Item 1 - Business
General
The X-Change Corporation (Company) was incorporated under the laws of the State of Delaware on February 5, 1969 and changed its corporate domicile to the State of Nevada on October 4, 2000. We were originally organized to seek merger and/or acquisition candidates and engaged in various transactions since our inception. As of December 31, 2008, the Company had disposed of all operating assets and operating activities.
In March 2010, the Company formed the wholly-owned subsidiaries - Caballo Blanco Communications, Ltd. and Commerce Services, Inc. - as Colorado corporations to conduct operations related to the various proposed acquisitions. On December 27, 2010, the Company changed the corporate name of Commerce Services, Inc. to PolySilicon, Inc. to conduct the business activities related to a then proposed acquisition. There has been no economic activity conducted within either subsidiary since their formation.
In August 2012, the Company formed the wholly-owned subsidiaries - Big Sky Oil, Inc. and Cut Bank Operating, Inc. - as Wyoming corporations to conduct operations related to various proposed new business activities. There has been no economic activity conducted within either subsidiary since their formation.
On December 12, 2012, the Company entered into an Asset Purchase Agreement with Cannabis Science, Inc. (a publicly-owned Nevada corporation) whereby the Company acquired various assets related to the use of cannabis including resale formulas, media, activism and marketing videos and other items and the assumption of Cannabis’ position in a Joint Venture Operating Agreement with Columbia Corp. and/or dupetit Natural Products GmbH.
Our principal office is located at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243 and our telephone number is (888) 889-0888.
Currently, the Company has no known exposures to any current or proposed climate change legislation which could negatively impact the Company’s operations or require capital expenditures to become compliant.
Unsuccessful Business Endeavors
On July 20, 2005, the Company exchanged 10,000,000 shares of common stock for 100% of the issued and outstanding stock of AirGATE Technologies, Inc. (AirGATE). This transaction made AirGATE a wholly-owned subsidiary of the Company.
In December 2008, the lender of a note payable by AirGATE began foreclosure proceedings against its collateral, which included 100% of the Company’s holdings in AirGATE and the right to convert the note into restricted, unregistered shares of the Company’s common stock. The note and accrued, and unpaid, interest was converted to 51,000,000 shares of the Company’s common stock and the foreclosure proceeding was consummated on January 16, 2009. Due to the timing of this transaction, the foreclosure and related disposition of AirGATE is reflected in the accompanying financial statements as of December 31, 2008.
On May 4, 2009, the Company entered into a Settlement Agreement and Release with AirGATE, HM Energy Technologies, Inc. (HM), Wm. Chris Mathers, the Company’s former CFO, (Mathers), Kathleen Hanafan, the Company’s former CEO, (Hanafan), Duke Loi, an employee of AirGATE, (Loi), Samson Investment Company (Samson), Ironman PI Fund (QP), L.P. (Ironman), John Thomas Bridge and Opportunity Fund, LP ("John Thomas" collectively with Samson and Ironman, SIJ) and Melissa CR 364, LTD (Melissa). As a result of the various transactions effected under the Agreement, SIJ surrendered all of their shares in the Company; cancelled all financial obligations of the Company, which approximated $3.96 million, including accrued but unpaid interest); and terminated their rights under the various warrant and guaranty agreements. The Company provided all parties with a full release of claims, known and unknown, in exchange for these various surrenders, cancellations and terminations.
On February 17, 2010, the Company entered into a Contract of Sale with Nydia Del Valle to acquire 100% of the issued and outstanding stock of Connected Media Technologies, Inc. (Connected), a Delaware Corporation, in exchange for 400,000,000 shares of restricted, unregistered common stock of the Company. A copy of the Contract of Sale was filed as an Exhibit to a Current Report on Form 8-K filed on or about February 22, 2010. At the time, Connected represented that it owned 52% of Global Broadcasting Systems, LLC and 52% of Cinemania TV, LLC.
On March 10, 2010, we discovered certain improprieties in Connected Media Technologies, Inc.’s, its officers and directors’ representations of its assets owned and other matters in the above proposed acquisition transaction and took the appropriate steps to remove the previously seated executive officers and directors affiliated with the acquisition target, Connected Media Technologies, Inc. We did not issue the aforementioned 400 million shares of its common stock for this transaction and will not be acquiring any assets from Connected Media Technologies, Inc.
On March 11, 2010, we announced a change in our strategic direction and business plan to focus on offering multimedia and e-commerce to the diverse and growing Hispanic markets within the United States and in other countries. In March 2010, the Company formed the wholly-owned subsidiaries - Caballo Blanco Communications, Ltd. and Commerce Services, Inc. - as Colorado corporations - to conduct these proposed operations of a Latino-targeted media delivery service and a bilingual home shopping network.
On August 16, 2010, The X-Change Corporation (Company) announced the pending acquisition of IPTV World, a company based in Los Angeles with hosting facilities in the famous One Wilshire carrier hotel. This acquisition was subject to the execution of a definitive agreement and the completion of appropriate due diligence by all parties
On September 8, 2010, in conjunction with the abandonment of the previously disclosed current business plan consisting of the development and implementation of a Latino-targeted media delivery service and a bilingual home shopping network, The X-Change Corporation (Company) announced the resignation of Fernando Gómez, Richard Steele, and Ron Vigdor from its Board of Directors and as officers of the Company.
On September 8, 2010, The X-Change Corporation (Company) announced the pending acquisition of Genesis Key, Inc. (Genesis Key), based in Washington, DC. This acquisition was subject to the execution of a definitive agreement and the completion of appropriate due diligence by all parties.
On September 20, 2010, The X-Change Corporation (Company) announced that the Company has signed an agreement to acquire Cybertel USA, Inc., based in Los Angeles, California, for $800,000 cash payable to the shareholders of Cybertel USA in exchange for 100% of the issued and outstanding stock of Cybertel USA, Inc. The closing of this transaction remains subject to the completion of appropriate due diligence by all parties.
On October 7, 2010, the Company announced that it was unable to conclude definitive agreements in all previously announced acquisitions of IPTV World, Genesis Key, Inc. and Cybertel USA and will not be acquiring these companies.
On October 7, 2010, the Company announced that it signed an agreement in principle to acquire 21-Century Silicon, Inc., based in Richardson, Texas (21-Century). The terms of the acquisition was anticipated to involve a change in control of the Company and the appointment of new directors. Concurrent with the execution of the agreement in principle, the Company issued 1,000,000 shares of restricted, unregistered common stock to license 21-Century’s technology and to secure an exclusive right to negotiate to acquire certain intellectual property. The closing of the acquisition was subject to the completion of all appropriate due diligence. On November 8, 2010, 21-Century executed a note payable to the Company in the amount of approximately $28,500, bearing interest at 10.0% for working capital advances made by the Company on 21-Century’s behalf. On January 17, 2011, the Company announced that through its wholly-owned subsidiary, PolySilicon, Inc, it had completed the purchase of the intangible assets of 21-Century, subject to an agreement to purchase a $3,500,000 note payable owed to the State of Texas (Texas Note) by 21-Century. On January 28, 2011, the Company announced that it had cancelled the purchase of 21-Century and canceled its offer to purchase the Texas Note. The purchase of the assets was conditioned on the Company being able to purchase the Texas Note. The State of Texas' insistence on additional repetitive reviews of the proposed transaction, which was scheduled for closing, resulted in the Company's inability to complete and close the financing necessary for silicon manufacturing. Concurrent with this action, the Company rescinded the 1,000,000 shares issued in the October 7, 2010 event and executed its lien on the assets of 21-Century Silicon in satisfaction of a note receivable and accrued interest totaling approximately $41,200. Upon foreclosure on said assets, the Company’s management elected to take a 100% impairment against the foreclosed value resulting in a charge to operations in the first quarter of 2011 of approximately $41,200. Any gain, if any, upon the ultimate disposition of said assets will be recognized at the point of future sale.
On March 7, 2011, the Company announced that it had entered into an Agreement and Plan of Exchange with Surrey Vacation Properties, Inc. (a Missouri corporation) (Seller) to acquire 100% of the issued and outstanding stock of the Seller. In the transaction, it is anticipated that the Company will issue 63,283,391 restricted, unregistered shares of its $0.001 par value common stock. A copy of the Contract for Sale was filed as an exhibit to a Current Report on Form 8-K filed with the SEC on or about March 11, 2011. On April 26, 2011, as reported on a Current Report on Form 8-K filed with the SEC on or about April 28, 2011, the CEO of Surrey Vacation Resorts, Inc. (Surrey) informed the Company that Surrey would not able to meet a condition of closing of the acquisition of Surrey by the Company. Surrey had been unable to obtain the necessary written approval of the acquisition transaction from its lenders and further informed the Company that Surrey would be unable to close the transaction. Upon receipt of this information, the Company agreed to terminate the aforementioned contract to acquire Surrey Vacation Resorts, Inc.
On May 25, 2011, the Company announced that it had closed on the purchase of a Casino Ship located in Freeport, Texas. The acquisition was purchased by LDC Collection Systems, Inc., a newly-formed and wholly-owned subsidiary incorporated under the Laws of the State of Texas. The purchase price was 2,000,000 shares of restricted, unregistered common stock of the Company with an agreed-upon valuation of approximately $1,750,000. The Casino ship, known as “The Texas Star Casino”, is a 155-foot ocean going vessel equipped with 250 slot machines and various table games. The ship also has facilities for entertainment, beverage service and dining. The ship was purchased from CJP Entertainment LLC, a Missouri corporation. The ship was built in 1977 and updated in 1986. The ship previously operated out of ports located in Georgia and Florida.
On June 6, 2011, the Company has also entered into a Letter of Intent ("LOI") with George J. Akmon and Jerry Monday & Associates, LLC (collectively referred to as "Operators") to operate “The Texas Star Casino” outside the nine mile territorial waters of Texas, in international waters, as a casino ship. As it is the intent to operate the ship outside the 9-mile State of Texas territorial limit means that the Company, nor its operators, will be required to acquire or hold a gaming license from the State of Texas.
On July 25, 2011, the Company, its wholly-owned subsidiary, LDC Collection Systems, Inc. and CJP Entertainment LLC, mutually agreed to execute a Repurchase Agreement whereby the May 25, 2011 transaction was reversed. The Company retained no rights to own or operate the cruise ship and no further action was taken on the June 6, 2011 LOI to operate said casino ship.
On August 18, 2011, The X-Change Corporation (Company) entered into an Asset Purchase Agreement (Agreement) with Old West Entertainment Corp. (Old West), a Nevada corporation, a privately-owned company which was not affiliated with the Company. As part of the Agreement, the Company acquired all right, title and interest in all of Old West's Operating Entertainment Business (Assets). The Assets included a website, client base, capital assets, hardware, software, intellectual property as well as all of Old West's artists, properties, patents, trademarks and distribution rights and agreements relating to Old West's music and entertainment business. The Company would also assume all rights and obligations under a Management Consulting Agreement between Old West and Arturo Molina Jr. (Molina), also known in the music business as "Frost." As consideration for this Agreement, the Company issued one million shares (1,000,000) of its common stock, in restricted form, to Old West.
As part of this Agreement, Molina was issued five million shares (5,000,000) of the Company's common stock for his management services for a period of one year and Molina was appointed President and CEO of the Company as well as acting CFO. The Company also issued five million shares (5,000,000) of its common stock in restricted form to the Bogat Family Trust (Bogat Trust) on behalf of Raymond Dabney (Dabney) as consideration for the management services Mr. Dabney was to provide to the Company in operating the music and entertainment portion of the business for a period of one year. Neither Molina, Dabney or the Bogat Trust were shareholders of Old West. Old West’s sole shareholder, officer and director is Mark Jordan. Mr. Jordan, Molina and the Bogat Trust were non-related and non-affiliates of the Company prior to this transaction.
