10-K 1 phoenix_10k-123108.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------------------- ------------------- COMMISSION FILE NUMBER: 000-31539 PHOENIX INTERESTS, INC. (Exact name of registrant as specified in its charter) NEVADA 61-1342734 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 334 RIVERBEND DRIVE LUDLOW, KENTUCKY 41016 ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number: 859-261-4213 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_| Smaller reporting company |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X| At June 30, 2008, the end of our second fiscal quarter, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $165,000 based on the closing price of $0.0001 as reported on the Over-the-Counter Bulletin Board Market. Number of shares of common stock outstanding as of April 15, 2009: 2,044,318,203. TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 2008 Page ---------- PART I Item 1. Business 1 Item 1A. Risk Factors Item 1B. Unresolved Staff Comments 3 Item 2. Properties 3 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 4 Item 6. Selected Financial Data 4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 7 Item 8. Financial Statements and Supplementary Data 7 Item 9. Disagreements With Accountants on Accounting and Financial Disclosure 7 Item 9A. Controls and Procedures 7 Item 9B. Other Information 8 PART III Item 10. Directors, Executive Officers and Corporate Governance 8 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 10 Item 13. Certain Relationships and Related Transactions, and Director Independence 10 Item 14. Principal Accounting Fees and Services 11 PART IV Item 15. Exhibits, Financial Statement Schedules 11 Signatures 13 i PART I ITEM 1. BUSINESS GENERAL INFORMATION Phoenix Interests, Inc. is a reporting company under the federal securities laws. Our shares of common stock are publicly traded on the Over-the-Counter Bulletin Board (OTCBB) under the symbol "PXIT." We were organized under the laws of Nevada on March 25, 1999. Following its incorporation, Phoenix Interests entered into the "pinhooking" and racing of thoroughbred horses. To date, substantially all of Phoenix Interests' revenues have been generated from the pinhooking of thoroughbred horses. During 2003, we discontinued all pinhooking activities and liquidated our remaining horse inventory. Going forward, we expect to generate revenues and profits when applicable from its investments in online account wagering, gaining and other various forms of legalized gambling. . On January 20, 2004, the Company elected to be regulated as a business development company under the Investment Company Act of 1940. The Company filed Form 1-E under the Securities and Exchange Act notifying the Securities and Exchange Commission of the intent to sell, under Regulation E promulgated under the Securities Act of 1933, up to $5 million of the Company's common stock. In March 2004, we formed a wholly owned subsidiary "Online Enterprises, Inc." as its initial entry into online account wagering and ecommerce. Specifically, via our subsidiary Online Enterprises, Inc. we developed web sites "http://www.Barn66.com" and "http://www.BetBarn66.com," which allowed users online to conduct live thoroughbred ecommerce and account wagering. The sites went live during November 2004 and January 2005, respectively. We are able to offer account wagering because of the affiliation we made in October 2004 with AmericaTab Ltd., an account wagering firm founded in 1999 and approved by the State of Oregon. During 2005, Barn66.com produced nominal revenue and we elected to offer its services for free to increase usage. BetBarn66.com produced revenue and showed growth during peak usage times. In January 2006, the Company was notified by AmericaTab, Ltd. that it was ending its affiliation by serving a six-month notice. Subsequently, the Company began exploring alternatives for its account wagering business. Consideration has focused on obtaining its own license, acquiring and/or affiliating with another account wagering firm. In June 2006, the Company sold its customer base back to AmericaTab Ltd. The Company received $10,000 from a note payable issued to American Tab which is being repaid from revenue generated from the Company's customer base. In January 2006, the SEC notified us that they considered that we were not in compliance with various requirements of the Investment Company Act, including requirements regarding a BDC's capital structure and financial statements. In this regard, specific concern was also raised by the staff regarding whether a BDC could have or issue convertible securities, whether a BDC could have voting provisions as set forth in the Company's Series C Preferred and whether the Company, with its limited capitalization, was an appropriate candidate to be a BDC. In March 2006, shareholders voted to un-elect the Company as a "Business Development Company," or "BDC." The shareholder election became effective at the end of the month. This action was predicated on the Company determining that it was no longer a benefit or advisable to remain a "BDC." Consistent comments and feedback from the SEC led the Company to this opinion. The Company felt the SEC had conveyed on more than one occasion that it did not think Phoenix Interests, Inc. was best suited or qualified to remain as a "BDC." On March 14, 2006, the Company filed a Definitive Information Statement with the Securities and Exchange Commission to withdraw as a business development company under the Investment Company Act of 1940. The financial statements for the year ended December 31, 2007 and 2006 have not been presented in a business development company format. Our ceasing to be a BDC will not absolve us for any actions taken by us while a BDC and we could still become liable for such prior actions. 1 The Company believes it has been harmed with the affiliation termination by AmericaTab, Ltd. The Company further believes it was caused by its launch of its "Betty" Kiosks. The launch and placement of 2 kiosks in a Kenton County Kentucky bar/restaurant so upset local track operator Turfway Park and its President Bob Ellison that they induced the "Alcohol and Beverage Commissions" or "ABC," to confiscate the machines just weeks after their launch. Mr. Ellison also threatened to pull the Turfway Park signal to AmericaTab and all of its affiliates. This confiscation later led to a false gambling/bookmaking indictment of the Company's consultant Patrick L. Brown which was dismissed in Kenton County during May 2006. The ending affiliation with AmericaTab, Ltd., the incident with Patrick L. Brown and somewhat forced transition from being a "BDC" has had a material and harmful effect on the Company, its operations and future. Consequently, this is why the Company is open to other ideas and directions for the business. Since the fourth quarter 2006, the Company focused on potential merger and acquisition candidates. During 2009, the Company began to focus on developing a global mobile computing technology business. On April 2, 2009, the Company announced a definitive purchase agreement to acquire Stonewall Networks. Stonewall Networks has developed a proprietary software solution for mobile network security, including an innovative security policy management product for enterprise customers. Our business address is 334 Riverbend Drive, Ludlow, Kentucky 41016, and our telephone number is (859) 261-4213. RISK FACTORS We are subject to various risks that may materially harm our business, financial condition and results of operations. If any of these risks or uncertainties actually occurs, the trading price of our common stock could decline and you could lose all or part of your investment. WE HAVE HISTORICALLY LOST MONEY, AND OUR LOSSES MAY CONTINUE IN THE FUTURE We have historically lost money. As of December 31, 2007, we had had an accumulated deficit of $(7,122,265). Further such losses are likely to occur in the future, and we may experience significant liquidity and cash flow problems if we are not able to raise additional capital as needed and on acceptable terms. We can give no assurances that we will be successful in reaching or maintaining profitable operations. WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS We have relied almost entirely on external financing to fund our operations. This financing has historically come from a combination of borrowings and from the sale of common stock and assets to third parties. We will need to raise additional capital to fund our anticipated operating expenses and future expansion. Among other things, external financing will be required to cover our operating costs. We cannot assure you that financing, whether from external sources or related parties, will be available if needed or on favorable terms. The sale of our common stock to raise capital may cause dilution to our existing shareholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price. THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES The report of our independent accountants on our December 31, 2007, financial statements includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to recurring losses and working capital shortages. Our ability to continue as a going concern will be determined by our ability to obtain additional funding. 