Notes to Consolidated Financial Statements
March 31, 2013 and December 31, 2012
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.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
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.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
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.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
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.
During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements filed with the U. S. Securities and Exchange Commission on its Annual Report on Form 10-K containing the Company’s financial statements for the year ended December 31, 2012. The information presented within these interim financial statements may not include all disclosures required by generally accepted accounting principles and the users of financial information provided for interim periods should refer to the annual financial information and footnotes when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements, prepared in accordance with the U. S. Securities and Exchange Commission’s instructions for Form 10-Q are unaudited and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending December 31, 2013.
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 March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012, respectively. All significant intercompany transactions, if any, have been eliminated.
NOTE C - Going Concern Uncertainty
As of March 31, 2013 and December 31, 2012, 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 X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE C - Going Concern Uncertainty - Continued
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.
NOTE D - Summary of Significant Accounting Policies
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1.
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Cash and cash equivalents
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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.
Financing fees recorded in connection with debt issuances were amortized on a straight-line basis over the maturity term of the related debt.
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3.
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Investment in long-lived assets
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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 March 31, 2013 and December 31, 2012, pursuant to the requirements of this accounting standard, management recorded a cumulative impairment for the future recoverability of these assets of approximately $900,000 and $600,000, respectively.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE D - Summary of Significant Accounting Policies - Continued
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4.
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Convertible Debt Instruments
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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.
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5.
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Accounting for Stock Options
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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.
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, 2008. The Company does not anticipate any examinations of returns filed for periods ending after December 31, 2008.
The Company uses the asset and liability method of accounting for income taxes. At March 31, 2013 and December 31, 2012, respectively, 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.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE D - Summary of Significant Accounting Policies - Continued
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7.
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Income (Loss) per share
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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 March 31, 2013 and 2012, 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.
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8.
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New and Pending Accounting Pronouncements
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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 the three months ended March 31, 2013 and for 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 X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE G - Debt Financing Arrangements - Continued
Melissa Note
- continued
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. In addition, the Melissa Note may be prepaid at any time without penalty.
The Company valued and recorded an embedded beneficial conversion feature in connection with the Melissa Note of $756,950, and 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 common stock.
In the first quarter of 2013, Melissa, Ltd. converted approximately $50,600 in principal into approximately 25,300,000 shares of common stock.
As of March 31, 2013 and December 31, 2012, respectively, the outstanding balance on the Melissa Note is approximately $695,958 and $724,996, 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 March 31, 2013 and December 31, 2012, respectively, an aggregate of approximately $227,669 and $205,042 has been advanced against this note.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE G - Debt Financing Arrangements
LCII Debentures
During the quarter ending September 30, 2007, the Company entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. (“LCII”) providing for two convertible debentures totaling $400,000 with two corresponding sets of non-detachable warrants totaling 4,000,000 shares with an exercise price of $1.00. The convertible debentures accrue interest at 6-1/4% until converted or the expiration of their three year term. The 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.
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 March 31, 2013 and December 31, 2012, respectively, the outstanding principal amount of convertible debentures totaled approximately $271,725.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE H - Income Taxes
The components of income tax (benefit) expense for each of the three months ended March 31, 2013 and 2012, respectively, are as follows:
|
|
|
|
Three months
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
ended
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has a cumulative net operating loss carryforward of approximately $4,920,000 as of March 31, 2013 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 each of the three months ended March 31, 2013 and 2012, respectively, differed from the statutory federal rate of 34 percent as follows:
|
|
|
Three months
|
|
|
Three months
|
|
|
|
|
ended
|
|
|
ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory rate applied to loss before income taxes
|
|
$
|
(1,170,000
|
)
|
|
$
|
(450,000
|
)
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
State income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Nondeductible charge for stock issued at less than “fair value”
|
|
|
895,000
|
|
|
|
440,000
|
|
|
Nondeductible charge for non-operating asset impairment
|
|
|
102,000
|
|
|
|
-
|
|
|
Amortization of nondeductible debt discount
|
|
|
-
|
|
|
|
-
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
Tax basis gain on forgiveness of debt
|
|
|
-
|
|
|
|
-
|
|
|
Other, including use of net operating loss
|
|
|
|
|
|
|
|
|
|
carryforward and reserve for deferred tax asset
|
|
|
173,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
(Remainder of this page left blank intentionally)
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE H - Income Taxes - Continued
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 March 31, 2013 and December 31, 2012, respectively:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,672,000
|
|
|
$
|
1,499,000
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
Debt discount amortization
|
|
|
657,000
|
|
|
|
657,000
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
2,329,000
|
|
|
|
2,156,000
|
|
|
Less valuation allowance
|
|
|
(
2,329,000
|
)
|
|
|
(
2,156,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
During the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, the valuation allowance for the deferred tax asset increased by approximately $173,000 and $145,000, 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.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE J - Common Stock Transactions - Continued
Reverse Stock split
- Continued
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
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.
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE J - Common Stock Transactions - Continued
Stock issuances
- continued
During the first quarter of 2013, the Company issued an aggregate 25,300,000 post-reverse split shares to Melissa CR 364 LTD. to retire approximately $50,600 in principal 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 $2,597,400 which was classified as “interest expense” in the accompanying financial statements.
In January 2013, the Company issued 5,000,000 shares of restricted, unregistered common stock to an individual as compensation for service as the Company’s Chief Operating Officer, Director and General Legal Counsel. These shares were valued at an aggregate $450,000. As the agreed-upon valuation was below the “fair value” of the securities issued, the Company experienced a non-cash charge of approximately $50,000 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. In February 2013, the Company issued an additional 2,500,000 of restricted, unregistered common stock to effect this acquisition, valued at an agreed-upon value of approximately $290,000. As the agreed-upon valuation was below the “fair value” of the securities issued, the Company adjusted the acquisition price by approximately $10,000 to equal the “fair value” of the securities issued. On March 31, 2013, management evaluated the additional carrying value of this acquistion and recognized an impairment charge to operations of approximately $300,000.
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.
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
Warrant
|
|
|
Average
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
|
607,016
|
|
|
$
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
(10,000
|
)
|
|
$
|
1.00
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
597,016
|
|
|
$
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
2,912,260
|
|
|
$
|
1.00
|
|
|
Cancelled
|
|
|
(145,613
|
)
|
|
$
|
20.00
|
|
|
Exercised
|
|
|
(135,000
|
)
|
|
$
|
1.00
|
|
|
Expired
|
|
|
(414,278
|
)
|
|
$
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
2,814,385
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
|
2,814,385
|
|
|
$
|
1.01
|
|
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2013 and December 31, 2012
NOTE K - Common Stock Warrants - Continued
As of March 31, 2013, the warrants break down as follows:
|
|
# warrants
|
|
|
|
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
2,777,260
|
|
|
$
|
1.00
|
|
|
|
37,125
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
2,814,385
|
|
|
$
|
1.01
|
|
|
|
# warrants
|
|
|
|
expiring in
|
|
|
|
|
|
|
|
|
|
|
|
2,777,260
|
|
|
|
2012
|
(*)
|
|
|
37,125
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
2,814,385
|
|
|
|
|
|
(*) - 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
In April 2013, the Company issued 300,000 shares of common stock to an individual for consulting services.
Management has evaluated all activity of the Company through June 4, 2013 (the issue date of the financial statements) and concluded that no subsequent events, other than as disclosed above, have occurred that would require recognition in the financial statements or disclosure in the notes to financial statements.