On February 22, 2012, the Company entered into a Repurchase Agreement (Repurchase Agreement) with Old West, Molina and the Bogat Trust. As a part of the Repurchase Agreement, the Company transferred all of the aforementioned assets back to Old West in exchange for Old West returning the shares which the Company issued to it as part of the original Asset Purchase Agreement. A complete copy of the Repurchase Agreement was attached as an exhibit to a Current Report on Form 8-K on or about March 5, 2012 and the effect of the Repurchase Agreement was to make the initial agreement null and void Ab Initio.
On April 12 and May 14, 2012, respectively, the Company through a concurrently formed entity to-be-acquired as a wholly-owned subsidiary, Cress Oil and Natural Gas Company (Cress), entered into Purchase and Sale Agreements (PSA) with Granite Group Energy (a Delaware Limited Liability Company hereafter referred to as "Granite") and Wexco Resources, LLC (a Colorado Limited Liability Company hereafter referred to as "Wexco"). As part of the Granite Agreement, the Company is acquiring from Granite approximately 21,111 net acres of mineral interests in return for the payment of approximately $15,000,000. As part of the Wexco Agreement, the Company is acquiring from Wexco approximately 50,000 net acres of mineral interests in Teton County, Montana in return for the payment of approximately $7,500,000. As of the date of this filing, this Agreement has not been consummated through the payment of the required consideration.
On May 10, 2012, the Company, through Cress, entered into an Agreement (the"Agreement") with Diverse Energy Investments, LLC ("Diverse"). As part of the Agreement, the Company is acquiring from Diverse approximately 15,000 net acres of mineral interests in Roosevelt and Daniels Counties, Montana in return for the payment of approximately $8,812,500. As of the date of this filing, this Agreement has not been consummated through the payment of the required consideration.
Diverse Energy Investments, LLC. transferred the ownership of the leases to M.L.H. LLC and signed a new Purchase and Sale agreement with Big Sky Oil, Inc. a new subsidiary of The X-Change Corporation. The Purchase and Sale Agreement (PSA) has a closing date of December 20,2012 and the acreage was increased to 19,499.28 net acres. The price has been increased to $11,455,827.00. Diverse Energy transferred the leases to M.L.H. because of a dispute as to the ownership of Diverse. The dispute does not involve the leases or The X-Change Corporation.
The Investor who agreed to fund Cress declined to fund the purchase of the Diverse leases. The Granite Group leases expired on July 20, 2012 when the closing did not take place. The closing did not take place because the individual who incorporated Cress Oil and agreed to fund the purchase informed Granite that he had changed his mind and was going to not transfer ownership of Cress to the Company. The Wexco leases expired by the terms of the Purchase and Sale Agreement. The Company is still seeking funding on the Wexco leases even though the PSA has expired.
Currently, the Company has closed on the M.L.H. LLC leases by way of a farm out agreement. The Company has agreed to pay $500,000 for each 640 Acre lease site drilled. The Company has initiated conversations with interested working interest investors for a drilling program to start operations involving a portion of the M.L.H. leases.
On August 31, 2012, the Company entered into a Purchase Agreement with 4C Tech Holdings Inc., an Alberta, Canada corporation ("4C"), 1237878 Alberta Ltd., an Alberta, Canada corporation ("1237878") and 1238105 Alberta Ltd., an Alberta, Canada corporation ("1238105") (4C, 1237878 and 1238105 are collectively referred to as "Sellers") in which the Company purchased from Sellers all the issued and outstanding shares of Guardian Telecom Inc., an Alberta, Canada corporation ("Guardian"). This transaction closed on September 10, 2012. As consideration, the Company agreed to pay to the Sellers US $3,500,000, as specified in the Purchase Agreement, and issue 1,000,000 restricted, unregistered shares of the Company's common stock. At closing, the Company issued the shares of common stock and executed the promissory notes and pledge agreements required by the Purchase Agreement to secure payment of the cash component of the purchase price. At the date of closing, none of the parties to the Purchase Agreement were affiliates of the Company. As of November 28, 2012, the Sellers had not provided certain required financial information, appointed an X-Change designated member to the Company's Board of Directors, or delivered the Guardian stock certificates, all of which were required by the Purchase Agreement. On November 29, 2012, the Company and the Sellers agreed to resend the transaction retroactive to August 31, 2012, thereby nullifying any previous disclosures related to this transaction.
Employees
The Company currently has no employees. Management of the Company expects to use consultants, attorneys and accountants as necessary, and does not anticipate a need to engage any full-time employees until such time that the aforementioned business opportunities become successful.
Item 1A
Item 1A - Risk Factors
Not required.
Item 1B
Item 1B - Uncleared Staff Comments
None
Item 2
Item 2 - Properties
We currently maintain a mailing address at 3741 Bloomington Street, #4, Colorado Springs, CO 80922. Our telephone number is (888) 889-0888. Other than this mailing address, we do not currently maintain any other office facilities, and does not anticipate the need for maintaining office facilities at any time in the foreseeable future as all of our officers and directors are employed full-time in other business ventures. We pay no rent or other fees for the use of the mailing address as these offices are used virtually full-time by other businesses of the Company’s controlling stockholder.
It is likely that the Company will not establish an office until it has completed a business acquisition transaction or otherwise commences the operations of a business activity; however, it is not possible to predict what arrangements will actually be made with respect to future office facilities.
Item 3
Item 3 - Legal Proceedings
None.
Item 4
Item 4 - Mine Safety Disclosures
None
PART II
Item 5
Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is currently quoted on the NASDAQ OTC Bulletin Board, under the trading symbol “XCHC.” As of April 22, 2013, there were approximately 78 registered holders of record of our common stock, exclusive of shares held in street name. The following table sets forth the range of the high and low bid prices per share of our common stock as reported on www.bigcharts.com during the last two calendar years for the period indicated.
Dividends
We have never paid any cash dividends on our common stock. We intend to retain and use any future earnings for the development and expansion of business and do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
We believe that all of the following offerings and sales were exempt from the registration requirements of the Securities Act of 1933 under Section 4(2) thereunder.
On March 26, 2010, LJII issued a Debenture Conversion Notice to the Company for the conversion of $32,000 of the outstanding debenture balance into 3,902,439 shares (approximately 195,122 post-reverse split shares) of the Company’s common stock. This conversion was completed on April 12, 2010 with the delivery of the shares to LJII. As the conversion price was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $57,760 which was classified as “interest expense” in the accompanying financial statements.
In September 2010 and December 2010, the Company issued an aggregate 9,797,416 restricted, unregistered post-reverse split shares to Melissa CR 364 LTD. to retire a combination of approximately $50,000 on the aforementioned line of credit and approximately $146,000 in accumulated accrued interest on both the AirGATE and line of credit notes. As the valuation of the conversion as stated in the separate note agreements was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $4,950,000 which was classified as “interest expense” in the accompanying financial statements.
On October 7, 2010, the Company issued 1,000,000 shares of restricted, unregistered post-reverse split shares, valued at approximately $530,000 which was equal to the closing quotation of the Company’s securities on the transaction date, to 21-Century Silicon, Inc. (a Texas corporation) to license the use of 21-Century’s technology and to secure an exclusive right to negotiate to acquire certain intellectual property from 21-Century. On January 28, 2011, concurrent with the abandonment of the 21-Century transaction, the Company rescinded the October 2010 transaction where 1,000,000 shares of restricted, unregistered common stock was issued to license the use of 21-Century’s technology and to secure an exclusive right to negotiate to acquire certain intellectual property from 21-Century. Further, concurrent with this action, the Company executed its lien on the assets pledged by 21-Century in satisfaction of a note receivable and accrued interest totaling approximately $41,200. Upon foreclosure on said assets, the Company’s management elected to take a 100% impairment against the foreclosed value resulting in a charge to operations in the first quarter of 2011 of approximately $41,200. Any gain, if any, upon the ultimate disposition of said assets will be recognized at the point of future sale.
On January 3, 2011, LJII issued a Debenture Conversion Notice to the Company for the conversion of $1,000 of the outstanding debenture balance into 21,375 shares of the Company’s common stock. Additionally, LJII exercised 10,000 outstanding warrants to obtain 10,000 shares of the Company’s common stock for $10,000 cash. This conversion was completed on January 5, 2011 with the delivery of the shares to LJII. As the aggregate conversion and exercise price was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $10,962 which was classified as “interest expense” in the accompanying financial statements.
In May 2011, the Company issued an aggregate 575,000 restricted, unregistered post-reverse split shares to Melissa CR 364 LTD. to retire a combination of approximately $75,000 on the aforementioned notes and approximately $40,000 in accumulated accrued interest. As the valuation of the conversion as stated in the separate note agreements was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $115,000 which was classified as “interest expense” in the accompanying financial statements.
In July 2011, in connection with the execution of a Letter of Intent ("LOI") with George J. Akmon and Jerry Monday & Associates, LLC (collectively referred to as "Operators") to operate “The Texas Star Casino” outside the nine mile territorial waters of Texas, in international waters, as a casino ship, the Company issued 100,000 shares of restricted, unregistered common stock as an inducement to execute the LOI. This transaction was valued at approximately $25,000 which approximated “fair value” of the Company’s securities on the date of issuance.
In August 2011, the Company issued an aggregate 12,252,136 shares of restricted, unregistered common stock to Old West, Molina and the Bogat Trust, as previously discussed. Concurrent with the rescission of this transaction, the Company recovered 11,000,000 shares of the 12,252,136 shares originally issued. Approximately 1,252,136 shares remained in the possession of Old West, Molina and/or the Bogat Trust. These net 1,252,136 shares remaining outstanding were initially valued at an agreed-upon value of approximately $25,042. As the agreed-upon transaction valuation was below the “fair value” of the shares issued, the Company experienced an additional non-cash charge to operations of approximately $475,812. The aggregate approximately $500,854 was charged to operations as “Loss on rescinded acquisition of Old West Entertainment Corp.” in the accompanying financial statements to reflect the net economic event related to these transactions.
In October and November 2011, the Company issued an aggregate 6,800,000 shares of free-trading common stock in settlement of approximately $13,600 of debt on the books of Old West Entertainment Corp. while Old West was an operating component of the Company and prior to the March 2012 rescission of the entire transaction. As the debt reduction was less than the “fair value” of the shares issued, the Company recognized an additional non-cash charge to operations of approximately $1,091,000 was recognized as “Loss on rescinded acquisition of Old West Entertainment Corp.” during the 4th quarter.
In July and October 2012, LJII issued separate Debenture Conversion Notices to the Company for the conversion of an aggregate $13,500 of the outstanding debenture balance into an aggregate 2,284,856 shares of the Company’s common stock. Additionally, LJII exercised 135,000 outstanding warrants to obtain 135,000 shares of the Company’s common stock for $135,000 cash. The conversions were completed on July 25, 2012 and October 5, 2012, respectively, with the delivery of the shares to LJII. As the aggregate conversion and exercise price was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $243,841 which was classified as “interest expense” in the accompanying financial statements.
In March, August and December 2012, the Company issued an aggregate 10,897,864 post-reverse split shares to Melissa CR 364 LTD. to retire a combination of approximately $151,996 in principal and accrued interest payable on the aforementioned notes. As the valuation of the conversion as stated in the separate note agreements was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $1,421,184 which was classified as “interest expense” in the accompanying financial statements.
On August 31, 2012, the Company entered into a Purchase Agreement with 4C Tech Holdings Inc., an Alberta, Canada corporation ("4C"), 1237878 Alberta Ltd., an Alberta, Canada corporation ("1237878") and 1238105 Alberta Ltd., an Alberta, Canada corporation ("1238105") (4C, 1237878 and 1238105 are collectively referred to as "Sellers") in which the Company purchased from Sellers all the issued and outstanding shares of Guardian Telecom Inc., an Alberta, Canada corporation ("Guardian"). This transaction closed on September 10, 2012. As consideration, the Company agreed to pay to the Sellers US $3,500,000, as specified in the Purchase Agreement, and issued 1,000,000 restricted, unregistered shares of the Company's common stock. On November 29, 2012, the Company and the Sellers agreed to resend the transaction retroactive to August 31, 2012, thereby nullifying any previous disclosures related to this transaction and the 1,000,000 shares of stock issued on September 10, 2012 were cancelled.