2 OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE SIGNIFICANTLY There has been a limited public market for our common stock, and we can give no assurances that an active trading market for our common stock will develop. The lack of an active trading market could adversely affect our shareholders' ability to sell our common stock without delay, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock regardless of our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. Substantial fluctuations in our stock price could significantly reduce the price of our stock. OUR COMMON STOCK IS TRADED ON THE OVER-THE-COUNTER BULLETIN BOARD, WHICH MAY MAKE IT MORE DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS Our common stock is currently traded on the Over-the-Counter Bulletin Board (OTCBB), where we expect it to remain for the foreseeable future. Broker-dealers often decline to trade in OTCBB stocks because the market for such securities is often limited, the stocks are more volatile, and the risks to investors are greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to find buyers for their shares. This could cause our stock price to decline. WE COULD LOSE THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER Our future success depends, in significant part, on the continued services of James D. Tilton, Jr., our chief executive officer. Our loss of his services could adversely affect our ability to develop our business plan. We do not have an employment agreement with Mr. Tilton, nor do we currently maintain key-man life insurance policies on him. We have been unable to pay Mr. Tilton since August 2006. NEVADA LAW AND OUR ARTICLES OF INCORPORATION MAY INHIBIT A TAKEOVER OF OUR COMPANY THAT STOCKHOLDERS MAY CONSIDER FAVORABLE. Provisions of Nevada law, such as its business combination statute, may have the effect of delaying, deferring, or preventing a change in control of our company. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock. OUR OFFICERS AND DIRECTORS HAVE THE ABILITY TO EXERCISE SIGNIFICANT INFLUENCE OVER MATTERS SUBMITTED FOR STOCKHOLDER APPROVAL AND THEIR INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS Our executive officers and directors, in the aggregate, have the ability to nominate two members to our board of directors. Accordingly, our directors and executive officers, whether acting alone or together, may have significant influence in determining the outcome of any corporate transaction or other matter submitted to our board of directors for approval, including issuances of common and preferred stock and the appointment of officers. This influence could make it more difficult for someone to acquire us. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES Our executive and administrative office is located at 334 Riverbend Drive, Ludlow, Kentucky 41016. These premises are owned by James D. Tilton, Jr., our chief executive officer. Through June 30, 2003, he did not charge the company any rent for our use of these premises. Starting July 1, 2003, he has charged the company $1,250 per month for its use of these premises, and during 2005 increased it to $1,500 per month. Since August 2006, the Company has not been able to pay any rent. 3 ITEM 3. LEGAL PROCEEDINGS As of December 31, 2008, and as of the date of this filing, the Company is not a party to any pending or threatened litigation, claim or assessment. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted for shareholder approval during the fiscal year covered by this Report. PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION A limited public market for our common stock exists on the NASDAQ Bulletin Board under the symbol "PXIT." The following table sets forth the range of high and low closing prices for our common stock for each quarterly period indicated, as reported by brokers and dealers making a market in the capital stock. Such quotations reflect inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions. Our common stock commenced trading on November 30, 2001. HIGH LOW ----------- ----------- For the year ended December 31, 2008: Fourth quarter $ 0.0001 $ 0.0001 Third quarter $ 0.0001 $ 0.0001 Second Quarter $ 0.0002 $ 0.0001 First quarter $ 0.0002 $ 0.0001 For the year ended December 31, 2007: Fourth quarter $ 0.0002 $ 0.0001 Third quarter $ 0.0002 $ 0.0001 Second Quarter $ 0.0002 $ 0.0001 First quarter $ 0.0002 $ 0.0001 As of April 15, 2009, there were approximately 1,000 record holders of our common stock. DIVIDENDS We have not paid any cash or other dividends on our common stock since our company was formed and we do not anticipate paying any such dividends in the foreseeable future. We intend to retain any earnings to use in our operations and to finance the expansion of our business. RECENT ISSUANCES OF UNREGISTERED SECURITIES During the year ended December 31, 2008, the Company issued 118,000,000 shares of common stock for the conversion of Series D preferred stock and preferred stock dividend in the amount of $8,260. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended. . ISSUER REPURCHASES OF EQUITY SECURITIES None. ITEM 6. SELECTED FINANCIAL DATA Intentionally Omitted. 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K and the information incorporated by reference may include "forward-looking statements" within the meaning of Section 27(a) of the Securities Act and section 21(e) of the Exchange Act. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward-looking statements. The following discussion should be read in conjunction with Phoenix Interests' financial statements and the related notes included in this Form 10-K included elsewhere in this Annual Report. OVERVIEW Phoenix Interests, Inc. is a reporting company under the federal securities laws. Our shares of common stock are publicly traded on the Over-the-Counter Bulletin Board (OTCBB) under the symbol "PXIT." We were organized under the laws of Nevada on March 25, 1999. Following its incorporation, Phoenix Interests entered into the "pinhooking" and racing of thoroughbred horses. To date, substantially all of Phoenix Interests' revenues have been generated from the pinhooking of thoroughbred horses. During 2003, we discontinued all pinhooking activities and liquidated our remaining horse inventory. Going forward, we expect to generate revenues and profits when applicable from its investments in online account wagering, gaining and other various forms of legalized gambling. On January 20, 2004, the Company elected to be regulated as a business development company under the Investment Company Act of 1940. The Company filed Form 1-E under the Securities and Exchange Act notifying the Securities and Exchange Commission of the intent to sell, under Regulation E promulgated under the Securities Act of 1933, up to $5 million of the Company's common stock. In March 2004, we formed a wholly owned subsidiary "Online Enterprises, Inc." as its initial entry into online account