UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2011
[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from ___________ to ___________
Commission File Number: 002-41703
The X-Change Corporation
(Exact Name of Registrant as Specified in Its Charter)
Nevada 90-0156146
(State of Incorporation) (I. R. S. Employer ID Number)
12655 North Central Expressway, Suite 1000, Dallas, Texas 75243
(Address of Principal Executive Offices)
(972) 386-7350
(Registrant's Telephone Number)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $0.001 par value
Indicate by check mark if the registrant is a well known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period the Company was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [ ]
No [X]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post files). Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes [X] No [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates as of April 27, 2012 was approximately $5,351,662 based upon
15,290,463 shares held by non-affiliates and a closing market price of $0.35 per
share on April 27, 2012, as reported on www.bigcharts.com.
As of April 19, 2012, there were 41,564,155 shares of Common Stock issued and
outstanding.
THE X-CHANGE CORPORATION
INDEX TO CONTENTS
Page
Number
------
PART I
Item 1 Business 3
Item 1A Risk Factors 6
Item 1B Uncleared Staff Comments 6
Item 2 Properties 6
Item 3 Legal Proceedings 6
Item 4 Mine Safety Disclosures 7
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 7
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk 13
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 13
Item 9A Controls and Procedures 13
Item 9B Other Information 14
PART III
Item 10 Directors, Executive Officers and Corporate Governance 14
Item 11 Executive Compensation 16
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 17
Item 13 Certain Relationships and Related Transactions, and Director
Independence 17
Item 14 Principal Accountant Fees and Services 18
PART IV
Item 15 Exhibits and Financial Statement Schedules 18
SIGNATURES 19
2
In this filing, the terms "we", "our", "us", "X-Change", and/or "Company" refer
to the Registrant, The X-Change Corporation.
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.
PART I
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, we had disposed of all assets and operations.
We are currently classified as a shell company as defined in Rule 405 under the
Securities Act of 1933, or the Securities Act, and Rule 12b-2 under the
Securities Exchange Act of 1934, or the Exchange Act. As a shell company, we
have no operations and no or nominal assets. Our principal office is located at
12655 North Central Expressway, Suite 1000, Dallas, Texas 75243 and our
telephone number is (972) 386-7350.
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.
3
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 Gomez, 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 X-Change Corporation (Company) announced that it has
signed an agreement to acquire 21-Century Silicon, Inc., based in Richardson,
Texas (21-Century Silicon). The terms of the acquisition is anticipated to
involve a change in control of the Company and the appointment of new directors.
As of the date of this report, the Company has issued 1,000,000 shares of the
Company's unregistered, restricted common stock to the stockholders of
21-Century Silicon in exchange for a technology license agreement and the
exclusive right to acquire 100 percent of intellectual property owned by
21-Century Silicon, subject to the approval and assumption of certain
outstanding 21-Century Silicon debt.
21-Century Silicon's technology was developed in 2005 by Dr. H. Bruce Li, and
21-Century Silicon was formed in 2006. To date, 21-Century Silicon has received
in excess of $5 million in research and development capital. 21-Century Silicon
(www.21-centurysilicon.com) manufactures high-purity silicon for the
photovoltaics/solar-energy industry. The company's core manufacturing technology
is based upon a proprietary furnace design that achieves solar-grade polysilicon
manufacturing at half the cost of conventional methods. Combined with its
patent-pending methods, 21-Century Silicon's manufacturing process is a believed
to be a revolution within the industry and should position the company as a
major player within the solar energy supply chain.
Known in the industry as 6N Silicon, the company's product meets the
specifications of photovoltaic supply companies. In contrast to its competition,
the company manufactures silicon at a low cost, with minimal production time,
and with virtually no environmental hazards. 21-Century is focused on meeting
the supply needs of the solar industry while maintaining its environmentally
friendly manufacturing process.
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
4
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 December 27, 2010, the Company formally changed the corporate name of
Commerce Services, Inc. to PolySilicon, Inc. to conduct the business activities
related to the acquisition of any intellectual property of 21-Century Silicon,
Inc. PolySilicon, Inc. (formerly Commerce Services, Inc.) had no history of
operations or other economic activity since its formation on March 24, 2010.
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
5
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.