In December 2012, the Company issued an aggregate 5,400,000 shares of restricted, unregistered common stock to three (3) individuals as compensation for service as either a Company officer and/or director. These shares were valued at an aggregate $159,000. As the agreed-upon valuation was below the “fair value” of the securities issued, the Company experienced a non-cash charge of approximately $320,000 which was classified as “officer and director compensation” in the accompanying financial statements.
On December 12, 2012, the Company entered into an Asset Purchase Agreement with Cannabis Science, Inc. (a publicly-owned Nevada corporation) whereby the Company acquired various assets related to the use of cannabis including resale formulas, media, activism and marketing videos and other items and the assumption of Cannabis’ position in a Joint Venture Operating Agreement with Columbia Corp. and/or dupetit Natural Products GmbH. The Company issued an aggregate 10,000,000 shares of restricted, unregistered common stock to effect this acquisition, valued at an agreed-upon value of approximately $300,000. As the agreed-upon valuation was below the “fair value” of the securities issued, the Company adjusted the acquisition price by approximately $300,000 to equal the “fair value” of the securities issued. On December 31, 2012, management evaluated the carrying value of this acquistion and recognized an impairment charge to operations of approximately $600,000.
In the first quarter of Calendar 2013, the Company issued an aggregate 29,500,000 shares of common stock to various parties for consulting fees and the redemption of debt.
Common Stock Warrants
In conjunction with, and as a component of, certain debt issuances, the Company has the following common stock warrants issued and outstanding as of December 31, 2012 and 2011, respectively.
As of December 31, 2012, the warrants break down as follows:
(*) - The warrants expiring in 2012 are an integral component of the LJII financing as previously discussed. As the debenture remains unpaid and LJII is continuing, with the Company’s approval, to convert the debenture into common stock and exercise warrants, they are considered to remain outstanding at and subsequent to December 31, 2012.
Repurchases of Equity Securities
We did not purchase any of our equity securities during 2011 and 2010.
Equity Compensation
In December 2012, the Company issued an aggregate 5,400,000 shares of restricted, unregistered common stock to three (3) individuals as compensation for service as either a Company officer and/or director, as follows: Wayne Duke - 350,000 shares; John McGuire - 50,000 shares; and Robert Kane - 5,000,000 shares. These shares were valued at an aggregate $159,000. As the agreed-upon valuation was below the “fair value” of the securities issued, the Company experienced a non-cash charge of approximately $320,000 which was classified as “officer and director compensation” in the accompanying financial statements.
During 2011, respectively, we did not issue any shares of our common stock to consultants. We may from time to time issue additional shares to our consultants, employees or directors at the discretion of our board of directors.
During 2007, the Board of Directors approved and adopted the 2007 Stock Incentive Plan allowing for stock options to be issued to employees, directors and consultants of up to 6,000,000 shares in the aggregate. The Plan was not presented to nor approved by a vote of the Company’s stockholders and provides for the issuance of incentive stock options and non-statutory options for common stock to the Company’s employees, directors and consultants. The exercise price of each option may not be less than the trading price of the Company’s stock on the date of the option grant. The options generally vest over a four year period and have a maximum term of ten years. Upon the 2008 foreclosure on our operating subsidiary, AirGATE, all outstanding stock options were cancelled. No options were exercised from their initial issuance through the December 31, 2008 effective disposition of this subsidiary. Additionally, no options have been granted subsequent to December 31, 2008.
Common Stock
Our authorized capital stock consists of 750,000,000 shares of $0.001 par value common stock and 75,000,000 shares of $0.001 par value preferred stock. Each share of common stock entitles a stockholder to one vote on all matters upon which stockholders are permitted to vote. No stockholder has any preemptive right or other similar right to purchase or subscribe for any additional securities issued by us, and no stockholder has any right to convert the common stock into other securities. No shares of common stock are subject to redemption or any sinking fund provisions. All the outstanding shares of our common stock are fully paid and non-assessable. Subject to the rights of the holders of the preferred stock, if any, our stockholders of common stock are entitled to dividends when, as and if declared by our board from funds legally available therefore and, upon liquidation, to a pro-rata share in any distribution to stockholders. We do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future.
Pursuant to our Articles of Incorporation, our board has the authority, without further stockholder approval, to provide for the issuance of up to 75,000,000 shares of our preferred stock in one or more series and to determine the dividend rights, conversion rights, voting rights, rights in terms of redemption, liquidation preferences, the number of shares constituting any such series and the designation of such series. Our board has the power to afford preferences, powers and rights (including voting rights) to the holders of any preferred stock preferences, such rights and preferences being senior to the rights of holders of common stock. No shares of our preferred stock are currently outstanding. Although we have no present intention to issue any shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rights to purchase such shares, may have the effect of delaying, deferring or preventing a change in control of our company.
Provisions Having A Possible Anti-Takeover Effect
Our Articles of Incorporation and Bylaws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of our board and in the policies formulated by our board and to discourage certain types of transactions which may involve an actual or threatened change of our control. Our board is authorized to adopt, alter, amend and repeal our Bylaws or to adopt new Bylaws. In addition, our board has the authority, without further action by our stockholders, to issue up to 75,000,000 shares of our preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The issuance of our preferred stock or additional shares of common stock could adversely affect the voting power of the holders of common stock and could have the effect of delaying, deferring or preventing a change in our control.
Preferred Stock
The Company is authorized to issue up to a total of 75,000,000 shares of $0.001 par value Preferred Stock. The Company’s Board of Directors has designated 250,000 shares as “Series A Convertible Preferred Stock”.
The Company is under no obligation to pay dividends or to redeem the Series A Convertible Preferred Stock. This series of stock is convertible into 10 shares of Common Stock at the option of the shareholder or upon automatic conversion. In the event of any liquidation, dissolution or winding-up of the Company, the holders of outstanding shares of Series A Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, before any payment shall be made to or set aside for holders of the Common Stock, at an amount of $1 per share.
As of December 31, 2012 and 2011, respectively, there were no shares of preferred stock issued and outstanding.
Restricted Securities
As of December 31, 2012, per our stock transfer agent, we had approximately 26,358,259 shares of common stock which may be considered to meet the definition and requirements of “restricted securities” as defined in Rule 144. Generally, restricted securities can be resold under Rule 144 once they have been held for the required statutory period, provided that the securities satisfies the current public information requirements of the Rule.
Transfer Agent
Our independent stock transfer agent is Signature Stock Transfer, Inc. Their address is 2220 Coit Road, Suite 480, PMB 317, Plano, Texas 75075. Their contact numbers are (972) 612-4120 for voice calls and (972) 612-4122 for fax transmissions.
Reports to Stockholders
The Company intends to remain compliant with its obligations under the Exchange Act and, therefore, plans to furnish its stockholders with an annual report for each fiscal year ending December 31 containing financial statements audited by its registered independent public accounting firm. In the event the Company enters into a business combination with another company, it is the present intention of management to continue furnishing annual reports to stockholders. Additionally, the Company may, in its sole discretion, issue unaudited quarterly or other interim reports to its stockholders when it deems appropriate. The Company intends to maintain compliance with the periodic reporting requirements of the Exchange Act.
Item 6
Item 6 - Selected Financial Data
Not applicable
Item 7
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
(1)
Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-K and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
(2)
Results of Operations
The Company had no revenue for either of the years ended December 31, 2012 and 2011, respectively.
General and administrative expenses for each of the years ended December 31, 2012 and 2011 were approximately $743,000 and $111,000, respectively. The 2012 and 2011 expenditures relate, principally, to the Company’s attempts to find a suitable business combination partner as well as adminstrative costs, including professional and consulting fees, related to the maintenance of the corporate entity and the Company’s continued compliance with the requirements of the Securities Exchange Act of 1934. Further, the 2012 expenditures include approximately $479,000 in non-cash charges related to the payment of compensation to current and former officers and/or directors with common stock. Additionally, the Company was invoiced and, accordingly, accrued, in the 4th quarter of 2012, approximately $200,000 in fees for services provided by consultants for various projects pursued during Calendar 2012.
The Company recognized aggregate interest accruals, amortization of debt financing fees and accretion of debt discounts of approximately $1,950,000 and $223,000 during each of the years ended December 31, 2012 and 2011, respectively. The Company’s convertible debenture with La Jolla Cove Investors, Inc. matured in August 2010 and was extended through December 31, 2012. This debenture is discussed more fully in the Notes to our Financial Statements contained elsewhere in this Annual Report on Form 10-K. We specifically note that all of the Company’s debt is in default and, accordingly, has been classified as “current” on the Company’s balance sheet regardless of the stated maturity date(s).
Management anticipates that future expenditure levels will fluctuate, either up or down, as the Company complies with its periodic reporting requirements and implements the business plan of identifying a suitable situation for a business combination transaction.
Earnings per share for the respective years ended December 31, 2012 and 2011 were $(0.10) and $(0.11) based on the weighted-average shares issued and outstanding at the end of each respective period.
The Company does not expect to generate any meaningful revenue or incur operating expenses for purposes other than fulfilling the obligations of a reporting company under the Securities Exchange Act of 1934 unless and until such time that the Company completes a business combination transaction.
(4)
Plan of Business
On December 12, 2012, the Company entered into an Asset Purchase Agreement with Cannabis Science, Inc. (a publicly-owned Nevada corporation) whereby the Company acquired various assets related to the use of cannabis including resale formulas, media, activism and marketing videos and other items and the assumption of Cannabis’ position in a Joint Venture Operating Agreement with Columbia Corp. and/or dupetit Natural Products GmbH.
The Company’s business plan is to develop and exploit the utilization of cannabis and hemp derived products. However, there is no assurance that the Company will be able successful in this endeavor or that any future operations will result in the appreciation of our stockholders’ investment in the then outstanding common stock.
(5)
Liquidity and Capital Resources
At December 31, 2012 and 2011, respectively, the Company had working capital of approximately $(1,500,000) and $(1,235,000).
Our current business plan will require additional capital; however, our management team has identified the potential future needs related to the asset acquisition from Cannabis Science, Inc.; however, has not been able to predict the availability of additional capital with any appropriate degree of accuracy at this time. However, there is no assurance that we will be successful in the development or operation of the business ventures we anticipate developing.
The Company's continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis. Further, the Company faces considerable risk in its business plan and a potential shortfall of funding due to any inability to raise capital in the equity securities market. If no additional operating capital is received during the next twelve months, the Company will be forced to rely on existing cash in the bank and additional funds loaned by management and/or significant stockholders.
The Company may become dependent upon additional external sources of financing; including being dependent upon its management and/or significant stockholders to provide sufficient working capital in excess of the Company’s initial capitalization to preserve the integrity of the corporate entity.
The Company anticipates offering future sales of equity securities. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
The Company’s certificate of incorporation authorizes the issuance of up to 75,000,000 shares of preferred stock and 750,000,000 shares of common stock. The Company’s ability to issue preferred stock may limit the Company’s ability to obtain debt or equity financing, The Company’s ability to issue these authorized but unissued securities may also negatively impact our ability to raise additional capital through the sale of our debt or equity securities.
The Company’s current controlling stockholder has maintained the corporate status of the Company and has provided all nominal working capital support on the Company's behalf since the December 2008 foreclosure action. Because of the Company's lack of operating assets, its continuance is fully dependent upon the majority stockholder's continuing support. It is the intent of this controlling stockholder to continue the funding the nominal necessary expenses to sustain the corporate entity. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such advances or loans exist. There is no legal obligation for either management or significant stockholders to provide additional future funding. Further, the Company is at the mercy of future economic trends and business operations for this controlling stockholder to have the resources available to support the Company. Should this pledge fail to provide financing, the Company has not identified any alternative sources of working capital to support the Company.
In such a restricted cash flow scenario, the Company would be unable to complete its business plan steps, and would, instead, delay all cash intensive activities. Without necessary cash flow, the Company may become dormant during the next twelve months, or until such time as necessary funds could be raised in the equity securities market.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach its goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps.
