UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2012
[ ] 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)
Check whether the issuer (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 that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark 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 (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES [ ] NO [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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: August 15, 2012: 46,108,791
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
THE X-CHANGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2012
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 - Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 1A - Risk Factors 23
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3 - Defaults Upon Senior Securities 23
Item 4 - Mine Safety Disclosures 24
Item 5 - Other Information 24
Item 6 - Exhibits 24
SIGNATURES 25
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The X-Change Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2012 and December 31, 2011
June 30, December 31,
2012 2011
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash on hand and in bank $ -- $ --
Note receivable -- --
Interest receivable -- --
------------ ------------
TOTAL CURRENT ASSETS -- --
------------ ------------
TOTAL ASSETS $ -- $ --
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Convertible debenture payable, net of unamortized discount $ 285,225 $ 285,225
Notes payable to shareholder 829,401 829,598
Accounts payable - trade 21,263 13,704
Accrued interest payable 156,178 106,632
------------ ------------
TOTAL CURRENT LIABILITIES 1,292,067 1,235,159
------------ ------------
TOTAL LIABILITIES 1,292,067 1,235,159
------------ ------------
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
32,816,291 and 24,068,427 shares issued and outstanding 32,816 24,068
Additional paid-in capital 26,230,189 24,924,147
Accumulated deficit (27,555,072) (26,183,374)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (1,292,067) (1,235,159)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ -- $ --
============ ============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of
these financial statements.
3
The X-Change Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
Six and Three months ended June 30, 2012 and 2011
(Unaudited)
Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
------------ ------------ ------------ ------------
REVENUES - net of returns and allowances $ -- $ -- $ -- $ --
COST OF SALES -- -- -- --
------------ ------------ ------------ ------------
GROSS PROFIT -- -- -- --
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative expenses 21,578 75,376 25,034 37,816
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 21,578 75,376 25,034 37,816
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (21,578) (75,376) (25,034) (37,816)
OTHER INCOME (EXPENSE)
Interest expense, including amortization
of financing fees and note discounts (1,344,230) (62,724) (24,758) (26,299)
Impairment of non-operating assets
acquired in note foreclosure -- (41,260) -- --
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,344,230) (103,894) (24,758) (26,299)
------------ ------------ ------------ ------------
Loss From Continuing Operations
Before Provision for Income Taxes (1,371,698) (179,360) (49,792) (64,115)
Provision for Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss (1,371,698) (179,360) (49,792) (64,115)
Other Comprehensive Income -- -- -- --
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (1,371,698) $ (179,360) $ (49,792) $ (64,115)
============ ============ ============ ============
Net loss per weighted-average share
of common stock outstanding, calculated
on Net Loss - basic and fully diluted $ (0.05) $ (0.01) $ (0.00) $ (0.00)
============ ============ ============ ============
Weighted-average number of shares
of common stock outstanding 29,019,141 15,787,435 32,816,291 16,154,478
============ ============ ============ ============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of
these financial statements.
4
The X-Change Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 2012 and 2011
(Unaudited)
Six months Six months
ended ended
June 30, June 30,
2012 2011
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (1,371,698) $ (179,360)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization -- --
Impairment of non-operating assets acquired in note foreclosure -- 41,260
Effect of issuance of common stock at less than "fair value" 1,294,684 10,962
Interest expense paid with common stock -- --
Increase (Decrease) in
Accounts payable and other 7,559 13,769
Accrued interest payable 49,546 47,691
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (19,909) (65,678)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -- --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from exercise of warrants -- 10,000
Cash contributed to support operations 2,610
Cash received on related party line of credit 17,299 55,678
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES 19,909 65,678
------------ ------------
DECREASE IN CASH -- --
Cash at beginning of period -- --
------------ ------------
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
Common Stock issued for license agreement $ -- $ (530,000)
============ ============
Conversion of Debenture Payable into Common Stock $ -- $ 1,000
============ ============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of
these financial statements.
5
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
The X-Change Corporation (Company) was incorporated under the laws of the State
of Delaware on February 5, 1969 and changed its corporate domicile to the State
of Nevada on October 4, 2000. We were originally organized to seek merger and/or
acquisition candidates and engaged in various transactions since our inception.
As of December 31, 2008, the Company 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 August 2011, the Company announced and abandoned several
proposed acquisition transactions.
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.
On April 12 and May 14, 2012, respectively, the Company through a concurrently
formed wholly owned subsidiary, Cress Oil and Natural Gas Company (Cress),
entered into Purchase and Sale Agreements with Granite Group Energy (a Delaware
Limited Liability Company hereafter referred to as "Granite") and Wexco
Resources, LLC (a Colorado Limited Liability Company hereafter referred to as
"Wexco"). As part of the Granite Agreement, the Company is acquiring from
Granite approximately 21,111 net acres of mineral interests in return for the
payment of approximately $15,000,000. As part of the Wexco Agreement, the
Company is acquiring from Wexco approximately 50,000 net acres of mineral
interests in Teton County, Montana in return for the payment of approximately $
7,500,000. As of the date of this filing, neither Agreement has been consummated
through the payment of the required consideration.