wagering and ecommerce. Specifically, via our subsidiary Online Enterprises, Inc. we developed web sites "http://www.Barn66.com" and "http://www.BetBarn66.com," which allowed users online to conduct live thoroughbred ecommerce and account wagering. The sites went live during November 2004 and January 2005, respectively. We are able to offer account wagering because of the affiliation we made in October 2004 with AmericaTab Ltd., an account wagering firm founded in 1999 and approved by the State of Oregon. During 2005, Barn66.com produced nominal revenue and we elected to offer its services for free to increase usage. BetBarn66.com produced revenue and showed growth during peak usage times. In January of 2006, AmericaTab notified us that it was ending its affiliation by serving a six-month notice. We are exploring entering into an agreement to sell our customer base to either AmericaTab or others. We are also considering partnering with other wagering firms. In January 2006, the Company was notified by AmericaTab, Ltd. that it was ending its affiliation by serving a six-month notice. Subsequently, the Company began exploring alternatives for its account wagering business. Consideration has focused on obtaining its own license, acquiring and/or affiliating with another account wagering firm. In June 2006, the Company sold its customer base back to AmericaTab Ltd. The Company received $10,000 from a note payable issued to American Tab which is being repaid from revenue generated from the Company's customer base. In January 2006, the SEC notified us that they considered that we were not in compliance with various requirements of the Investment Company Act, including requirements regarding a BDC's capital structure and financial statements. In this regard, specific concern was also raised by the staff regarding whether a BDC could have or issue convertible securities, whether a BDC could have voting provisions as set forth in the Company's Series C Preferred and whether the Company, with its limited capitalization, was an appropriate candidate to be a BDC. 5 In March 2006, shareholders voted to un-elect the Company as a "Business Development Company," or "BDC." The shareholder election became effective at the end of the month. This action was predicated on the Company determining that it was no longer a benefit or advisable to remain a "BDC." Consistent comments and feedback from the SEC led the Company to this opinion. The Company felt the SEC had conveyed on more than one occasion that it did not think Phoenix Interests, Inc. was best suited or qualified to remain as a "BDC." On March 14, 2006, the Company filed a Definitive Information Statement with the Securities and Exchange Commission to withdraw as a business development company under the Investment Company Act of 1940. The financial statements for the year ended December 31, 2007 and 2006 have not been presented in a business development company format. Our ceasing to be a BDC will not absolve us for any actions taken by us while a BDC and we could still become liable for such prior actions. The Company believes it has been harmed with the affiliation termination by AmericaTab, Ltd. The Company further believes it was caused by its launch of its "Betty" Kiosks. The launch and placement of 2 kiosks in a Kenton County Kentucky bar/restaurant so upset local track operator Turfway Park and its President Bob Ellison that they induced the "Alcohol and Beverage Commissions" or "ABC," to confiscate the machines just weeks after their launch. Mr. Ellison also threatened to pull the Turfway Park signal to AmericaTab and all of its affiliates. This confiscation later led to a false gambling/bookmaking indictment of the Company's consultant Patrick L. Brown which was dismissed in Kenton County during May 2006. The ending affiliation with AmericaTab, Ltd., the incident with Patrick L. Brown and somewhat forced transition from being a "BDC" has had a material and harmful effect on the Company, its operations and future. Consequently, this is why the Company is open to other ideas and directions for the business. Since the fourth quarter 2006, the Company focused on potential merger and acquisition candidates. During 2009, the Company began to focus on developing a global mobile computing technology business. On April 2, 2009, the Company announced a definitive purchase agreement to acquire Stonewall Networks. Stonewall Networks has developed a proprietary software solution for mobile network security, including an innovative security policy management product for enterprise customers. CRITICAL ACCOUNTING POLICIES ACCRUED DERIVATIVE LIABILITY - The convertible debenture and the Series A, D and E preferred stock can be converted into common stock at a conversions price that is a percentage of the market price; therefore the number of shares that could be required to be delivered upon "net-share settlement" is essentially indeterminate. In accordance with SFAS No. 133, we have bifurcated the beneficial conversion features embedded in our convertible debentures and preferred stock and have recorded the fair value of these beneficial conversion features as a current liability. CONVERTIBLE PREFERRED STOCK - Our Series A, D and E preferred stock are presented as a current liability since we have financial instruments that are convertible into common stock at a conversions price that is a percentage of the market price; therefore the number of shares that could be required to be delivered upon "net-share settlement" is essentially indeterminate and we do not have enough authorized shares to satisfy the conversion of our convertible preferred stock. REVENUE RECOGNITION - Revenue is recognized at the time a bet is placed on our online website. OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 REVENUES. Our revenues for the years ended December 31, 2008 and 2007 were $7,282 and $11,124, respectively. OPERATIONAL EXPENSES. Our operational expenses for the years ended December 31, 2008 and 2007, were $235,177 and $284,710, respectively. INTEREST EXPENSE AND FINANCING COSTS. Our interest expense and financing costs for the year ended December 31, 2008 and 2007 were $23,550 and $15,477, respectively. The increase in the interest expense and financing costs is the result of increased borrowings and the additional financing costs associated with the issuance of a convertible note. 6 CHANGE IN ACCRUED DERIVATIVE LIABILITY. Change in accrued derivative liability for the years ended December 31, 2008 and 2007 was $108,708 and $375,401, respectively. The change in derivative liability is directly related to the change in the accrued derivative liability balance which fluctuates based fair value. NET(LOSS). Our net loss for the year ended December 31, 2008 and 2007 was $360,153 and $664,464, respectively. The difference is principally due to the change in the accrued derivative liability. CHANGES IN BALANCE SHEET. We had current assets of $17,620 at December 31, 2008. We had total assets of $17,620 at December 31, 2008, total liabilities of $5,517,828 at December 31, 2008 and stockholders' (deficit) of ($5,500,208) at December 31, 2008. LIQUIDITY, CAPITAL RESOURCES AND CASH REQUIREMENTS. During the year ended December 31, 2008 net cash used in operating activities was $89,011 as compared to $36,080 for the year ended December 31, 2007. Net cash provided by financing activities during the year ended December 31, 2008 was $106,631 primarily as a result of the proceeds from notes payable. As a result of the above, as of December 31, 2008, we had a cash position of $17,620. We have historically financed our operations via convertible-debt and preferred-stock financing obtained from various private equity firms. These funds intend, over time, to convert their positions into shares of our common stock. This will cause significant dilution to existing shareholders. In the immediate future, we have no commitments or plans to finance our business. We intend to seek a merger with a larger operational enterprise. CHANGE IN NUMBER OF EMPLOYEES The Company in 2009 has no plan to hire additional employees depending upon the direction and nature of its ongoing business operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Intentionally Omitted ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are listed in the Index to Financial Statements on page F-1. ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. ITEM 9A(T). CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES Our principal executive officer, based on his evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K, has concluded that our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. 7 INTERNAL CONTROL OVER FINANCIAL REPORTING MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008. This Annual Report on Form 10-K does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in internal control over financial reporting (as defined in Rule 13a-15f under the Exchange Act) that occurred during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth the name, age and position with the Company of each officer and director of the Company as of the date of this report. NAME AGE POSITION ----------------------- --------- ----------------------------------- James D. Tilton, Jr. 48 Chairman of the Board, Chief Executive Officer, President, and Secretary BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS James D. Tilton, Jr., has served as chairman of our board of directors, chief executive officer, president, secretary, treasurer and sole director since we were formed. Mr. Tilton has more than 11 years' experience in the securities industry. From 1995 to 1996, he was stockbroker at Morgan Keegan. From 1997 to 1999, he worked independently in the securities industry, specializing in corporate finance and investment banking. Mr. Tilton has been involved in the financing of private and public small-growth companies. Since January 1999, Mr. Tilton has also been TuneIn Media, Inc.'s chief executive officer and president. TuneIn Media, Inc. was an interactive media content provider and currently is a dormant company. Mr. Tilton formally resigned this position in October of 2005. Mr. Tilton is currently a director of Girasolar (OTCBB: GRSR). Mr. Tilton has a B.A. in Political Science with an emphasis in Accounting/Business from the University of Louisville. BOARD OF DIRECTORS Our Directors are elected by the vote of a plurality in interest of the holders of our voting stock and hold office for a term of one year and until a successor has been elected and qualified. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action. 8 COMMITTEES Our board of directors acts as our audit committee. No member of our board of directors is an "audit committee financial expert," as that term is defined in Item 401(e) of Regulation S-B promulgated under the Securities Act. To date, we have conducted limited operations and generated only minimal revenue since inception. In light of the foregoing, and on evaluating our internal controls, our board of directors determined that our internal controls are adequate to insure that financial information is recorded, processed, summarized, and reported in a timely and accurate manner in accordance with applicable rules and regulations of the Securities and Exchange Commission. Accordingly, our board of directors concluded that the benefits of retaining an individual who qualifies as an "audit committee financial expert" would be outweighed by the costs of retaining such a person. BOARD COMPENSATION Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. EMPLOYMENT AGREEMENTS Our employment agreement with James D. Tilton, Jr., ended on December 31, 2002. This agreement provided for payment of an annual base salary of $90,000 for calendar year 2000, $120,000 for calendar year 2001, and $180,000 for calendar year 2002. During those years, we did not pay him a salary. We agreed to pay Mr. Tilton a salary of $180,000 during 2003, but did not actually pay him a salary. The shortfall between the salary we undertook to pay Mr. Tilton between January 1, 2000 and December 31, 2003, and the compensation payments actual made to him equaled $350,000. In recognition of that fact, in December 2003 we agreed to pay to Mr. Tilton, as and when the board of directors determines that funds are available to do so and in one or more payments of $200,000. In 2004, we paid Mr. Tilton $169,478 of this $200,000. Mr. Tilton's employment agreement also provided for the one-time grant under our Millennium Stock Option Plan of 3,000,000 incentive stock options (reduced to 300,000 by the ten-for-one reverse stock split effected in January 2004) to Mr. Tilton at 110% of the fair market value of our common stock on the date of the grant. These options vested but were cancelled upon our electing to be regulated as a business development company. As of yet we have not entered into a new employment agreement with Mr. Tilton. FAMILY RELATIONSHIPS None BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under section 16 of the Exchange Act, our directors and executive officers and beneficial owners of more than 10% of the our common stock are required to file certain reports, within specified time periods, indicating their holdings of and transactions in our common stock and derivative securities. Based solely on a review of those reports provided to us and written representations from those persons regarding the necessity to file any such reports, we are not aware of any failures to file reports or report transactions in a timely manner during our fiscal year ended December 31, 2008. CODE OF ETHICS Our board of directors had adopted a code of ethics applicable to persons at our company who are responsible for financial management. A copy of the code of ethics is attached to this Annual Report as Exhibit 14.1. NOMINATING PROCEDURES During 2008 there were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors. 9 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth the compensation awarded to, earned by or paid to Mr. Tilton. We had no other officers during this period. LONG-TERM COMPENSATION AWARDS ------------------------------- RESTRICTED SECURITIES NAME AND PRINCIPAL YEAR SALARY OTHER ANNUAL STOCK UNDERLYING POSITION COMPENSATION AWARDS OPTIONS ----------------------------- ------- ------------- ---------------- -------------- ------------- James D. Tilton, Jr 2008 $ 96,000(1) $ - $ - - Chairman of the Board, Chief Executive Officer and President ____________ (1) Accrued and unpaid
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table shows, as of March 21, 2009, the beneficial ownership of our common stock and preferred stock (1) by any person or group that we know beneficially owns more than 5% of the outstanding common stock or any class of preferred stock, (2) by each director and executive officer, and (3) by all directors and executive officers as a group. Unless otherwise indicated, the holders of the shares shown in this table have sole voting and investment power with respect to those shares. The address of all individuals for whom an address is not otherwise indicated is 334 Riverbend Drive, Ludlow, Kentucky 47131. NAME AND ADDRESS OF NUMBER OF SHARES OF PERCENTAGE OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS OF STOCK CLASS (1) --------------------------- ----------------------- --------------------- ------------------- James D. Tilton, Jr. 218,798 Common * % 5,000 Class C Preferred 100.0 % 2,130 (1) Class D Preferred 18.4 % All directors and officers as a group 218,798 Common * % 5,000 Class C Preferred 100.0 % 2,130 Class D Prefered 18.4 % ____________ * less than 1% (1) Figures based on 11,575 shares of Class D Preferred Stock outstanding as of April 15, 2009.