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 - RISK FACTORS
Not required.
ITEM 1B - UNCLEARED STAFF COMMENTS
None
ITEM 2 - PROPERTIES
We currently maintain a mailing address at 12655 North Central Expressway, Suite
1000, Dallas, Texas 75243. Our telephone number is (972) 386-7350. 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 - LEGAL PROCEEDINGS
"La Jolla Cove Investors, Inc. v. The X-Change Corporation and Does 1-10",
Superior Court of California, County of San Diego, filed December 8, 2011, Case
37-2011-00102204-CU-CO-CTL. Plaintiff "La Jolla Cove Investors, Inc." (LJII)
filed a Complaint for Breach of Contract against the Company alleging that the
Company failed to comply with the terms and conditions of the 6-1/4% Convertible
Note, dated August 29, 2007 and the 6-1/4% Convertible Note, dated October 9,
2007 and has refused to honor Conversion Notices tendered on and subsequent to
July 6, 2011. LJII is requesting an acceleration of the cumulative debt totaling
approximately $400,838 and additional interest of approximately $48 per day
after October 1, 2011, plus fees, costs, expenses and disbursements associated
with this action.
On April 19, 2012, the Company filed a Cross Complaint against LJII alleging a
default by LJII due to LJII's failure to exercise and fund the contractually
linked proportionate number of warrants accompanying Conversion Notices
exercised between October 2008 and January 2011 despite the Company's tender of
demand letters for payment. The Company is requesting approximately $475,000 for
the unfunded mandatory warrant exercise; prejudgment interest at 10%, commencing
March 26, 2010; various injunctive releases and associated costs and fees.
The Company is unable to ascertain the potential outcome of these actions and is
of the opinion that no material impact on the Company's financial position will
occur.
6
ITEM 4 - MINE SAFETY DISCLOSURES
None
PART II
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 January 12, 2011, there were approximately 142
registered holders of record of the common stock. 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.
High Low
---- ---
Year ended December 31, 2010
Quarter ended March 31 $ 0.184 $ 0.78
Quarter ended June 30 $ 0.32 $ 1.58
Quarter ended September 30 $ 0.05 $ 1.00
Quarter ended December 31 $ 0.441 $ 1.00
Year ended December 31, 2011
Quarter ended March 31 $ 0.74 $ 0.27
Quarter ended June 30 $ 0.40 $ 0.15
Quarter ended September 30 $ 0.20 $ 0.05
Quarter ended December 31 $ 0.30 $ 0.04
Year ending December 31, 2012
Quarter ended March 31 $ 0.30 $ 0.04
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%
7
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.
Common Stock Warrants
In conjunction with, and as a component of, certain debt issuances, the Company
has issued an aggregate 607,016 warrants issued and outstanding as of December
31, 2011 with exercise prices between $0.70 and $20.00 per share.
Number of Weighted
Warrant Average
Shares Price
------ -----
Balance at January 1, 2010 15,819,352 $0.63
=========== =====
Exercised (320,000)
Cancelled pursuant to 2009 debt cancellation (2,591,500)
Effect of reverse split (11,533,096)
Cancellation of 2007 A & B warrants (372,500)
Issue of replacement 2007 A & B warrants 372,510
-----------
Balance at December 31, 2010 607,016 $5.72
=========== =====
Issued --
Exercised (10,000)
Surrendered at debt cancellation --
Expired --
-----------
Balance at December 31, 2011 597,016 $5.72
=========== =====
8
As of December 31, 2011, the warrants break down as follows:
# warrants exercise price
---------- --------------
372,510 $ 0.70
58,825 $ 1.40
13,300 $ 4.00
10,000 $ 8.00
6,768 $ 12.00
13,613 $ 20.00
597,016 $ 5.72
# warrants expiring in
---------- -----------
135,613 2010 (*)
424,278 2012
37,125 2018
-------
597,016
=======
----------
(*) The warrants which expired in 2010 are an integral component of the LJII
financing as previously discussed. See Item 3 - Legal Proceedings.
Repurchases of Equity Securities
We did not purchase any of our equity securities during 2011 and 2010.
Equity Compensation
During 2011 and 2010, 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 37,500,000 shares of $0.001 par value
common stock and 3,750,000 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 3,750,000
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.