Regardless of whether the Company’s cash assets prove to be inadequate to meet the Company’s operational needs, the Company might seek to compensate providers of services by issuances of stock in lieu of cash.
(6)
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (GAAP). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note D of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
(7)
Effect of Climate Change Legislation
The Company currently has no known or identified exposure to any current or proposed climate change legislation which could negatively impact the Company’s operations or require capital expenditures to become compliant. Additionally, any currently proposed or to-be-proposed-in-the-future legislation concerning climate change activities, business operations related thereto or a publicly perceived risk associated with climate change could, potentially, negatively impact the Company’s efforts to identify an appropriate target company which may wish to enter into a business combination transaction with the Company.
Item 7A
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any.
Item 8
Item 8 - Financial Statements and Supplementary Data
The required financial statements begin on page of this document.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Resignation of S. W. Hatfield, CPA's
On February 21, 2013, the Board of Directors of the Company was notified by it's auditors, S. W. Hatfield, CPA (SWHCPA) of Dallas, Texas that, as a result of the Asset Purchase Agreement with Cannabis Science, Inc., principally including the Joint Venture Operating Agreement with dupetit Natural Products GmbH (a Germany-based company), as reported in a Current Report on Form 8-K filed on or about December 28, 2012, SWHCPA would not stand for reappointment as the Company’s auditing firm for the year ended December 31, 2012.
The Company's Board of Directors has accepted the pending resignation of SWHCPA.
No accountant's report on the financial statements for either of the past two (2) years contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles, except for a going concern opinion expressing substantial doubt about the ability of the Company to continue as a going concern.
During the Company's two most recent fiscal years (ended December 31, 2011 and 2010) and from January 1, 2012 to the date of this Report, there were no disagreements with SWHCPA on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure. For the years ended December 31, 2011 and 2010, and from January 1, 2012 through the date of this report, there were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K.
The Company provided SWHCPA with a copy of the foregoing disclosure and requested SWHCPA to furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made therein. A copy of SWHCPA’s letter dated February 21, 2013 was attached as Exhibit 16.1 in the Company’s filing on Form 8-K.
Proposed engagement of Drake Klein Messineo, CPA’s PA
On February 26, 2013, the Board of Directors of the Company announced that it had engaged the services of Drake Klein Messineo CPA’s PA (aka DKM Certified Public Accountants) (DKM) of Clearwater, Florida to perform the audit of the Company’s financial statements as of and for the year ended December 31, 2012. This announcement was predicated upon a February 25, 2013 e-mail communication from DKM representing an inferred acceptance of the engagement.
On April 4, 2013, DKM informed the Company “... we are not going to be able to pursue this engagement. Our resources are too thin at this time to provide the company [sic] with the quality and quantity of audit work that X-Change would require.”
Accordingly, DKM never issued, and the Company did not execute, an engagement letter related to the audit of our 2012 financial statements, nor has DKM issued any type of accountant’s report or auditor’s report on any of the Company’s financial statements. During the period from February 25, 2013 through the date of this report, there were no disagreements with DKM on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure.
As DKM was never officially the auditor of record for the Company, no exhibit letter(s) were required to be filed with our Current Report on Form 8-K.
Reengagement of S. W. Hatfield, CPA
On April 11, 2013, upon receipt of specific representations of the Company’s management and the management of dupetit Natural Products GmbH, the accounting firm of S. W. Hatfield, CPA agreed to accept an engagement to audit the Company’s financial statements as of and for the year ended December 31, 2012 with the express understanding that the appointment as auditor would cease concurrent with the filing of the Company’s Form 10-K for the year ended December 31, 2012.
The Company’s Board of Directors has accepted the engagement terms of S. W. Hatfield, CPA.
No accountant's report on the financial statements for either of the past two (2) years contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles, except for a going concern opinion expressing substantial doubt about the ability of the Company to continue as a going concern.
During the Company's two most recent fiscal years (ended December 31, 2011 and 2010) and from January 1, 2012 to the date of this Report, there were no disagreements with SWHCPA on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure. For the years ended December 31, 2011 and 2010, and from January 1, 2012 through the date of this report, there were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K.
The Company provided SWHCPA with a copy of the foregoing disclosure and requested SWHCPA to furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made therein. A copy of SWHCPA’s letter dated April 25, 2013 is attached as Exhibit 16.1 in this filing.
Item 9A
Item 9A - Controls and Procedures
Disclosure Controls and Procedures. Our management, under the supervision and with the participation of our Chief Executive and Financial Officer (Certifying Officer), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15 promulgated under the Exchange Act as of the end of the period covered by this Annual Report. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Certifying Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Certifying Officer concluded that as of such date, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in our reports is recorded, processed, summarized and reported within the time periods specified by the SEC due to a weakness in our controls described below. However, our Certifying Officer believes that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the respective periods presented.
Management’s Annual Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act.
Internal control over financial reporting is defined under the Exchange Act as a process designed by, or under the supervision of, our CEO and CFO and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
--
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
--
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
--
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
Management's assessment of the effectiveness of the Company's internal control over financial reporting is as of the year ended December 31, 2012. We are currently no specific business plans, no operations, revenues or employees. Because we have only one officer and director, the Company's internal controls are deficient for the following reasons, (1) there are no entity level controls because there is only one person serving in the dual capacity of sole officer and sole director, (2) there are no segregation of duties as that same person approves, enters, and pays the Company's bills, and (3) there is no separate audit committee. As a result, the Company's internal controls have an inherent weakness which may increase the risks of errors in financial reporting under current operations and accordingly are deficient as evaluated against the criteria set forth in the Internal Control - Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal controls over financial reporting were not effective as of December 31, 2012.
This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal control over financial reporting, pursuant to the current appropriate Laws and Regulations.
Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting which internal controls will remain deficient until such time as the Company completes a business combination transaction or acquisition of an operating business at which time management will be able to implement effective controls and procedures.
Item 9B
Item 9B - Other Information
Not applicable.
PART III
Item 10
Item 10 - Directors, Executive Officers and Corporate Governance
The directors and executive officers serving the Company are as follows:
Name
Age
Position Held and Tenure
Robert J. Kane
Director, President, and CEO
Alfredo Dupetit
Director and V.P. of European Operations
Chad S. Johnson
Director and COO
The director named above will serve until the next annual meeting of the Company’s stockholders or until any successors are duly elected and have qualified. Directors will be elected for one-year terms at the annual stockholders meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement, of which none currently exists or is contemplated. There is no arrangement or understanding between any of the directors or officers of the Company and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current directors to the Company’s board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of the Company’s affairs.
The sole director and officer will devote his time to the Company’s affairs on an as needed basis. There are no agreements or understandings for the officer or director to resign at the request of another person, and he is not acting on behalf of, and will not act at the direction of, any other person.
Biographical Information
Robert J. Kane-Director-President, and CEO
Mr. Kane worked as a registered representative for Stifel Nicolaus & Co. from November 2008 to December 2009. From January 2010 to February 2011, Mr. Kane worked as president of Cannabis Consulting, Inc. Mr. Kane has worked as vice president of investor relations for Cannabis Science, Inc. from September 2011 to present.
Mr. Alfredo Dupetit- Director and V.P. of European Operations
Mr. Dupetit is the owner and operator of Dupetit Natural Products GmbH (“DNPG”) since January 2006. Under the expertise of Mr. Dupetit, DNPG is a manufacturer and wholesaler of organic hemp products, including cosmetics and nutriceuticals. He also owns and operates BioScent (www.bioscent.info) since January 2006, which manufactures and distributes 100% natural and organic perfumes. Mr. Dupetit has extensive expertise in developing and producing of organic and hemp based cosmetics.
Chad S. Johnson- Director and COO
Mr. Johnson, a native of Emporia, Kansas, and a resident of Washington, D.C., began his professional career in 1992 after graduating from Harvard College and Harvard Law School . Following a federal judicial clerkship, Mr. Johnson joined the law firm Skadden Arps Slate Meagher & Flom LLP, where he practiced for several years in federal and state financial institution regulatory law with a focus on mergers and acquisitions, serving such clients as Citigroup, Sumitomo Bank, and Travelers. He also performed substantial pro bono work for national LGBT and HIV and AIDS organizations while at Skadden. In 2000, Mr. Johnson left his firm to serve as the Deputy Director of Business Leader Outreach and Deputy Director of Gay and Lesbian Issues for the Gore/Lieberman campaign, after which he served as Executive Director of the National Stonewall Democrats, the only national LGBT gay Democrats organization in the nation. From 2003 to 2012, Mr. Johnson served as chief of staff and general counsel of The Center for Cosmetic Surgery, including management of medical devices and skincare. In addition to other legal, charitable, and business endeavors, in 2010, Mr. Johnson co-founded the World AIDS Institute, a non-profit organization dedicated to document and preserve the global history of AIDS and to strengthen the spectrum of initiatives to find a cure, and more recently in 2012 co-founded with Timothy Ray Brown (the Berlin Patient) and David Purdy, the only charitable organization with a sole mission of finding an HIV cure: the Timothy Ray Brown Foundation. Also in 2012, Mr. Johnson was appointed to serve as a member of the Board of Directors of Cannabis Science, Inc.
Indemnification of Officers and Directors.
We have the authority under the Nevada General Corporation Law to indemnify our directors and officers to the extent provided for in such statute. Set forth below is a discussion of Nevada law regarding indemnification which we believe discloses the material aspects of such law on this subject. The Nevada law provides, in part, that a corporation may indemnify a director or officer or other person who was, is or is threatened to be made a named defendant or respondent in a proceeding because such person is or was a director, officer, employee or agent of the corporation, if it is determined that such person:
*
conducted himself in good faith;
*
reasonably believed, in the case of conduct in his official capacity as a director or officer of the corporation, that his conduct was in the corporation's best interest and, in all other cases, that his conduct was at least not opposed to the corporation's best interests; and
*
in the case of any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful.
A corporation may indemnify a person under the Nevada law against judgments, penalties, including excise and similar taxes, fines, settlement, unreasonable expenses actually incurred by the person in connection with the proceeding. If the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification is limited to reasonable expenses actually incurred by the person in connection with the proceeding, and shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the corporation. The corporation may also pay or reimburse expenses incurred by a person in connection with his appearance as witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding.
Our Articles of Incorporation provides that none of our directors shall be personally liable to us or our stockholders for monetary damages for an act or omission in such directors' capacity as a director; provided, however, that the liability of such director is not limited to the extent that such director is found liable for (a) a breach of the directors' duty of loyalty to us or our stockholders, (b) an act or omission not in good faith that constitutes a breach of duty of the director to us or an act or omission that involves intentional misconduct or a knowing violation of the law, (c) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, or (d) an act or omission for which the liability of the director is expressly provided under Nevada law. Limitations on liability provided for in our Articles of Incorporation do not restrict the availability of non-monetary remedies and do not affect a director's responsibility under any other law, such as the federal securities laws or state or federal environmental laws.
We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as executive officers and directors. The inclusion of these provisions in our Articles of Incorporation may have the effect of reducing a likelihood of derivative litigation against our directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of case, even though such an action, if successful, might otherwise have benefitted us or our stockholders.
Our Bylaws provide that we will indemnify our directors to the fullest extent provided by Nevada General Corporation Law and we may, if and to the extent authorized by our board of directors, so indemnify our officers and other persons whom we have the power to indemnify against liability, reasonable expense or other matters.
Insofar as indemnification for liabilities arising under the Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by such director, officer, or controlling person in connection with the securities being registered, we will (unless in the opinion of our counsel the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of our common stock to file reports regarding ownership of and transactions in our securities with the Securities and Exchange Commissioner and to provide us with copies of those filings. Based solely on our inquiries and absence of any copies received by us and/or a written representation from certain reporting persons, we believe that during the fiscal year ended December 31, 2012 that all eligible persons were not in compliance with the requirements of Section 16(a).