EQUITY COMPENSATION PLAN INFORMATION We currently have no equity compensation plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE RELATED PARTY TRANSACTIONS The premises housing our executive and administrative office are owned by James D. Tilton, Jr., our chief executive officer. See "Description of Property." Starting July 1, 2003, he has charged the company $1,250 per month for our use of these premises, and during 2005 was increased to $1,500 per month. Since August 2006, the Company, due to lack of funds has been unable to pay rent. 10 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Aggregate fees billed to us for the fiscal years ended December 31, 2008 and 2007 by our principal accountants, Gruber and Company, LLC, are as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2008 2007 --------------- ---------------- Audit Fees $ 15,000 $ 13,000 Audit-Related Fees $ 12,000 $ 12,500 Tax Fees $ - $ - Other Fees $ - $ - The audit-related fees relate to review services performed by our accountant; the tax fees relate to preparation of our tax returns by our accountant. Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our independent accountants must now be approved in advance by the audit committee to assure that those services do not impair the accountants' independence. We do not have an audit committee, so our board of directors reviews and approves audit and permissible non-audit services performed by Gruber and Company LLC as well as the fees they charge for performing those services. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS A list of the financial statements of the Company filed as part of this Report can be found in the Index to Financial Statements on page F-1. The following Exhibits are filed herewith and made part hereof. 3.1 Articles of incorporation of the registrant (incorporated by reference to the registrant's registration statement on Form 10-SB, as amended, filed with the Commission on July 5, 2000). 3.2 Certificate of designations of Series A preferred stock of the registrant filed with the Nevada Secretary of State on April 18, 2002 (incorporated by reference to the registrant's quarterly report on form 10-QSB filed with the Commission on June 6, 2004). 3.3 Certificate of designations of Series B preferred stock of the registrant filed with the Nevada Secretary of State on December 17, 2003 (incorporated by reference to the registrant's quarterly report on form 10-QSB filed with the Commission on June 6, 2004). 3.4 Certificate of amendment of the registrant filed with the Nevada Secretary of State on December 31, 2003 (incorporated by reference to the registrant's quarterly report on form 10-QSB filed with the Commission on June 6, 2004). 3.5 Certificate of designations of Series C preferred stock of the registrant filed with the Nevada Secretary of State on January 13, 2004 (incorporated by reference to the registrant's quarterly report on form 10-QSB filed with the Commission on June 6, 2004). 3.6 Corrected certificate of designation of Series D preferred stock of the registrant (filed herewith). 3.7 Bylaws of the registrant (incorporated by reference to the registrant's registration statement on Form 10-SB, as amended, filed with the Commission on July 5, 2000). 10.1 Debenture issued by the registrant to Patrick L. Brown due April 30, 2004 (incorporated by reference to the registrant's quarterly report on form 10-QSB filed with the Commission on June 6, 2004). 10.2 Debenture issued by the registrant to Pinnacle Investment Partners, L.P. due February 7, 2005 (incorporated by reference to the registrant's quarterly report on form 10-QSB filed with the Commission on June 6, 2004). 11 10.3 Securities purchase agreement dated February 7, 2004, between the registrant and Pinnacle Investment Partners, L.P. (incorporated by reference to the registrant's quarterly report on form 10-QSB filed with the Commission on June 6, 2004). 10.4 Form of securities purchase agreement providing for purchase of shares of Series D preferred stock and shares of common stock (incorporated by reference to current report on Form 8-K of the registrant filed with the Commission on January 4, 2005). 14.1 Code of Ethics (filed herewith). 21.1 Subsidiaries of Registrant (filed herewith). 31.1 Certification of the Chief Executive Officer under 18 U.S.C. section 1350, as adopted in accordance with section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Certification of the Chief Executive Officer under 18 U.S.C. section 1350, as adopted in accordance with section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 12 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHOENIX INTERESTS, INC. ----------------------- Registrant Date: May 6, 2009 By: /s/ James D. Tilton ------------------------------------ James D. Tilton Chairman, President, Secretary and Chief Executive Officer (Principal Executive Officer and Principal Financial and Accounting Officer) In accordance with the requirements of the Exchange Act, this report is signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ James D. Tilton, Jr. Chairman May 6, 2009 ----------------------------- President and James D. Tilton, Jr. Chief Executive (Principal Executive Officer and Officer Principal Accounting Officer) 13 PHOENIX INTERESTS, INC. CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2008 AND 2007 Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2008 and 2007 F-3 Consolidated Statements of Operations for the years ended December 31, 2008 and 2007F-4 Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2008 and 2007 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 F-6 Notes to Consolidated Financial Statements F-7 F-1 Report of Independent Registered Public Accounting Firm To The Board of Directors and Stockholders of Phoenix Interests, Inc. Ludlow, Kentucky We have audited the accompanying consolidated balance sheets of Phoenix Interests, Inc. and subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall finan cial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Phoenix Interests, Inc. and subsidiary as of December 31, 2008 and 2007, and the consolidated results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has incurred a net loss of $360,153, used cash for operations of $89,011 for the year ended December 31, 2008, has an accumulated deficit of $7,769,233 as of December 31, 2008 and has a working capital deficit of $5,500,208 as of December 31, 2008. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Gruber and Company, LLC Certified Public Accountants Lake St. Louis, Missouri May 5, 2009 F-2 Phoenix Interests, Inc. and Subsidiary Consolidated Balance Sheets As of December 31, 2008 and 2007 2008 2007 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 17,620 $ -- ----------- ----------- TOTAL CURRENT ASSETS $ 17,620 $ -- =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Cash overdraft $ 22,249 $ 20,618 Convertible debt - related party 264,022 229,022 Convertible debt 37,480 37,480 Notes payable 145,000 40,000 Accounts payable and accrued expenses 243,873 236,439 Dividends payable 966,679 681,124 Accrued derivative liability 1,844,625 1,715,917 Preferred stock; Series A; $0.001 par value; 5,000 shares authorized; 2,656 and 2,656 shares issued and outstanding 265,600 265,600 Preferred stock; Series D convertible; $0.001 par value; 25,000 shares authorized; 11,575 and 8,415 shares issued and outstanding 1,157,500 841,500 Preferred stock; Series E convertible; $0.001 par value; 25,000 shares authorized; 5,708 and 5,708 shares issued and outstanding 570,800 570,800 ----------- ----------- TOTAL CURRENT LIABILITIES 5,517,828 4,638,500 =========== =========== COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' DEFICIT Preferred stock; Series B; $0.001 par value; 100,000 shares authorized; 0 and 0 shares issued and outstanding -- -- Preferred stock; Series C; $0.001 par value; 12,000,000 shares authorized; 5,000 and 228,000 shares issued and outstanding 5 228 Common stock; $0.001 par value; 5,000,000,000 shares authorized; 1,607,061,087 and 1,489,061,087 shares issued and outstanding 1,607,061 1,489,061 Additional paid-in capital 661,959 994,476 Accumulated deficit (7,769,233) (7,122,265) ----------- ----------- TOTAL STOCKHOLDERS' DEFICIT (5,500,208) (4,638,500) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 17,620 $ -- =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-3 Phoenix Interests, Inc. and Subsidiary Consolidated Statements of Operations For The Years Ended December 31, 2008 and 2007 2008 2007 --------------- --------------- REVENUES $ 7,282 $ 11,124 OPERATING EXPENSES Compensation 96,000 180,000 Professional fees 114,511 