9
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 3,750,000
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 3,750,000 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, 2011 and 2010, respectively, there were no shares of
preferred stock issued and outstanding.
Restricted Securities
As of December 31, 2011, per our stock transfer agent, we had approximately
17,545,728 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 - SELECTED FINANCIAL DATA
Not applicable
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.
10
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, except for nominal interest income, for either of
the years ended December 31, 2011 and 2010, respectively.
General and administrative expenses for each of the years ended December 31,
2011 and 2010 were approximately $111,000 and $127,000, respectively. The 2011
and 2010 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.
The Company recognized aggregate interest accruals, amortization of debt
financing fees and accretion of debt discounts of approximately $223,000 and
$5,176,000 during each of the years ended December 31, 2011 and 2010,
respectively. The Company's convertible debenture with La Jolla Cove Investors,
Inc. matured in August 2010. 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 due to
the December 2008 foreclosure action and, accordingly, has been classified as
"current" on the Company's balance sheet regardless of the stated maturity
date(s). As of this filing, La Jolla Cove Investors has not made a demand for
payment on the matured debenture.
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, 2011 and 2010
were $(0.11) and $(0.83) 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
During March and April 2012, the Company has placed approximately 100,000 acres
in eastern Montana and western North Dakota under lease for oil and gas
exploration, subject to the completion of due diligence and the acquisition of
capital necessary to perform under the terms of the arrangement. Our immediate
future plans involve the development of capital and commencement of operations
to facilitate the exploration of these properties.
(5) LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2011 and 2010, respectively, the Company had a working capital
of approximately $(1,235,000) and $(1,137,000).
Our current business plan will require additional capital; however, our
management team has identified the potential future needs related to the
eastern-Montana/western-North Dakota oil & gas leases; 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
11
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
3,750,000 shares of preferred stock and 37,500,000 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
12
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 - 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 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required financial statements begin on page F-1 of this document.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
13
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, 2011. We are
currently considered to be a shell company in as much as we have 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, 2011.
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, 2011 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 - OTHER INFORMATION
Not applicable.
PART III
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
---- --- ------------------------
R. Wayne Duke 72 President, Chief Executive Officer, Chief
Financial Officer and Director
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
R. Wayne Duke became our Chairman, President, Chief Financial Officer and
Secretary in March 2012 and is responsible for the Company's overall operations.
Mr. Duke was formerly our Chairman, President, acting Chief Financial Officer
and Secretary during parts of 2008 and 2009.
14
Mr. Duke is the sole officer and director of K&D Equity Investments, Inc. He is
also the Chief Executive Officer of USMetrics, Inc. a parts supplier to the
Maintenance, Repair and Overhaul industry, and the Chairman and CEO of
Industrial Clearinghouse, Inc., an MRO excess inventory clearinghouse. Through
February 2008, Mr. Duke was an officer or director of Brighton Oil & Gas, Inc.
(currently Cannabis Science, Inc. (OTCBB: CBIS)). Mr. Duke holds a BBA in
Finance and a Masters Degree in Business from The University of North Texas.
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
15
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, 2011 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 - 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
Change in
Pension
Value and
Non-Equity Non-qualified
Incentive Deferred All
Name and Plan Compen- Other
Principal Stock Option Compen- sation Compen-
Position Year Salary($) Bonus($) Awards($) Awards($) sation($) Earnings($) sation($) Totals($)
-------- ---- --------- -------- --------- --------- --------- ----------- --------- ---------
Arturo Molina 2011 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0-
Former CEO
Haviland Wright 2011 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0-
Former CEO 2010 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0-
2009 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0-
R. Wayne Duke 2009 $ -0- $ -0- $ -0- $ -0- $-0- $-0- $-0- $ -0-
CEO
16
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 - 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.