Conflicts of Interest
Our officers and directors are currently involved in other full-time ventures and, accordingly, at the present time, will not devote more than a small portion of his time to the affairs of the Company. There will be occasions when the time requirements of the Company’s business may conflict with the demands of the officer’s other business and investment activities. Such conflicts may require that the Company attempt to employ additional personnel. There is no assurance that the services of such persons will be available or that they can be obtained upon terms favorable to the Company.
Involvement on Certain Material Legal Proceedings During the Past Five (5) Years
(1)
No director, officer, significant employee or consultant has been convicted in a criminal proceeding, exclusive of traffic violations or is subject to any pending criminal proceeding.
(2)
No bankruptcy petitions have been filed by or against any business or property of any director, officer, significant employee or consultant of the Company nor has any bankruptcy petition been filed against a partnership or business association where these persons were general partners or executive officers.
(3)
No director, officer, significant employee or consultant has been permanently or temporarily enjoined, barred, suspended or otherwise limited from involvement in any type of business, securities or banking activities.
(4)
No director, officer or significant employee has been convicted of violating a federal or state securities or commodities law.
Item 11
Item 11 - Executive Compensation
The current management and oversight of the Company requires less than four (4) hours per month. As the Company’s sole officer and director is engaged in other full-time income producing activities, the Company’s sole officer or director has not received any compensation from the Company. In future periods, subsequent to the consummation of a business combination transaction, the Company anticipates that it will pay compensation to its officer(s) and/or director(s). See Certain Relationships and Related Transactions.
SUMMARY COMPENSATION TABLE
Name and
Principal Position
Year
Salary
($)
Bonus ($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Arturo Molina
Former CEO
Haviland Wright
Former CEO
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
R. Wayne Duke,
Former CEO
$350,000
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$350,000
$-0-
As of December 31, 2011, the Company has no other Executive Compensation issues which would require the inclusion of other mandated table disclosures.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of the date of this Annual Report, the number of shares of Common Stock owned of record and beneficially by executive officers, directors and persons who hold 5% or more of the outstanding Common Stock of the Company. Also included are the shares held by all executive officers and directors as a group.
_______________________________
(1)
On April 22, 2013, there were 73,785,647 shares of our common stock outstanding and no shares of preferred stock issued and outstanding. Under applicable SEC rules, a person is deemed the "beneficial owner" of a security with regard to which the person directly or indirectly, has or shares (a) the voting power, which includes the power to vote or direct the voting of the security, or (b) the investment power, which includes the power to dispose, or direct the disposition, of the security, in each case irrespective of the person's economic interest in the security. Under SEC rules, a person is deemed to beneficially own securities which the person has the right to acquire within 60 days through the exercise of any option or warrant or through the conversion of another security.
(2)
In determining the percent of voting stock owned by a person on April 22, 2013 (a) the numerator is the number of shares of common stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the total of (i) the 73,785,647 shares of common stock outstanding on April 22, 2013, and (ii) any shares of common stock which the person has the right to acquire within 60 days upon the exercise of options or warrants or conversion of convertible securities (approximately 2,814,385 shares on the exercise of the LaJolla and other outstanding warrants and approximately 3,900,000 shares to be issued if there was total conversion of the LaJolla debenture at October 5, 2012, the date of the last debenture conversion notice) - approximately 6,714,385 beneficial shares in total. Accordingly, neither the numerator nor the denominator includes the La Jolla shares which may be issued upon the exercise of any options or warrants or the conversion of any other convertible securities in existence as of the date of this filing.
Changes in Control
There are currently no arrangements which may result in a change in control of the Company.
Item 13
Item 13 - Certain Relationships and Related Transactions, and Director Independence
There are no relationships or transactions between us and any of our directors, officers and principal stockholders.
We currently maintain a mailing address at 3741 Bloomington Street, Suite #4, Colorado Springs, CO 80922. Our telephone number is (888) 889-0888. Other than this mailing address, we do not currently maintain any other office facilities, and does not anticipate the need for maintaining office facilities at any time in the foreseeable future as all of our officers and directors are employed full-time in other business ventures. We pay no rent or other fees for the use of the mailing address as these offices are used virtually full-time by other businesses of the Company’s controlling stockholder.
Director Independence
Pursuant to the Company’s current structure of having a sole director, who is also the Company’s sole officer and controlling shareholder, the Company has no independent directors, as defined in Rule 4200 (a) (15) of the NASDAQ Marketplace Rules.
Item 14
Item 14 - Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two fiscal years to its principal accountant, S. W. Hatfield, CPA:
1.
Audit fees consist of amounts billed for professional services rendered for the audits of our financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Securities & Exchange Commission and related comfort letters and other services that are normally provided by S. W. Hatfield, CPA, our current independent auditors, in connection with statutory and regulatory filings or engagements.
2.
Audit Related fees consist of fees billed for assurance and related services by our principal accountant that are related to the performance of the audit or review of our financial statements and are not reported under Audit Fees.
3.
Tax fees consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
We have considered whether the provision of any non-audit services, currently, in the past or in the future, is compatible with either S. W. Hatfield, CPA maintaining their respective independence and have determined that these services do not compromise their independence.
Financial Information System Design and Implementation: S. W. Hatfield, CPA did not charge the Company any fees for financial information system design and implementation fees.
The Company has no formal audit committee. However, the entire Board of Directors (Board) is the Company's defacto audit committee. In discharging its oversight responsibility as to the audit process, the Board obtained from the independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors' independence as required by the appropriate Professional Standards issued by the Public Company Accounting Oversight Board, the U. S. Securities and Exchange Commission and/or the American Institute of Certified Public Accountants. The Board discussed with the auditors any relationships that may impact their objectivity and independence, including fees for non-audit services, and satisfied itself as to the auditors' independence. The Board also discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Company's internal controls.
The Company’s principal accountants, S. W. Hatfield, CPA, did not engage any other persons or firms other than the principal accountant’s full-time, permanent employees.
Item 15
Item 15 - Exhibits, Financial Statement Schedules
16.1
Letter from S. W. Hatfield, CPA
21.1
List of subsidiaries
31.1
Certification of Chief Executive and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(Financial Statements begin on next page)
THE X-CHANGE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F - 1
LETTERHEAD OF S. W. HATFIELD, CPA
REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
The X-Change Corporation
We have audited the accompanying consolidated balance sheets of The X-Change Corporation (a Nevada corporation) as of December 31, 2012 and 2011 and the related consolidated statements of operations and comprehensive loss, consolidated statement of changes in stockholders' equity (deficit) and consolidated statements of cash flows for each of the years ended December 31, 2012 and 2011, respectively. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The consolidated financial statements referred to above, in our opinion, present fairly, in all material respects, the consolidated financial position of The X-Change Corporation as of December 31, 2012 and 2011 and the consolidated results of its operations and cash flows for each of the years ended December 31, 2012 and 2011, 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 C to the consolidated financial statements, the Company has no operations or significant assets and is dependent upon significant stockholders to provide sufficient working capital to maintain the integrity of the corporate entity. These circumstances create substantial doubt about the Company's ability to continue as a going concern and Management's plans in regard to these matters are also described in Note C. The consolidated financial statements do not contain any adjustments that might result from the outcome of these uncertainties.
/s/ S. W. Hatfield, CPA
S. W. HATFIELD, CPA
Dallas, Texas
April 12, 2013 (except for Note L
as to which the date is April 25, 2013)
F - 2
THE X-CHANGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011
The accompanying notes are an integral part of these financial statements.
F - 3
THE X-CHANGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 2012 and 2011
The accompanying notes are an integral part of these financial statements.
F - 4
THE X-CHANGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Years ended December 31, 2012 and 2011
The accompanying notes are an integral part of these financial statements.
F - 5
THE X-CHANGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2012 and 2011
The accompanying notes are an integral part of these financial statements.
F - 6
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE A - Organization and Description of Business
The X-Change Corporation (Company) was incorporated under the laws of the State of Delaware on February 5, 1969 and changed its corporate domicile to the State of Nevada on October 4, 2000. We were originally organized to seek merger and/or acquisition candidates and engaged in various transactions since our inception. As of December 31, 2008, the Company had disposed of all operating assets and operating activities.
In March 2010, the Company formed the wholly-owned subsidiaries - Caballo Blanco Communications, Ltd. and Commerce Services, Inc. - as Colorado corporations to conduct operations related to the various proposed acquisitions. On December 27, 2010, the Company changed the corporate name of Commerce Services, Inc. to PolySilicon, Inc. to conduct the business activities related to a then proposed acquisition. There has been no economic activity conducted within either subsidiary since their formation.
In August 2012, the Company formed the wholly-owned subsidiaries - Big Sky Oil, Inc. and Cut Bank Operating, Inc. - as Wyoming corporations to conduct operations related to various proposed new business activities. There has been no economic activity conducted within either subsidiary since their formation.
On December 12, 2012, the Company entered into an Asset Purchase Agreement with Cannabis Science, Inc. (a publicly-owned Nevada corporation) whereby the Company acquired various assets related to the use of cannabis including resale formulas, media, activism and marketing videos and other items and the assumption of Cannabis’ position in a Joint Venture Operating Agreement with Columbia Corp. and/or dupetit Natural Products GmbH.
Abandoned business ventures
On October 7, 2010, the Company announced that it signed an agreement in principle to acquire 21-Century Silicon, Inc., based in Richardson, Texas (21-Century). The terms of the acquisition was anticipated to involve a change in control of the Company and the appointment of new directors. Concurrent with the execution of the agreement in principle, the Company issued 1,000,000 shares of restricted, unregistered common stock to license 21-Century’s technology and to secure an exclusive right to negotiate to acquire certain intellectual property. The closing of the acquisition was subject to the completion of all appropriate due diligence. On November 8, 2010, 21-Century executed a note payable to the Company in the amount of approximately $28,500, bearing interest at 10.0% for working capital advances made by the Company on 21-Century’s behalf. On January 17, 2011, the Company announced that through its wholly-owned subsidiary, PolySilicon, Inc, it had completed the purchase of the intangible assets of 21-Century, subject to an agreement to purchase a $3,500,000 note payable owed to the State of Texas (Texas Note) by 21-Century. On January 28, 2011, the Company announced that it had cancelled the purchase of 21-Century and canceled its offer to purchase the Texas Note. The purchase of the assets was conditioned on the Company being able to purchase the Texas Note. The State of Texas' insistence on additional repetitive reviews of the proposed transaction, which was scheduled for closing, resulted in the Company's inability to complete and close the financing necessary for silicon manufacturing. Concurrent with this action, the Company rescinded the 1,000,000 shares issued in the October 7, 2010 event and executed its lien on the assets of 21-Century Silicon in satisfaction of a note receivable and accrued interest totaling approximately $41,200. Upon foreclosure on said assets, the Company’s management elected to take a 100% impairment against the foreclosed value resulting in a charge to operations in the first quarter of 2011 of approximately $41,200. Any gain, if any, upon the ultimate disposition of said assets will be recognized at the point of future sale.
On March 7, 2011, the Company announced that it had entered into an Agreement and Plan of Exchange with Surrey Vacation Properties, Inc. (a Missouri corporation) (Seller) to acquire 100% of the issued and outstanding stock of the Seller. In the transaction, it is anticipated that the Company will issue 63,283,391 restricted, unregistered shares of its $0.001 par value common stock. A copy of the Contract for Sale was filed as an exhibit to a Current Report on Form 8-K filed with the SEC on or about March 11, 2011. On April 26, 2011, as reported on a Current Report on Form 8-K filed with the SEC on or about April 28, 2011, the CEO of Surrey Vacation Resorts, Inc. (Surrey) informed the Company that Surrey would not able to meet a condition of closing of the acquisition of Surrey by the Company. Surrey had been unable to obtain the necessary written approval of the acquisition transaction from its lenders and further informed the Company that Surrey would be unable to close the transaction. Upon receipt of this information, the Company agreed to terminate the aforementioned contract to acquire Surrey Vacation Resorts, Inc.
