement with David Loev 10.5(4) Consulting Agreement with Joseph Wagner 10.6(4) Employment Agreement with Jean Wilson 31.1* Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certificate of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certificate of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Filed herein. (1) Attached as Exhibit 3.1 to the Company's Form 8-K filed with the Securities and Exchange Commission on January 5, 2005, and incorporated herein by reference. (2) Attached as Exhibits to the Company's Form 8-K/A filed with the Securities and Exchange Commission on March 11, 2005. (3) Attached as Exhibits to the Company's Form 10-KSB filed with the Securities and Exchange Commission on February 24, 2005, and incorporated herein by reference. (4) Incorporated by reference to documents filed as Exhibits to our Registration Statement on Form SB-2 filed with the Commission on August 17, 2004. b) REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the three months ended September 30, 2005, or for the subsequent period from September 30, 2005 until the filing of this report on Form 10-QSB. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. XA, Inc. -------- DATED: November 14, 2005 By: /s/ Joseph Wagner ----------------------- Joseph Wagner Chief Executive Officer