Number of shares Number of shares Beneficial Percent
Name and address directly owned indirectly owned ownership(1) of class(2)
---------------- -------------- ---------------- ----------- ----------
Melissa CR 364 LTD (3) 17,495,728 -- 17,495,728 42.09%
Deutsche Holdings, Ltd. (4) 2,465,894 -- 2,465,894 5.93%
South Beach Live, Inc. (3) 50,000 -- 50,000 .12%
Officers and Directors as a group (5) -- -- -- 0.00%
----------
(1) On April 19, 2012, there were 41,564,155 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 19,
2012 (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 41,564,155 shares of common stock outstanding on April 19, 2012,
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 135,603 shares on the
exercise of the LaJolla outstanding warrants and approximately 5,704,500
shares to be issued if there was total conversion of the LaJolla debenture
at January 12, 2011, the date of the last debenture conversion notice) -
approximately 5,840,103 beneficial shares in total. Given the existing
litigation, it is currently uncertain on the ultimate ability of LaJolla to
convert or the Company's obligation to accept any conversion notice.
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.
(3) The contact address for the listed stockholder is 12655 North Central
Expressway, Suite 1000, Dallas, Texas 75243.
(4) The contact address for Deutsche Holdings, Ltd. is Shirley St., P. O. Box
N-3950, Nassau, Bahamas.
(5) Our current sole officer and director does not own any of our equity
securities.
CHANGES IN CONTROL
There are currently no arrangements which may result in a change in control of
the Company.
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 12655 North Central Expressway, Suite
1000, Dallas, Texas 75243. Our telephone number is (972) 386-7350. 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.
17
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 - 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:
Year ended Year ended
December 31, December 31,
2011 2010
-------- --------
1 Audit fees $ 26,610 $ 27,138
1 Audit-related fees -- --
2 Tax fees -- --
3 All other fees -- --
-------- --------
Totals $ 26,610 $ 27,138
======== ========
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 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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)
18
THE X-CHANGE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2011 and 2010 F-3
Consolidated Statements of Operations and Comprehensive Loss for the
years ended December 31, 2011 and 2010 F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 2011 and 2010 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2011 and 2010 F-6
Notes to Consolidated Financial Statements F-7
F-1
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, 2011 and 2010 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,
2011 and 2010, 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, 2011 and 2010 and the consolidated
results of its operations and cash flows for each of the years ended December
31, 2011 and 2010, 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 30, 2012
F-2
THE X-CHANGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
December 31, December 31,
2011 2010
------------ ------------
ASSETS
CURRENT ASSETS
Cash on hand and in bank $ -- $ --
Note receivable -- 40,714
Interest receivable -- 546
------------ ------------
TOTAL CURRENT ASSETS -- 41,260
------------ ------------
OTHER ASSETS
License agreement -- 530,000
Prepaid debt financing fees, net of accumulated
amortization of approximately $29,333, respectively -- --
------------ ------------
TOTAL OTHER ASSETS -- 530,000
------------ ------------
TOTAL ASSETS $ -- $ 571,260
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Convertible debenture payable, net of unamortized discount $ 285,225 $ 286,225
Notes payable to shareholder 829,598 834,490
Accounts payable - trade 13,704 4,570
Accrued interest payable 106,632 50,072
------------ ------------
TOTAL CURRENT LIABILITIES 1,235,159 1,178,357
------------ ------------
TOTAL LIABILITIES 1,235,159 1,178,357
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock - $0.001 par value. 3,750,000 shares authorized
none issued and outstanding -- --
Common stock - $0.001 par value. 37,500,000 shares authorized
24,068,427 and 16,309,916 shares issued and outstanding 24,068 16,310
Additional paid-in capital 24,924,147 23,579,289
Accumulated deficit (26,183,374) (24,202,696)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (1,235,159) (607,097)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 571,260 $ 571,260
============ ============
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, 2011 and 2010
Year ended Year ended
December 31, December 31,
2011 2010
------------ ------------
REVENUES - net of returns and allowances $ -- $ --
COST OF SALES -- --
------------ ------------
GROSS PROFIT -- --
------------ ------------
OPERATING EXPENSES
General and administrative expenses 111,242 127,417
------------ ------------
TOTAL OPERATING EXPENSES 111,242 127,417
------------ ------------
LOSS FROM OPERATIONS (111,242) (127,417)
OTHER INCOME (EXPENSE)
Interest income -- 546
Interest expense (222,522) (5,100,478)
Amortization of financing fees and note discounts -- (76,694)
Loss on rescinded acquisition of Old West Entertainment Corp. (1,605,654) --