F - 7
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE A - Organization and Description of Business - Continued
Abandoned business ventures - continued
On May 25, 2011, the Company announced that it had closed on the purchase of a Casino Ship located in Freeport, Texas. The acquisition was purchased by LDC Collection Systems, Inc., a newly-formed and wholly-owned subsidiary incorporated under the Laws of the State of Texas. The purchase price was 2,000,000 shares of restricted, unregistered common stock of the Company with an agreed-upon valuation of approximately $1,750,000. The Casino ship, known as “The Texas Star Casino”, is a 155-foot ocean going vessel equipped with 250 slot machines and various table games. The ship also has facilities for entertainment, beverage service and dining. The ship was purchased from CJP Entertainment LLC, a Missouri corporation. The ship was built in 1977 and updated in 1986. The ship previously operated out of ports located in Georgia and Florida.
On June 6, 2011, the Company has also entered into a Letter of Intent ("LOI") with George J. Akmon and Jerry Monday & Associates, LLC (collectively referred to as "Operators") to operate “The Texas Star Casino” outside the nine mile territorial waters of Texas, in international waters, as a casino ship. As it is the intent to operate the ship outside the 9-mile State of Texas territorial limit means that the Company, nor its operators, will be required to acquire or hold a gaming license from the State of Texas.
On July 25, 2011, the Company, its wholly-owned subsidiary, LDC Collection Systems, Inc. and CJP Entertainment LLC, mutually agreed to execute a Repurchase Agreement whereby the May 25, 2011 transaction was reversed. The Company retained no rights to own or operate the cruise ship and no further action was taken on the June 6, 2011 LOI to operate said casino ship.
On August 18, 2011, The X-Change Corporation (Company) entered into an Asset Purchase Agreement (Agreement) with Old West Entertainment Corp. (Old West), a Nevada corporation, a privately-owned company which was not affiliated with the Company. As part of the Agreement, the Company acquired all right, title and interest in all of Old West's Operating Entertainment Business (Assets). The Assets included a website, client base, capital assets, hardware, software, intellectual property as well as all of Old West's artists, properties, patents, trademarks and distribution rights and agreements relating to Old West's music and entertainment business. The Company would also assume all rights and obligations under a Management Consulting Agreement between Old West and Arturo Molina Jr. (Molina), also known in the music business as "Frost." As consideration for this Agreement, the Company issued one million shares (1,000,000) of its common stock, in restricted form, to Old West.
As part of this Agreement, Molina was issued five million shares (5,000,000) of the Company's common stock for his management services for a period of one year and Molina was appointed President and CEO of the Company as well as acting CFO. The Company also issued five million shares (5,000,000) of its common stock in restricted form to the Bogat Family Trust (Bogat Trust) on behalf of Raymond Dabney (Dabney) as consideration for the management services Mr. Dabney was to provide to the Company in operating the music and entertainment portion of the business for a period of one year. Neither Molina, Dabney or the Bogat Trust were shareholders of Old West. Old West’s sole shareholder, officer and director is Mark Jordan. Mr. Jordan, Molina and the Bogat Trust were non-related and non-affiliates of the Company prior to this transaction.
On February 22, 2012, the Company entered into a Repurchase Agreement (Repurchase Agreement) with Old West, Molina and the Bogat Trust. As a part of the Repurchase Agreement, the Company transferred all of the aforementioned assets back to Old West in exchange for Old West returning the shares which the Company issued to it as part of the original Asset Purchase Agreement. A complete copy of the Repurchase Agreement was attached as an exhibit to a Current Report on Form 8-K on or about March 5, 2012 and the effect of the Repurchase Agreement was to make the initial agreement null and void Ab Initio.
On April 12 and May 14, 2012, respectively, the Company through a concurrently formed entity to-be-acquired as a wholly-owned subsidiary, Cress Oil and Natural Gas Company (Cress), entered into Purchase and Sale Agreements (PSA) with Granite Group Energy (a Delaware Limited Liability Company hereafter referred to as "Granite") and Wexco Resources, LLC (a Colorado Limited Liability Company hereafter referred to as "Wexco"). As part of the Granite Agreement, the Company is acquiring from Granite approximately 21,111 net acres of mineral interests in return for the payment of approximately $15,000,000. As part of the Wexco Agreement, the Company is acquiring from Wexco approximately 50,000 net acres of mineral interests in Teton County, Montana in return for the payment of approximately $7,500,000. As of the date of this filing, this Agreement has not been consummated through the payment of the required consideration.
F - 8
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE A - Organization and Description of Business - Continued
Abandoned business ventures - continued
On May 10, 2012, the Company, through Cress, entered into an Agreement (the"Agreement") with Diverse Energy Investments, LLC ("Diverse"). As part of the Agreement, the Company is acquiring from Diverse approximately 15,000 net acres of mineral interests in Roosevelt and Daniels Counties, Montana in return for the payment of approximately $8,812,500. As of the date of this filing, this Agreement has not been consummated through the payment of the required consideration.
Diverse Energy Investments, LLC. transferred the ownership of the leases to M.L.H. LLC and signed a new Purchase and Sale agreement with Big Sky Oil, Inc. a new subsidiary of The X-Change Corporation. The Purchase and Sale Agreement (PSA) has a closing date of December 20,2012 and the acreage was increased to 19,499.28 net acres. The price has been increased to $11,455,827.00. Diverse Energy transferred the leases to M.L.H. because of a dispute as to the ownership of Diverse. The dispute does not involve the leases or The X-Change Corporation.
The Investor who agreed to fund Cress declined to fund the purchase of the Diverse leases. The Granite Group leases expired on July 20, 2012 when the closing did not take place. The closing did not take place because the individual who incorporated Cress Oil and agreed to fund the purchase informed Granite that he had changed his mind and was going to not transfer ownership of Cress to the Company. The Wexco leases expired by the terms of the Purchase and Sale Agreement. The Company is still seeking funding on the Wexco leases even though the PSA has expired.
Currently, the Company has closed on the M.L.H. LLC leases by way of a farm out agreement. The Company has agreed to pay $500,000 for each 640 Acre lease site drilled. The Company has initiated conversations with interested working interest investors for a drilling program to start operations involving a portion of the M.L.H. leases.
On August 31, 2012, the Company entered into a Purchase Agreement with 4C Tech Holdings Inc., an Alberta, Canada corporation ("4C"), 1237878 Alberta Ltd., an Alberta, Canada corporation ("1237878") and 1238105 Alberta Ltd., an Alberta, Canada corporation ("1238105") (4C, 1237878 and 1238105 are collectively referred to as "Sellers") in which the Company purchased from Sellers all the issued and outstanding shares of Guardian Telecom Inc., an Alberta, Canada corporation ("Guardian"). This transaction closed on September 10, 2012. As consideration, the Company agreed to pay to the Sellers US $3,500,000, as specified in the Purchase Agreement, and issue 1,000,000 restricted, unregistered shares of the Company's common stock. At closing, the Company issued the shares of common stock and executed the promissory notes and pledge agreements required by the Purchase Agreement to secure payment of the cash component of the purchase price. At the date of closing, none of the parties to the Purchase Agreement were affiliates of the Company. As of November 28, 2012, the Sellers had not provided certain required financial information, appointed an X-Change designated member to the Company's Board of Directors, or delivered the Guardian stock certificates, all of which were required by the Purchase Agreement. On November 29, 2012, the Company and the Sellers agreed to resend the transaction retroactive to August 31, 2012, thereby nullifying any previous disclosures related to this transaction.
NOTE B - Preparation of Financial Statements
The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has adopted a year-end of December 31.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F - 9
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE B - Preparation of Financial Statements - Continued
Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
For segment reporting purposes, the Company operated in only one industry segment during the periods represented in the accompanying financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole.
These financial statements reflect the books and records of the Company and its wholly-owned subsidiaries as of and for years ended December 31, 2012 and 2011, respectively. All significant intercompany transactions, if any, have been eliminated.
NOTE C - Going Concern Uncertainty
As of December 31, 2012 and 2011, respectively, the Company has no operations, limited cash on hand, and significant debt. Because of these factors, the Company’s auditors have issued an audit opinion on the Company’s financial statements which includes a statement describing our going concern status. This means, in the auditor’s opinion, substantial doubt about our ability to continue as a going concern exists at the date of their opinion.
The Company’s business plan is to develop and exploit the utilization of cannabis and hemp derived products. However, there is no assurance that the Company will be able successful in this endeavor or that any future operations will result in the appreciation of our stockholders’ investment in the then outstanding common stock.
The Company’s current controlling stockholder has maintained the corporate status of the Company and has provided all working capital support on the Company's behalf since the December 2008 foreclosure action. Because of the Company's lack of operating assets, its continuance is fully dependent upon the majority stockholder's continuing support. It is the intent of this controlling stockholder to continue the funding the nominal necessary expenses to sustain the corporate entity. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such advances or loans exist. There is no legal obligation for either management or significant stockholders to provide additional future funding. Further, the Company is at the mercy of future economic trends and business operations for this controlling stockholder to have the resources available to support the Company. Should this pledge fail to provide financing, the Company has not identified any alternative sources of working capital to support the Company.
The Company's ultimate continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis. The Company faces considerable risk in it’s business plan and a potential shortfall of funding due any potential inability to raise capital in the equity securities market. If adequate operating capital and/or cash flows are not received during the next twelve months, the Company could become dormant until such time as necessary funds could become available.
The Company anticipates future sales or issuances of equity securities to fulfill its business plan. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
The Company’s Articles of Incorporation authorize the issuance of up to 75,000,000 shares of preferred stock and 750,000,000 shares of common stock. The Company’s ability to issue preferred stock may limit the Company’s ability to obtain debt or equity financing as well as impede potential takeover of the Company, which may be in the best interest of stockholders. The Company’s ability to issue these authorized but unissued securities may also negatively impact our ability to raise additional capital through the sale of our debt or equity securities.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach its goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps.
F - 10
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE D - Summary of Significant Accounting Policies
1.
Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company's cash management policies.
2.
Financing Fees
Financing fees recorded in connection with debt issuances were amortized on a straight-line basis over the maturity term of the related debt.
3.
Investment in long-lived assets
On December 12, 2012, the Company entered into an Asset Purchase Agreement with Cannabis Science, Inc. (a publicly-owned Nevada corporation) whereby the Company acquired various assets related to the use of cannabis including resale formulas, media, activism and marketing videos and other items and the assumption of Cannabis’ position in a Joint Venture Operating Agreement with Columbia Corp. and/or dupetit Natural Products GmbH. This acquisition was valued at an aggregate of approximately $600,000. In accordance with the applicable sections of the FASB Accounting Standards Codification, the Company follows the policy of evaluating all property and equipment as of the end of each reporting quarter. At December 31, 2012, pursuant to the requirements of this accounting standard, management recorded an impairment for the future recoverability of these assets of approximately $600,000.
4.
Convertible Debt Instruments
The Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant to the Beneficial Conversion Feature and Debt Topics of the FASB Accounting Standards Codification. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt.
5.
Accounting for Stock Options
The Company has adopted the provisions of the Compensation Topic of the FASB Accounting Standards Codification which requires the measurement and recognition of compensation expense for all share-based payment awards made to its employees and directors based on estimated fair values at the time of grant. In addition, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 “Share-Based Payment” (SAB 107) in March 2005, which provides supplemental accounting guidance.
The valuation techniques used in applying these provisions are sensitive to certain assumptions and parameters used including the volatility and liquidity of the Company’s stock. The Black Scholes option valuation model used in this process was developed for use in estimating the fair value of trading options that have no vesting restrictions and are fully transferable. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
The Company has recorded in the past, and may record in the future, substantial non-cash compensation expense which is not expected to have a significant effect on our financial condition or cash flows but are expected to have a significant, adverse effect on our reported results of operations.
The Company follows the provisions of the Compensation topic of the FASB Accounting Standards Codification for equity instruments granted to non-employees.