72,693 Office expenses 1,872 10,382 Travel 4,265 718 Depreciation and amortization -- 2,605 Rent 18,000 18,000 Utilities 20 -- Bank charges 509 312 --------------- --------------- TOTAL OPERATING EXPENSES 235,177 284,710 --------------- --------------- LOSS FROM OPERATIONS (227,895) (273,586) OTHER INCOME (EXPENSE) Interest expense and financing costs (23,550) (15,477) Change in accrued derivative liability (108,708) (375,401) --------------- --------------- TOTAL OTHER INCOME (EXPENSE) (132,258) (390,878) --------------- --------------- LOSS BEFORE PROVISION FOR INCOME TAXES (360,153) (664,464) PROVISION FOR INCOME TAXES -- -- --------------- --------------- NET LOSS (360,153) (664,464) PREFERRED STOCK DIVIDENDS (286,815) (272,219) --------------- --------------- NET LOSS ATTRIBUTED TO COMMON STOCKHOLDERS $ (646,968) $ (936,683) =============== =============== NET LOSS PER SHARE ATTRIBUTED TO COMMON STOCKHOLDERS - BASIC AND DILUTED: $ (0.00) $ (0.00) =============== =============== WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC AND DILUTED 1,605,863,585 1,028,156,986 =============== =============== The accompanying notes are an integral part of these consolidated financial statements. F-4 Phoenix Interests, Inc. and Subsidiary Consolidated Statement of Stockholders' Deficit For The Years Ended December 31, 2008 and 2007 ---------------------- Series C Common Stock Additional Total ---------------------- ---------------------------- Paid-in Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Deficit ---------- --------- -------------- ----------- ----------- ------------ ------------ Balance, December 31, 2006 228,000 $ 228 841,450,757 $ 841,451 $ 1,547,890 $ (6,185,582) $ (3,796,013) Common stock issued for conversion of debt -- -- 101,576,923 101,577 (89,862) -- 11,715 Common stock issued for conversion of Series D preferred stock and preferred stock dividends -- -- 385,319,122 385,319 (320,338) -- 64,981 Common stock issued for conversion of Series E preferred stock and preferred stock dividends -- -- 35,714,285 35,714 (30,714) -- 5,000 Common stock issued for services -- -- 125,000,000 125,000 (112,500) -- 12,500 Accrued preferred stock dividends -- -- -- -- -- (272,219) (272,219) Net loss -- -- -- -- -- (664,464) (664,464) ---------- --------- -------------- ----------- ----------- ------------ ------------ Balance, December 31, 2007 228,000 228 1,489,061,087 1,489,061 994,476 (7,122,265) (4,638,500) Common stock issued for conversion of Series D preferred stock and preferred stock dividends -- -- 118,000,000 118,000 (109,740) -- 8,260 Accrued preferred stock dividends -- -- -- -- -- (286,815) (286,815) Conversion of Series C preferred stock to Series D preferred stock (223,000) (223) -- -- (222,777) -- (223,000) Net loss -- -- -- -- -- (360,153) (360,153) ---------- --------- -------------- ----------- ----------- ------------ ------------ Balance, December 31, 2008 5,000 $ 5 1,607,061,087 $ 1,607,061 $ 661,959 $ (7,769,233) $ (5,500,208) ========== ========= ============== =========== =========== ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-5 Phoenix Interests, Inc. and Subsidiary Consolidated Statements of Cash Flows For The Years Ended December 31, 2008 and 2007 2008 2007 --------- --------- CASH FLOW FROM OPERATING ACTIVITIES: Net loss $(360,153) $(664,464) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization -- 2,605 Stock issued for services -- 12,500 Common Stock issued for financing costs -- 15,000 Change in accrued derivative liability 108,708 375,401 Non-cash financing charge 20,000 -- Issuance of Series D preferred stock for services 90,000 -- Changes in operating assets and liabilities: Accounts receivable -- 1,042 Accounts payable and accrued expenses 7,434 64,997 Accrued compensation - related party 45,000 156,839 --------- --------- Net cash used in operating activities (89,011) (36,080) --------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Cash overdraft, net 1,631 (1,330) Proceeds from notes payable 105,000 37,410 --------- --------- Net cash provided by financing activities 106,631 36,080 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 17,620 -- CASH AND CASH EQUIVALENTS, Beginning of period -- -- --------- --------- CASH AND CASH EQUIVALENTS, End of period $ 17,620 $ -- ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ -- $ -- ========= ========= Income taxes paid $ -- $ -- ========= ========= SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of debentures/notes payable to common stock $ -- $ 101,577 ========= ========= Conversion of Series D & E dividends to common stock $ 1,260 $ 421,033 ========= ========= Conversion of Series A, D & E preferred stock to common stock $ 7,000 $ -- ========= ========= Accrued compensation converted to convertible note - related party $ 35,000 $ -- ========= ========= The accompanying notes are an integral part of these consolidated financial statements. F-6
PHOENIX INTERESTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization ------------ Phoenix Interests, Inc. (the "Company") was organized under the laws of Nevada on March 25, 1999 as Thoroughbred Interests, Inc. Effective May 18, 2004, the Company changed its name to Phoenix Interests, Inc. The Company's prior business operations consisted of purchasing, training and selling of thoroughbred horses. As of December 31, 2003, the Company liquidated its entire inventory of thoroughbred horses. On January 20, 2004, the Company elected to be regulated as a business development company under the Investment Company Act of 1940. The Company filed Form 1-E under the Securities and Exchange Act notifying the Securities and Exchange Commission of the intent to sell, under Regulation E promulgated under the Securities Act of 1933, up to $5 million of the Company's common stock. On March 14, 2006, the Company filed a Definitive Information Statement with the Securities and Exchange Commission to withdraw as a business development company under the Investment Company Act of 1940. The financial statements for the year ended December 31, 2008 and 2007 have not been presented in a business development company format. Going Concern ------------- The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company incurred a net loss of $360,153, used cash for operations of $89,011 for the year ended December 31, 2008, has an accumulated deficit of $7,769,233 as of December 31, 2008 and has a working capital deficit of $5,500,208 as of December 31, 2008. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes that it can continue to raise equity financing to support its operations or find an acquisition candidate to complete a merger. Stock Splits ------------- On January 7, 2004, the Company affected a one-for-ten reverse stock split of its common stock. On January 20, 2006, the Company authorized a one for fifty reverse stock splits of its common stock. All share information for common shares has been retroactively restated for these two reverse stock splits. Consolidated Financial Statements --------------------------------- The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Online Enterprises, Inc. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All inter-company accounts and transactions have been eliminated. Stock Based Compensation ------------------------ The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123." The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were no stock options granted during the year ended December 31, 2008 and 2007. F-7 Use of Estimates ---------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As of December 31, 2008, the Company used estimates in determining accrued expenses, the value of stock based compensation issued for services and the value of the accrued derivative liability. Actual results could differ from these estimates. Fair Value of Financial Instruments ----------------------------------- On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follow: o Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. The Company's Level 1 assets include cash equivalents, primarily institutional money market funds, whose carrying value represents fair value because of their short-term maturities of the investments held by these funds. o Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Company's Level 2 liabilities consist of two liabilities arising from the issuance of a convertible debenture in 2006 and in accordance with EITF 00-19: a warrant liability for detachable warrants, as well as an accrued derivative liability for the beneficial conversion feature. These liabilities are remeasured on a quarterly basis. Fair value is determined using the Black-Scholes valuation model based on observable market inputs, such as share price data and a discount rate consistent with that of a government-issued security of a similar maturity. o Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. The following table represents our assets and liabilities by level measured at fair value on a recurring basis at December 31, 2008. Description Level 1 Level 2 Level 3 --------------------------------- ----------- ------------ ----------- LIABILITIES Accrued derivative liability - 1,844,625 - Cash and Cash Equivalents ------------------------- For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid debt instruments purchased with a maturity of three months or less, plus all certificates of deposit. Concentration of Credit Risk ---------------------------- Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivables. The Company places its cash with high quality financial institutions and at times may exceed the FDIC $250,000 insurance limit. The Company extends credit based on an evaluation of the customer's financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required. The Company derived 100% of its revenue through AmericaTab. F-8 Impairment of Long-Lived Assets ------------------------------- In accordance with Statement No. 144, long-lived assets, such as property, equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Organization Costs ------------------ The Company has incurred various expenditures in the formation of its corporate and organizational structure. In accordance with SOP 98-5 these costs were expensed as incurred. Accrued Derivative Liability ---------------------------- The convertible debenture and the Series A, D and E preferred stock can be converted into common stock at a conversion price that is a percentage of the market price; therefore the number of shares that could be required to be delivered upon "net-share settlement" is essentially indeterminate. In accordance with SFAS No. 133, the Company has bifurcated the beneficial conversion features embedded in its convertible debentures and preferred stock and has recorded the fair value of these beneficial conversion features as a current liability. Convertible Preferred Stock --------------------------- The Company's Series A, D and E preferred stock are presented as a current liability since the Company has financial instruments that are convertible into common stock at a conversion price that is a percentage of the market price; therefore the number of shares that could be required to be delivered upon "net-share settlement" is essentially indeterminate and the Company does not have enough authorized shares to satisfy the conversion of its convertible preferred stock. Revenue Recognition ------------------- Revenue is recognized at the time a bet is placed on the Company's online website. Income Taxes ------------ The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. F-9 Earnings (Loss) Per Share ------------------------- The Company reports earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of options and warrants to purchase common shares would have an anti-dilutive effect. The following potential common shares have been excluded from the computation of diluted net loss per share for years ended December 31, 2008 and 2007 because the effect would have been anti-dilutive: 2008 2007 ----------------- ---------------- Common stock issuable upon conversion of notes payable 6,758,040,000 5,630,040,000 Common stock issuable upon conversion of preferred stock 41,814,570,476 33,262,350,476 Comprehensive Loss ------------------ SFAS No. 130, "Reporting Comprehensive Loss," establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. For the year ended December 31, 2008 and 2007, the Company did not have items that represented other comprehensive income and, accordingly, a statement of comprehensive loss has not been included herein. Reclassification ---------------- Certain reclassifications have been made to the 2007 balances to conform to the 2008 presentation. Recently Issued Accounting Pronouncements ----------------------------------------- In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements", which is an amendment of Accounting Research Bulletin ("ARB") No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations." This statement replaces FASB Statement No. 141, "Business Combinations." This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position. F-10 In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133." SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position. In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 will not have an impact on the Company's financial statements. In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60." The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 163 will not have an impact on the Company's financial statements. NOTE 2 - RELATED PARTY TRANSACTIONS Total rent expense accrued to Mr. Tilton, the Company's CEO for the years ended December 31, 2008 and 2007 was $18,000 and $18,000, respectively. During the year ended December 31, 2008, $35,000 from unpaid officer compensation was converted to convertible debt. NOTE 3 - CONVERTIBLE DEBT In 2007, the Company converted at total of $37,480 of accounts payable and $229,022 of officer compensation into convertible debt. In addition, in 2008 the Company converted $35,000 of officer compensation into convertible debt. The convertible debt can be converted at the option of the debt holder into shares of the Company's common stock at a 50% discount to the market price at the date of conversion. NOTE 4 -NOTE PAYABLE During the year ended December 31, 2007, the Company issued two notes payable in the amount of $25,000 and $15,000. The notes are unsecured, bears interest at the rate of 12% per annum and are payable upon demand. During the three months ended March 31, 2008, the Company issued a note payable in the amount of $20,000. The note is unsecured, bears interest at the rate of 12% per annum and is payable upon demand. All three notes can be converted into shares of common stock at a 50% discount at the option of the noteholder. During the three months ended June 30, 2008, the Company issued a note payable in the amount of $50,000. The note is unsecured, bears interest at the rate of 12% per annum and is payable upon demand. During the three months ended September 30, 2008, the Company issued a note payable in the amount of $10,000. The note is unsecured, bears interest at the rate of 18% per annum and is payable upon demand. During the three months ended December 31, 2008, the Company issued a note payable in the amount of $25,000. The note is unsecured, bears interest at the rate of 18% per annum and is payable upon demand. F-11 NOTE 5 -STOCKHOLDERS' DEFICIT On January 2, 2004, the Company filed a Certificate of Amendment to its Articles of Incorporation for the State of Nevada to amend its capitalization. The amendment grants the Company the authority to issue 1 billion shares of par value $0.001 stock consisting of 20,000,000 preferred shares and 980,000,000 common shares. On October 5, 2005, the Company filed an Information Statement requesting approval from the stockholders to give the Company's board of directors the authority to (1) effect a reverse stock split of each share of common stock of the Company at a ratio of one share for up to 50 shares of common stock outstanding, as determined by the Company's board of directors at its discretion, and (2) amend the Company's Articles of Incorporation to increase from 980,000,000 to 5,000,000,000 the number of shares of common