Impairment of non-operating assets acquired in note foreclosure (41,260) --
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,869,436) (5,176,626)
------------ ------------
LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES (1,980,678) (5,304,043)
PROVISION FOR INCOME TAXES -- --
------------ ------------
LOSS FROM OPERATIONS (1,980,678) (5,304,043)
OTHER COMPREHENSIVE INCOME -- --
------------ ------------
COMPREHENSIVE LOSS $ (1,980,678) $ (5,304,043)
============ ============
Net loss per weighted-average share of common stock outstanding,
calculated on Net Loss - basic and fully diluted $ (0.11) $ (0.83)
============ ============
Weighted-average number of shares of common stock outstanding 17,541,720 6,403,235
============ ============
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, 2011 and 2010
Common Stock Additional
--------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
BALANCES AT JANUARY 1, 2010 5,317,378 $ 5,317 $17,830,580 $(18,898,653) $(1,062,756)
Common stock issued for
Debenture conversion 195,122 195 31,805 -- 32,000
Effect of issuance at less than
"fair value" -- -- 57,756 -- 57,756
Payment of note principal and
accrued interest 9,797,416 9,798 186,150 -- 195,948
Effect of issuance at less than
"fair value" -- -- 4,943,998 -- 4,943,998
Acquisition of License Agreement 1,000,000 1,000 529,000 -- 530,000
Replacement and repricing of 2007
A & B stock warrants issued in
conjunction with a private placement
sale of common stock -- -- 298,000 -- 298,000
Less cost of raising capital -- -- (298,000) -- (298,000)
Net loss for the year -- -- -- (5,304,043) (5,304,043)
----------- -------- ----------- ------------ -----------
BALANCES AT DECEMBER 31, 2011 16,609,916 16,310 23,579,289 (24,202,696) (607,097)
Rescission of License Agreement (1,000,000) (1,000) (529,000) -- (530,000)
Common stock issued for
Debenture conversion and
exercise of warrant 31,375 31 10,969 -- 11,000
Effect of issuance at
less than "fair value" -- -- 10,963 -- 10,963
Debt conversion 575,000 57 114,943 -- 115,000
Effect of issuance at
less than "fair value" -- -- 115,000 -- 115,000
Consulting fees 100,000 100 24,900 -- 25,000
Acquisition of Old West
Entertainment Corp. 12,252,136 12,252 42,791 -- 55,053
Recovery of shares upon
rescission of transaction (11,000,000) (11,000) (19,000) -- (30,000)
Effect of issuance at
less than "fair value" -- -- 475,812 -- 475,812
Settlement of Old West
Entertainment Corp. debt 6,800,000 6,800 6,800 -- 13,600
Effect of issuance at
less than "fair value" -- -- 1,091,000 -- 1,091,000
Net loss for the year -- -- -- (1,980,678) (1,980,678)
----------- -------- ----------- ------------ -----------
BALANCES AT DECEMBER 31, 2010 16,309,916 $ 16,310 $23,579,289 $(26,183,374) $(1,235,139)
=========== ======== =========== ============ ============
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, 2011 and 2010
Year ended Year ended
December 31, December 31,
2011 2010
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year $ (1,980,678) $ (5,304,043)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization -- 76,694
Effect of issuance of common stock at less than "fair value" 1,692,775 5,001,754
Loss on rescinded acquisition of Old West Entertainment Corp. 38,841 --
Impairment of non-operating assets acquired in note foreclosure 41,260 --
Expenses paid with common stock 25,000 --
Interest expense capitalized as principal -- --
Interest expense paid with common stock -- 568
(Increase) Decrease in
Interest receivable -- (546)
Increase (Decrease) in
Accounts payable - trade 9,134 3,325
Accrued interest payable 96,560 98,724
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (77,108) (124,092)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash advanced on note receivable -- (40,714)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES -- (40,714)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received on exercise of warrant 10,000 --
Cash received on related party notes payable 67,108 163,726
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES 77,108 163,726
------------ ------------
INCREASE (DECREASE) IN CASH -- (1,080)
Cash at beginning of period -- 1,080
------------ ------------
CASH AT END OF PERIOD $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID
Interest paid for the period $ -- $ --
============ ============
Income taxes paid for the period $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Convertible debenture converted to common stock $ 1,000 $ 32,000
============ ============
Note payable and accrued interest payable to related party converted
to common stock $ 115,000 $ 195,948
============ ============
Common stock issued for license agreement $ -- $ 530,000
============ ============
Common Stock returned with cancellation of license agreement $ (530,000) $ --
============ ============
Conversion of Debenture Payable into Common Stock $ 1,000 $ --
============ ============
Repayment of Note Payable to Stockholder with Common Stock $ 75,000 $ --
============ ============
Payment of Accrued Interest Payable to Stockholder with Common Stock $ 40,000 $ --
============ ============
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, 2011 and 2010
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 has 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.