F - 11
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE D - Summary of Significant Accounting Policies - Continued
6.
Income taxes
The Company files income tax returns in the United States of America and various states, as appropriate and applicable. The Company is no longer subject to U.S. federal, state and local, as applicable, income tax examinations by regulatory taxing authorities for any period prior to December 31, 2006. The Company does not anticipate any examinations of returns filed for periods ending after December 31, 2006.
The Company uses the asset and liability method of accounting for income taxes. At December 31, 2012 and 2011, the deferred tax asset and deferred tax liability accounts, as recorded when material to the financial statements, are entirely the result of temporary differences. Temporary differences generally represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization, allowance for doubtful accounts and vacation accruals.
The Company has adopted the provisions required by the Income Taxes topic of the FASB Accounting Standards Codification. The Codification Topic requires the recognition of potential liabilities as a result of management’s acceptance of potentially uncertain positions for income tax treatment on a “more-likely-than-not” probability of an assessment upon examination by a respective taxing authority. As a result of the implementation of Codification’s Income Tax Topic, the Company did not incur any liability for unrecognized tax benefits.
7.
Income (Loss) per share
Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).
Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company’s net income (loss) position at the calculation date.
As of December 31, 2012 and 2011, respectively, the Company’s outstanding stock options, warrants, and convertible debentures are considered to be anti-dilutive due to the Company’s net operating loss.
8.
Accounting for Stock Options
The Company has adopted the provisions of the Compensation Topic of the FASB Accounting Standards Codification which requires the measurement and recognition of compensation expense for all share-based payment awards made to its employees and directors based on estimated fair values at the time of grant. In addition, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 “Share-Based Payment” (SAB 107) in March 2005, which provides supplemental accounting guidance.
The valuation techniques used in applying these provisions are sensitive to certain assumptions and parameters used including the volatility and liquidity of the Company’s stock. The Black Scholes option valuation model used in this process was developed for use in estimating the fair value of trading options that have no vesting restrictions and are fully transferable. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
F - 12
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE D - Summary of Significant Accounting Policies - Continued
8.
Accounting for Stock Options - continued
The Company has recorded in the past, and may record in the future, substantial non-cash compensation expense which is not expected to have a significant effect on our financial condition or cash flows but are expected to have a significant, adverse effect on our reported results of operations.
The Company follows the provisions of the Compensation topic of the FASB Accounting Standards Codification for equity instruments granted to non-employees.
9.
New and Pending Accounting Pronouncements
The Company is of the opinion that any and all pending accounting pronouncements, either in the adoption phase or not yet required to be adopted, will not have a significant impact on the Company's financial position or results of operations.
NOTE E - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any.
NOTE F - Concentrations of Credit Risk
The Company maintains its cash in domestic financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, the Company is entitled to aggregate coverage as defined by Federal regulation per account type per separate legal entity per financial institution. During each of the respective years ended December 31, 2012 and 2011, the Company has not maintained any balances in a financial institution with credit risk exposures in excess of statutory FDIC coverage. The Company has incurred no losses as a result of any unsecured credit risk exposures.
NOTE G - Debt Financing Arrangements
Melissa Note
On August 15, 2006, the Company executed a long-term Promissory Note (Melissa Note) with Melissa CR 364 Ltd., a Texas limited partnership (Melissa Ltd.) providing a $1,000,000 line of credit. Melissa Ltd. is managed by a former officer and shareholder of the Company.
The Melissa Note had an initial term of 24 months with interest accruing at 10% per annum. Accrued interest under the note was payable quarterly beginning November 1, 2006, and the principal and any remaining accrued interest was due at maturity on August 14, 2008. The Company pledged 100% of the issued and outstanding common stock of AirGATE as collateral for the note. At the discretion of Melissa Ltd, the Melissa Note may be converted into restricted common stock of the Company at any time at an agreed upon conversion rate of $0.825 per share. In addition, the Melissa Note may be prepaid at any time without penalty.
F - 13
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE G - Debt Financing Arrangements - Continued
Melissa Note - continued
The Company valued and recorded an embedded beneficial conversion feature in connection with the Melissa Note of $756,950, and amortized this amount over the initial two year life of the note resulting in non-cash charges to earnings as a component of interest expense through December 31, 2008.
At maturity, the Company failed to make the required payment of the entire outstanding principal and accrued interest due under the Melissa Note. On August 22, 2008, the Company, AirGATE and the Melissa Ltd. entered into an Amendment to Promissory Note (the Amendment) amending the Melissa Note. The Amendment extended the maturity date of the Note to December 15, 2008 and, in a supplemental Board action, changed the conversion rate to par value ($0.001 per share). In connection with the Amendment, AirGATE paid Melissa Ltd. (I) $100,000 to be applied against the outstanding principal of the Melissa Note, (ii) all interest on the Note accrued through August 15, 2008, and (iii) $4,500, representing Melissa Ltd’s attorneys’ fees and costs in connection with the Amendment.
After the application of the $100,000 principal payment against the outstanding principal under the Note, the outstanding principal owed under the Note was $697,794. Interest payments were due on the 15th of each month beginning September 15, 2008. If either the Company and/or AirGATE completes a corporate financing transaction before December 15, 2008, whereby either the Company and/or AirGATE receives in excess of $300,000 through the issuance of debt or equity or a combination thereof, the Company and/or AirGATE agreed to remit to Melissa Ltd. in payment of the obligations under the Melissa Note, the entire net proceeds of such transaction, or such smaller amount of net proceeds as is necessary to pay the entire outstanding principal amount of the Melissa Note, plus all accrued interest.
In December 2008, Melissa Ltd. began foreclosure proceedings against its collateral, which included 100% of the Company’s holdings in AirGATE, and the right to convert the Melissa Note into restricted, unregistered shares of the Company’s common stock. The foreclosure proceeding was consummated on January 16, 2009 and the Company’s holdings in AirGATE were forfeited. Additionally, Melissa Ltd. converted approximately $51,000 of principal on the Melissa Note to 51,000,000 shares of the Company’s common stock, concurrent with the maturity date of December 15, 2008.
In May 2011, Melissa, Ltd. converted approximately $75,000 in principal and $40,000 of accrued interest into 575,000 shares of restricted, unregistered common stock.
In March, August, September and December, 2012, respectively, Melissa, Ltd. converted approximately $87,346 in principal and approximately $64,550 of accrued interest into 10,897,864 shares of restricted, unregistered common stock.
As of December 31, 2012 and 2011, respectively, the outstanding balance on the Melissa Note is approximately $724,996 and $615,025, inclusive of capitalized accrued interest. Interest continues to accrue at the default rate of 18.0% per annum.
South Beach Live, Ltd. Note
During Calendar 2009, the Company executed a $100,000 Line of Credit Note Payable with South Beach Live, Ltd. (South Beach), a significant Company stockholder, to provide funds necessary to support the corporate entity and comply with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended. This note bears interest at 10.0% and matured in Calendar 2011. Post maturity, the note has been due upon demand and no demand for payment has been made by South Beach. Through December 31, 2012 and 2011, respectively, an aggregate of approximately $205,042 and $236,359 has been advanced against this note.
LCII Debentures
During the quarter ending September 30, 2007, the Company entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. (“LCII”) providing for two convertible debentures totaling $400,000 with two corresponding sets of non-detachable warrants totaling 4,000,000 shares with an exercise price of $1.00. The convertible debentures accrue interest at 6-1/4% until converted or the expiration of their three year term. The respective debentures matured in August 2010; however, in the absence of a formal extension agreement, both parties have agreed to stay the maturity and allow future conversions and warrant exercises to occur.
F - 14
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE G - Debt Financing Arrangements - Continued
LCII Debentures - continued
The debentures and warrants have mandatory conversion features. These conversion features becomes effective in the first full calendar month after the common stock underlying the debenture is either i) registered under the Securities Act of 1933 (the “Act”), which is at the Company’s option, or ii) available by LCII to be resold pursuant to Rule 144 of the Act. If the conversion feature becomes effective, LCII is obliged to convert an average of 10% of the face value of the debenture each calendar month into a variable number of shares of the Company’s common stock. The number of shares is determined by a formula where the dollar amount of the debenture being converted is multiplied by eleven, from which the product of the conversion price and ten times the dollar amount of the debenture being converted is then subtracted, all of which is then divided by the conversion price. The conversion price is equal to the lesser of (i) $1.00, or (ii) 80% of the average of the 3 lowest volume weighted average prices during the twenty trading days prior to the conversion election. The Company can prevent conversion if the trading price falls below $0.30 per share on the date LCII elects to convert. Under certain provisions, if LCII does not convert an average of at least 5% of the face value of the debenture, the Company may prepay portions of the debenture. As contractually linked, if LCII converts a portion of the debenture, LCII must also exercise a proportionate amount of the warrants.
In the event that the entire $400,000 of the convertible debentures is converted in conjunction with the required exercise of warrants, the Company will receive a total of $4.4 million from LCII. The aggregate number of shares issuable to LCII in this event is dependent on the trading price of the Company’s common stock over the term of the conversion process.
The Company allocated the proceeds from the debentures between the warrants and the debt based on the estimated relative fair value of the warrants and the debt. The value of the warrants was calculated at $273,634 using the Black-Scholes model and the following assumptions: discount rate of 4.1%, volatility of 156% and expected term of three years. The Company also calculated a beneficial conversion feature totaling $126,366. The Company is amortizing both the warrant value and value attributed to the beneficial conversion feature (total $400,000) over the term of the debentures. This non-cash charge to income is included in interest expense.
On June 13, 2012, the Company entered into a Settlement Agreement and Addendum to Securities Repurchase Agreement with LJII . On December 8, 2011, LJII sued the Company in regards to a claimed breach of a convertible debenture dated August 29 and October 9, 2007. The Company filed its answer and cross complaint in the lawsuit. In June 2012, both parties determined that it would be in their best interest to settle the suit and cross complaint. As part of the settlement LJII agreed to extend the Maturity Date of the Debentures to December 31, 2013 and to exercise approximately 2,800,000 Common Stock Warrants at One Dollar ($1.00) per Share as the Debentures are converted. This Settlement Agreement and Addendum effectively cancelled the initial warrant(s) (approximately 145,613 warrants exercisable at $20.00 as effected by the Company’s 2010 reverse stock split) and issued 2,912,260 new warrants reflecting the restructured warrant(s), pricing and expiration date. The Company recognized no effect in the accompanying financial statements as a result of this transaction; however, the Company will experience a “cheap stock” charge equivalent to the difference between the “fair value” of the shares issued and the contractual blended conversion/exercise price on the date of each future conversion transaction.
On July 23, 2012 and October 5, 2012, LJII tendered notices to the Company to convert an aggregate $13,500 in debenture principle and exercise an aggregate 135,000 in warrants. These transactions generated approximately $135,000 in warrant proceeds to the Company.
At December 31, 2012 and 2011, respectively, the outstanding principal amount of convertible debentures totaled approximately $271,725 and $285,225.
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F - 15
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE H - Income Taxes
The components of income tax (benefit) expense for each of the years ended December 31, 2012 and 2011, respectively, are as follows:
The Company has a cumulative net operating loss carryforward of approximately $4,400,000 as of December 31, 2012 to offset future taxable income. Subject to current regulations, components of this cumulative carryforward will begin to expire at the end of each fiscal year starting in 2023. The amount and availability of the net operating loss carryforwards may be subject to limitations set forth by the Internal Revenue Code. Factors such as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of the carryforwards.
The Company's income tax expense (benefit) for the years ended December 31, 2012 and 2011, respectively, differed from the statutory federal rate of 34 percent as follows:
Temporary differences due to statutory requirements in the recognition of assets and liabilities for tax and financial reporting purposes, generally including such items as organizational costs, accumulated depreciation and amortization, allowance for doubtful accounts, organizational and start-up costs and vacation accruals. These differences give rise to the financial statement carrying amounts and tax bases of assets and liabilities causing either deferred tax assets or liabilities, as necessary, as of December 31, 2012 and 2011, respectively:
F - 16
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE H - Income Taxes - Continued
During the years ended December 31, 2012 and 2011, respectively, the valuation allowance for the deferred tax asset increased (decreased) by approximately $145,000 and $(6,000), respectively.