stock the Company is authorized to issue. The stockholders approved items (1) and (2) above and on November 9, 2005, the Company filed a Certificate of Amendment with the Nevada Secretary of State increasing the number of authorized common shares to 5,000,000,000. On January 7, 2004, the Company affected a one-for-ten reverse stock split of its common stock. On January 20, 2006, the Company authorized a one for fifty reverse stock split of its common stock. All share information for common shares has been retroactively restated for these two reverse stock splits. Common Stock ------------ The Company had the following transactions in its common stock: o For the year ended December 31, 2008, the Company issued 118,000,000 of common stock for the conversion of Series D stock and preferred stock dividends of $7,000 and $1,260, respectively. Preferred Stock --------------- The Company has debt and equity instruments that can be converted into common stock at a conversion prices that are a percentage of the market price; therefore the number of shares that could be required to be delivered upon "net-share settlement" is essentially indeterminate. Therefore, the Series A, D and E Preferred Stock which can be converted into shares of common stock are shown in the accompanying consolidated balance sheet as a current liability. SERIES A PREFERRED STOCK - There are 5,000 shares of Series A preferred stock authorized. Each share of Series A preferred stock is entitled to receive a monthly dividend of $2.00 per share, payable quarterly in arrears, and is convertible into common stock at the rate of $100 per share ($500,000 in the aggregate) at a discount of (1) 75% of the closing bid price of the common stock (if at the option of the holder), or (2) 60% of the closing bid price of the common stock (if at the option of our company). In the event of liquidation, all shares of Series A preferred stock would automatically be converted into shares of our common stock at rate of $100 per share, with holders of shares of Series A preferred stock being entitled to receive, in the aggregate, shares of our common stock valued at $500,000. Shares of Series A preferred stock vote with shares of our common stock on an as-converted basis. SERIES B PREFERRED STOCK - There are 100,000 shares of Series B preferred stock authorized. In the event of liquidation, each share of Series B preferred stock ranks equivalent to one share of our common stock. Shares of Series B preferred stock are not entitled to participate in dividends declared on our common stock. The Series B preferred stock votes together with our common stock on the basis of 1,000 votes per share. SERIES C PREFERRED STOCK - There are 12,000,000 shares of Series C preferred stock authorized. Each share of Series C preferred stock is convertible into one share of our common stock. The Series C preferred stock is non-interest bearing, does not have voting rights, and is not entitled to receive dividends. In the event of a liquidation, each share of Series C preferred stock will automatically convert into one share of our common stock and will otherwise not be entitled to any preference over shares of our common stock or any shares of our preferred stock. Shares of Series C preferred stock are entitled to name two members of our board of directors. F-12 SERIES D PREFERRED STOCK - There are 25,000 shares of Series D preferred stock authorized. Shares of Series D preferred stock are entitled to participate, on an as-converted basis, in any dividends declared on the common stock. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, holders of Series D preferred stock shall be entitled to share pari passu with the holders of shares of common stock in the assets of the Corporation, on an as converted basis, whether such assets are capital or surplus of any nature. Any outstanding shares of Series D preferred stock may, at the option of the holder, be converted at any time or from time to time into fully paid and nonassessable shares of common stock at the conversion rate in effect at the time of conversion, determined as provided herein, except that (1) a holder of shares of Series D preferred stock may at any given time convert only up to that number of shares of Series D preferred stock as would result in the aggregate beneficial ownership of the Company's common stock (calculated in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of that holder and all persons affiliated with that holder not being more than 4.99% of the Company's common stock then outstanding and (2) a holder of shares of Series D preferred stock may not convert more than half of that holder's shares of Series D preferred stock within any 30-day period. The number of shares into which one share of Series D preferred stock is convertible will be determined by dividing (1) the sum of (A) Stated Value plus (B) an amount equal to 1% of the Stated Value multiplied by the number of months from the original issue date until the date of conversion (pro rated for any period of less than a month) by (2) the conversion price at that time. The conversion price is the lesser of (1) 70% of the closing bid price and (2) $0.0192 (the amount being 120% of the closing bid price on December 22, 2004). During the year ended December 31, 2008, the Company issued 900 shares of Series D preferred stock for consulting services. SERIES E PREFERRED STOCK - There are 5,000 shares of Series E preferred stock authorized. Shares of Series E preferred stock may, at the option of the holder, be converted into shares of common stock at the conversion rate in effect at the time of conversion. The number of shares into which one share of Series E preferred stock is convertible will be determined by dividing (1) the sum of (A) the "Stated Value" (equal to $100) plus (B) an amount equal to 1.5% of the Stated Value multiplied by the number of months from the date of issuance until the date of conversion (pro rated for any period of less than a month) by (2) the lesser of (A) $0.006 and (B) the Conversion Price at that time. For these purposes, "Conversion Price" means 70% of the Closing Bid Price, and "Closing Bid Price" on a given day means the lowest closing bid price of the common stock out of the closing bid price of the common stock on each of the five immediately preceding trading days on NASDAQ or any other principal securities price quotation system or market on which prices of the common stock are reported. NOTE 6 - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 2008 are as follows: DECEMBER 31, 2008 ---------------- Deferred tax assets: Federal net operating loss $ 1,760,000 State net operating loss 266,000 ---------------- Total deferred tax assets 2,026,000 Less valuation allowance (2,026,000) ---------------- $ -- ================ At December 31, 2008, the Company had federal and state net operating loss ("NOL") carryforwards of approximately $5,170,000 and $5,324,000, respectively. NOLs could, if unused, expire in varying amounts in the years 2017 through 2019. F-13 The valuation allowance increased by $134,000 and $248,000 during 2008 and 2007, respectively. The Company has provided a 100% valuation allowance on the deferred tax assets at December 31, 2008 to reduce such asset to zero, since there is no assurance that the Company will generate future taxable income to utilize such asset. Management will review this valuation allowance requirement periodically and make adjustments as warranted. The reconciliation of the effective income tax rate to the federal statutory rate for the years ended December 31, 2008 and 2007 is as follows: 2008 2007 ---------- ---------- Federal income tax rate (34.0%) (34.0%) State tax, net of federal benefit (5.0%) (5.0%) Increase in valuation allowance 39.0% 39.0% ---------- ---------- Effective income tax rate 0.0% 0.0% ========== ========== Utilization of the net operating loss and tax credit carryforwards is subject to significant limitations imposed by the change in control under I.R.C. 382, limiting its annual utilization to the value of the Company at the date of change in control times the federal discount rate. F-14