Between March 2010 and October 2010, the Company announced and abandoned several
proposed acquisitions. 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.
F-7
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
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 will be
providing 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 are
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.
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.
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.
F-8
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
NOTE B - PREPARATION OF FINANCIAL STATEMENTS - CONTINUED
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 as of
and for years ended December 31, 2011 and 2010, respectively.
NOTE C - GOING CONCERN UNCERTAINTY
As of December 31, 2011 and 2010, respectively, the Company has no operations,
limited cash on hand, and significant debt related to the financing of the
operations of its former subsidiary, AirGATE. 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 seek an acquisition or merger with a private
operating company which offers an opportunity for growth and possible
appreciation of our stockholders' investment in the then issued and outstanding
common stock. However, there is no assurance that the Company will be able to
successfully consummate an acquisition or merger with a private operating
company or, if successful, that any acquisition or merger 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.
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.
F-9
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
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. 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.
4. 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.
5. 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, 2011 and 2010, 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.
F-10
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
5. Income taxes - continued
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.
6. 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, 2011 and 2010, 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.
7. 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.
8. 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.
F-11
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
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 years ended December 31, 2011 and 2010, respectively,
the Company has not had any had deposits 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.
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
December 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.
F-12
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
NOTE G - DEBT FINANCING ARRANGEMENTS
Melissa Note - continued
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.
As of December 31, 2011 and , 2010, respectively, the outstanding balance on the
Melissa Note is approximately $615,025 and $668,239, inclusive of capitalized
accrued interest. Interest continues to accrue at 10% 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 matures in Calendar
2011. Through December 31, 2011 and 2010, respectively, an aggregate of
approximately $236,359 and $169,250 has been advanced against this note.
LCII Debentures
During the quarter ending December 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.
F-13
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
NOTE G - DEBT FINANCING ARRANGEMENTS - CONTINUED
LCII Debentures - continued
At December 30, 2011 and 2010, respectively, the outstanding principal amount of
convertible debentures totaled approximately $285,225 and $286,225.
NOTE H - INCOME TAXES
The components of income tax (benefit) expense for each of the years ended
December 31, 2011 and 2010, respectively, are as follows:
Year ended Year ended
December 31, December 31,
2011 2010
-------- --------
Federal:
Current $ -- $ --
Deferred -- --
-------- --------
State:
Current -- --
Deferred -- --
-------- --------
Total $ -- $ --
======== ========
The Company has a cumulative net operating loss carryforward of approximately
$4,300,000 as of December 31, 2011 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, 2011
and 2010, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2011 2010
------------ ------------
Statutory rate applied to loss before income taxes $ (636,000) $ (1,803,000)
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Nondeductible charge for stock issued at less
than "fair value" 576,000 1,701,000
Nondeductible charge for non-operating asset
impairment 14,000 --
Amortization of nondeductible debt discount -- 23,000
Stock based compensation -- --
Tax basis gain on forgiveness of debt -- --
Other, including use of net operating loss
carryforward and reserve for deferred tax asset 46,000 79,000
------------ ------------
Income tax expense $ -- $ --
============ ============
(Remainder of this page left blank intentionally)
F-14
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
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 December 31, 2011 and 2010,
respectively:
December 31, December 31,
2011 2010
------------ ------------
Deferred tax assets
Net operating loss carryforwards $ 1,354,000 $ 1,360,000
Stock based compensation -- --
Debt discount amortization 657,000 657,000
Other -- --
------------ ------------
2,011,000 2,017,000
Less valuation allowance (2,011,000) (2,017,000)
------------ ------------
Net Deferred Tax Asset $ -- $ --
============ ============
During the years ended December 31, 2011 and 2010, respectively, the valuation
allowance for the deferred tax asset increased (decreased) by approximately
4(6,000) and $111,000, 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, 2011 and 2010, 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.