NOTE I - Preferred Stock
The Company is authorized to issue up to a total of 75,000,000 shares of $0.001 par value Preferred Stock. The Company’s Board of Directors has designated 250,000 shares as “Series A Convertible Preferred Stock”.
The Company is under no obligation to pay dividends or to redeem the Series A Convertible Preferred Stock. This series of stock is convertible into 10 shares of Common Stock at the option of the shareholder or upon automatic conversion. In the event of any liquidation, dissolution or winding-up of the Company, the holders of outstanding shares of Series A Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, before any payment shall be made to or set aside for holders of the Common Stock, at an amount of $1 per share.
As of December 31, 2012 and 2011, respectively, there were no shares of preferred stock issued and outstanding.
NOTE J - Common Stock Transactions
Amendment to the Articles of Incorporation
On January 31, 2011, the Board of Directors of the Company and its majority shareholder approved an amendment to its Articles of Incorporation increasing the authorized capital of the Company from 37,500,000 shares of common stock, par value $.001 and 3,750,000 shares of preferred stock, par value $.001, to 750,000,000 shares of common stock and 75,000,000 share of preferred stock. The Amended Articles were filed with the Nevada Secretary of State on March 22, 2011, the effective date of the amendment.
Reverse Stock split
Effective August 9, 2010, Company’s Board of Directors declared a 1-for-20 reverse split of the issued and outstanding shares of common stock. The reverse stock split was implemented by adjusting the stockholders’ book entry accounts to reflect the number of shares held by each stockholder following the split. No fractional shares were issued in connection with the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share. The reverse stock split reduced the number of the Company’s issued and outstanding shares of common stock on this date from 136,089,746 to approximately 5,513,000.
On January 31, 2011, the Company’s Board of Directors and its majority shareholder approved an amendment to its Articles of Incorporation increasing the authorized capital of the Company from 37,500,000 shares of $0.001 par value common stock and 3,750,000 shares of $0.001 par value preferred stock to 750,000,000 shares of $0.001 par value common stock and 75,000,000 shares of $0.001 par value preferred stock. The Amended Articles were filed with the Nevada Secretary of State on March 22, 2011, the effective date of the amendment.
The effects of these actions are reflected in the accompanying financial statements as of the first day of the first period presented.
Stock issuances
On March 26, 2010, LJII issued a Debenture Conversion Notice to the Company for the conversion of $32,000 of the outstanding debenture balance into 3,902,439 shares (approximately 195,122 post-reverse split shares) of the Company’s common stock. This conversion was completed on April 12, 2010 with the delivery of the shares to LJII. As the conversion price was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $57,760 which was classified as “interest expense” in the accompanying financial statements.
In September 2010 and December 2010, the Company issued an aggregate 9,797,416 restricted, unregistered post-reverse split shares to Melissa CR 364 LTD. to retire a combination of approximately $50,000 on the aforementioned line of credit and approximately $146,000 in accumulated accrued interest on both the AirGATE and line of credit notes. As the valuation of the conversion as stated in the separate note agreements was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $4,950,000 which was classified as “interest expense” in the accompanying financial statements.
F - 17
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE J - Common Stock Transactions - Continued
Stock issuances - continued
On October 7, 2010, the Company issued 1,000,000 shares of restricted, unregistered post-reverse split shares, valued at approximately $530,000 which was equal to the closing quotation of the Company’s securities on the transaction date, to 21-Century Silicon, Inc. (a Texas corporation) to license the use of 21-Century’s technology and to secure an exclusive right to negotiate to acquire certain intellectual property from 21-Century. On January 28, 2011, concurrent with the abandonment of the 21-Century transaction, the Company rescinded the October 2010 transaction where 1,000,000 shares of restricted, unregistered common stock was issued to license the use of 21-Century’s technology and to secure an exclusive right to negotiate to acquire certain intellectual property from 21-Century. Further, concurrent with this action, the Company executed its lien on the assets pledged by 21-Century in satisfaction of a note receivable and accrued interest totaling approximately $41,200. Upon foreclosure on said assets, the Company’s management elected to take a 100% impairment against the foreclosed value resulting in a charge to operations in the first quarter of 2011 of approximately $41,200. Any gain, if any, upon the ultimate disposition of said assets will be recognized at the point of future sale.
On January 3, 2011, LJII issued a Debenture Conversion Notice to the Company for the conversion of $1,000 of the outstanding debenture balance into 21,375 shares of the Company’s common stock. Additionally, LJII exercised 10,000 outstanding warrants to obtain 10,000 shares of the Company’s common stock for $10,000 cash. This conversion was completed on January 5, 2011 with the delivery of the shares to LJII. As the aggregate conversion and exercise price was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $10,962 which was classified as “interest expense” in the accompanying financial statements.
In May 2011, the Company issued an aggregate 575,000 restricted, unregistered post-reverse split shares to Melissa CR 364 LTD. to retire a combination of approximately $75,000 on the aforementioned notes and approximately $40,000 in accumulated accrued interest. As the valuation of the conversion as stated in the separate note agreements was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $115,000 which was classified as “interest expense” in the accompanying financial statements.
In July 2011, in connection with the execution of a Letter of Intent ("LOI") with George J. Akmon and Jerry Monday & Associates, LLC (collectively referred to as "Operators") to operate “The Texas Star Casino” outside the nine mile territorial waters of Texas, in international waters, as a casino ship, the Company issued 100,000 shares of restricted, unregistered common stock as an inducement to execute the LOI. This transaction was valued at approximately $25,000 which approximated “fair value” of the Company’s securities on the date of issuance.
In August 2011, the Company issued an aggregate 12,252,136 shares of restricted, unregistered common stock to Old West, Molina and the Bogat Trust, as previously discussed. Concurrent with the rescission of this transaction, the Company recovered 11,000,000 shares of the 12,252,136 shares originally issued. Approximately 1,252,136 shares remained in the possession of Old West, Molina and/or the Bogat Trust. These net 1,252,136 shares remaining outstanding were initially valued at an agreed-upon value of approximately $25,042. As the agreed-upon transaction valuation was below the “fair value” of the shares issued, the Company experienced an additional non-cash charge to operations of approximately $475,812. The aggregate approximately $500,854 was charged to operations as “Loss on rescinded acquisition of Old West Entertainment Corp.” in the accompanying financial statements to reflect the net economic event related to these transactions.
In October and November 2011, the Company issued an aggregate 6,800,000 shares of free-trading common stock in settlement of approximately $13,600 of debt on the books of Old West Entertainment Corp. while Old West was an operating component of the Company and prior to the March 2012 rescission of the entire transaction. As the debt reduction was less than the “fair value” of the shares issued, the Company recognized an additional non-cash charge to operations of approximately $1,091,000 was recognized as “Loss on rescinded acquisition of Old West Entertainment Corp.” during the 4th quarter.
In July and October 2012, LJII issued separate Debenture Conversion Notices to the Company for the conversion of an aggregate $13,500 of the outstanding debenture balance into an aggregate 2,284,856 shares of the Company’s common stock. Additionally, LJII exercised 135,000 outstanding warrants to obtain 135,000 shares of the Company’s common stock for $135,000 cash. The conversions were completed on July 25, 2012 and October 5, 2012, respectively, with the delivery of the shares to LJII. As the aggregate conversion and exercise price was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $243,841 which was classified as “interest expense” in the accompanying financial statements.
F - 18
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE J - Common Stock Transactions - Continued
Stock issuances - continued
In March, August and December 2012, the Company issued an aggregate 10,897,864 post-reverse split shares to Melissa CR 364 LTD. to retire a combination of approximately $151,996 in principal and accrued interest payable on the aforementioned notes. As the valuation of the conversion as stated in the separate note agreements was below the “fair value” of the securities issued, the Company experienced a non-cash charge to operations of approximately $1,421,184 which was classified as “interest expense” in the accompanying financial statements.
On August 31, 2012, the Company entered into a Purchase Agreement with 4C Tech Holdings Inc., an Alberta, Canada corporation ("4C"), 1237878 Alberta Ltd., an Alberta, Canada corporation ("1237878") and 1238105 Alberta Ltd., an Alberta, Canada corporation ("1238105") (4C, 1237878 and 1238105 are collectively referred to as "Sellers") in which the Company purchased from Sellers all the issued and outstanding shares of Guardian Telecom Inc., an Alberta, Canada corporation ("Guardian"). This transaction closed on September 10, 2012. As consideration, the Company agreed to pay to the Sellers US $3,500,000, as specified in the Purchase Agreement, and issued 1,000,000 restricted, unregistered shares of the Company's common stock. On November 29, 2012, the Company and the Sellers agreed to resend the transaction retroactive to August 31, 2012, thereby nullifying any previous disclosures related to this transaction and the 1,000,000 shares of stock issued on September 10, 2012 were cancelled.
In December 2012, the Company issued an aggregate 5,400,000 shares of restricted, unregistered common stock to three (3) individuals as compensation for service as either a Company officer and/or director. These shares were valued at an aggregate $159,000. As the agreed-upon valuation was below the “fair value” of the securities issued, the Company experienced a non-cash charge of approximately $320,000 which was classified as “officer and director compensation” in the accompanying financial statements.
On December 12, 2012, the Company entered into an Asset Purchase Agreement with Cannabis Science, Inc. (a publicly-owned Nevada corporation) whereby the Company acquired various assets related to the use of cannabis including resale formulas, media, activism and marketing videos and other items and the assumption of Cannabis’ position in a Joint Venture Operating Agreement with Columbia Corp. and/or dupetit Natural Products GmbH. The Company issued an aggregate 10,000,000 shares of restricted, unregistered common stock to effect this acquisition, valued at an agreed-upon value of approximately $300,000. As the agreed-upon valuation was below the “fair value” of the securities issued, the Company adjusted the acquisition price by approximately $300,000 to equal the “fair value” of the securities issued. On December 31, 2012, management evaluated the carrying value of this acquistion and recognized an impairment charge to operations of approximately $600,000.
NOTE K - Common Stock Warrants
In conjunction with, and as a component of, certain debt issuances, the Company has issued an aggregate 607,016 warrants to purchase an equivalent number of shares of common stock at prices between $0.70 and $20.00 per share, as adjusted by the Company’s reverse stock split.
F - 19
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2012 and 2011
NOTE K - Common Stock Warrants - Continued
As of December 31, 2012, the warrants break down as follows:
(*) - The warrants expiring in 2012 are an integral component of the LJII financing as previously discussed. As the debenture remains unpaid and LJII is continuing, with the Company’s approval, to convert the debenture into common stock and exercise warrants, they are considered to remain outstanding at and subsequent to December 31, 2012.
NOTE L - Subsequent Events
Between January 1, 2013 and March 14, 2013, the Company issued an aggregate 29,500,000 shares of common stock to various individuals for consulting services and/or retirement of various debts payable.
Management has evaluated all activity of the Company through April 25, 2013 (the issue date of the restated financial statements) and concluded that no subsequent events, other than as disclosed above, have occurred that would require recognition in the financial statements or disclosure in the notes to financial statements.
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(Signatures follow on next page)
F - 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The X-Change Corporation
Dated: April 25, 2013
/s/ Robert J. Kane
Robert J. Kane
President, Chief Executive Officer
Acting Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates as indicated.
The X-Change Corporation
Dated: April 25, 2013
/s/ Robert J. Kane
Robert J. Kane
President, Chief Executive Officer
Acting Chief Financial Officer and Director
The X-Change Corporation
Dated: April 25, 2013
/s/ Alfredo Dupetit
Alfredo Dupetit
Vice President of European Operations
and Director
The X-Change Corporation
Dated: April 25, 2013
/s/ Chad S. Johnson
Chad S. Johnson
Chief Operating Officer
and Director