F-15
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
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
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 December 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.
F-16
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
NOTE J - COMMON STOCK TRANSACTIONS - CONTINUED
Stock issuances - continued
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.
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, 2010 15,819,352 $0.63
=========== =====
Exercised (320,000)
Cancelled pursuant to 2009 debt cancellation (2,591,500)
Effect of reverse split (11,533,096)
Cancellation of 2007 A & B warrants (372,500)
Issue of replacement 2007 A & B warrants 372,510
-----------
Balance at December 31, 2010 607,016 $5.72
=========== =====
Issued -- --
Exercised (10,000) --
Expired -- --
-----------
Balance at December 31, 2011 597,016 $5.72
=========== =====
As of December 31, 2011, the warrants break down as follows:
# warrants exercise price
---------- --------------
372,510 $ 0.70
58,825 $ 1.40
13,300 $ 4.00
10,000 $ 8.00
6,768 $ 12.00
13,613 $ 20.00
597,016 $ 5.72
THE X-CHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2011 and 2010
NOTE K - COMMON STOCK WARRANTS - CONTINUED
# warrants expiring in
---------- -----------
135,613 2010 (*)
-- 2011
424,278 2012
-- 2017
37,125 2018
-------
597,016
=======
----------
(*) The warrants expiring in 2010 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, 2011.
NOTE L - LITIGATION CONTINGENCY
"La Jolla Cove Investors, Inc. v. The X-Change Corporation and Does 1-10",
Superior Court of California, County of San Diego, filed December 8, 2011, Case
37-2011-00102204-CU-CO-CTL.
Plaintiff "La Jolla Cove Investors, Inc." (LJII) filed a Complaint for Breach of
Contract against the Company alleging that the Company failed to comply with the
terms and conditions of the 6-1/4% Convertible Note dated August 29, 2007 and
the 6-1/4% Convertible Note dated October 9, 2007 and has refused to honor
Conversion Notices tendered on and subsequent to July 6, 2011. LJII is
requesting an acceleration of the cumulative debt totaling approximately
$400,838 and additional interest of approximately $48 per day after October 1,
2011, plus fees, costs, expenses and disbursements associated with this action.
On April 19, 2012, the Company filed a Cross Complaint against LJII alleging a
default by LJII due to LJII's failure to exercise and fund the contractually
linked proportionate number of warrants accompanying Conversion Notices
exercised between October 2008 and January 2011 despite the Company's tender of
demand letters for payment. The Company is requesting approximately $475,000 for
the unfunded contractually linked mandatory warrant exercise; prejudgment
interest at 10%, commencing March 26, 2010; various injunctive releases and
associated costs and fees.
The Company is unable to ascertain the potential outcome of these actions and is
of the opinion that no material impact on the Company's financial position will
occur.
NOTE M - SUBSEQUENT EVENTS
On March 20, 2012, the Company issued 8,747,864 shares of restricted,
unregistered shares to Melissa CR 364, Ltd. in partial repayment of
approximately $17,496 in notes payable principal. As the valuation of the
conversion as stated in the respective note agreements was below the "fair
value" of the securities issued, the Company will experience a non-cash charge
to operations of approximately $1,494,684 which will be classified as "interest
expense" in the Company's financial statements.
During March and April 2012, the Company has placed approximately 100,000 acres
in eastern Montana and western North Dakota under lease for oil and gas
exploration, subject to the completion of due diligence and the acquisition of
capital necessary to perform under the terms of the arrangement.
Management has evaluated all activity of the Company through April 30, 2012 (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.
(Signatures follow on next page)
F-17
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: May 4, 2012 /s/ R. Wayne Duke
-------------------------------------
R. Wayne Duke
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.
Dated: May 4, 2012 /s/ R. Wayne Duke
-------------------------------------
R. Wayne Duke
President, Chief Executive Officer
Acting Chief Financial Officer
and Director
19