On May 10, 2012, the Company, through Cress, entered into an Agreement (the
"Agreement") with Diverse Energy Investments, LLC ("Diverse"). As part of the
Agreement, the Company is acquiring from Diverse approximately 15,000 next acres
of mineral interests in Roosevelt and Daniels Counties, Montana in return for
the payment of approximately $8,812,500. As of the date of this filing, this
Agreement has not been consummated through the payment of the required
consideration.
6
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
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.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-K containing the Company's
financial statements for the year ended December 31, 2011. The information
presented within these interim financial statements may not include all
disclosures required by generally accepted accounting principles and the users
of financial information provided for interim periods should refer to the annual
financial information and footnotes when reviewing the interim financial results
presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-Q, are unaudited and contain all material adjustments,
consisting only of normal recurring adjustments necessary to present fairly the
financial condition, results of operations and cash flows of the Company for the
respective interim periods presented. The current period results of operations
are not necessarily indicative of results which ultimately will be reported for
the full fiscal year ending December 31, 2012.
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
June 30, 2012 and December 31, 2011 and for each of the six and three months
ended June 30, 2012 and 2011, respectively.
NOTE C - GOING CONCERN UNCERTAINTY
As of June 30, 2012 and December 31, 2011, respectively, the Company has no
operations, no 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 annual
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.
7
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE C - GOING CONCERN UNCERTAINTY - CONTINUED
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.
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. 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.
8
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
3. 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.
4. 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 June 30, 2012 and December 31, 2011, respectively, the deferred tax asset and
deferred tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences generally represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization, allowance for doubtful accounts and vacation
accruals.
The Company has adopted the provisions required by the Income Taxes topic of the
FASB Accounting Standards Codification. The Codification Topic requires the
recognition of potential liabilities as a result of management's acceptance of
potentially uncertain positions for income tax treatment on a
"more-likely-than-not" probability of an assessment upon examination by a
respective taxing authority. As a result of the implementation of Codification's
Income Tax Topic, the Company did not incur any liability for unrecognized tax
benefits.
5. 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).
9
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
5. Income (Loss) per share - continued
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 June 30, 2012 and 2011, respectively, the Company's outstanding stock
options, warrants, and convertible debentures are considered to be anti-dilutive
due to the Company's net operating loss.
6. New and Pending Accounting Pronouncements
The Company is of the opinion that any and all pending accounting
pronouncements, either in the adoption phase or not yet required to be adopted,
will not have a significant impact on the Company's financial position or
results of operations.
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The Company does not use derivative
instruments to moderate its exposure to financial risk, if any.
NOTE F - CONCENTRATIONS OF CREDIT RISK
When applicable, the Company maintains 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 six months ended June 30, 2012 and
the year ended December 31, 2011, 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.
10
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE G - DEBT FINANCING ARRANGEMENTS
Melissa Note - continued
The Company valued and recorded an embedded beneficial conversion feature in
connection with the Melissa Note of $756,950, and amortized this amount over the
initial two year life of the note resulting in non-cash charges to earnings as a
component of interest expense through December 31, 2008.
At maturity, the Company failed to make the required payment of the entire
outstanding principal and accrued interest due under the Melissa Note. On August
22, 2008, the Company, AirGATE and the Melissa Ltd. entered into an Amendment to
Promissory Note (the Amendment) amending the Melissa Note. The Amendment
extended the maturity date of the Note to December 15, 2008 and, in a
supplemental Board action, changed the conversion rate to par value ($0.001 per
share). In connection with the Amendment, AirGATE paid Melissa Ltd. (i) $100,000
to be applied against the outstanding principal of the Melissa Note, (ii) all
interest on the Note accrued through August 15, 2008, and (iii) $4,500,
representing Melissa Ltd's attorneys' fees and costs in connection with the
Amendment.
After the application of the $100,000 principal payment against the outstanding
principal under the Note, the outstanding principal owed under the Note was
$697,794. Interest payments were due on the 15th of each month beginning
September 15, 2008. If either the Company and/or AirGATE completes a corporate
financing transaction before December 15, 2008, whereby either the Company
and/or AirGATE receives in excess of $300,000 through the issuance of debt or
equity or a combination thereof, the Company and/or AirGATE agreed to remit to
Melissa Ltd. in payment of the obligations under the Melissa Note, the entire
net proceeds of such transaction, or such smaller amount of net proceeds as is
necessary to pay the entire outstanding principal amount of the Melissa Note,
plus all accrued interest.
In December 2008, Melissa Ltd. began foreclosure proceedings against its
collateral, which included 100% of the Company's holdings in AirGATE, and the
right to convert the Melissa Note into restricted, unregistered shares of the
Company's common stock. The foreclosure proceeding was consummated on January
16, 2009 and the Company's holdings in AirGATE were forfeited. Additionally,
Melissa Ltd. converted approximately $51,000 of principal on the Melissa Note to
51,000,000 shares of the Company's common stock, concurrent with the maturity
date of December 15, 2008.
In May 2011, Melissa, Ltd. converted approximately $75,000 in principal and
$40,000 of accrued interest into 575,000 shares of restricted, unregistered
common stock.
On March 20, 2012, the Company issued 8,747,864 shares of restricted,
unregistered shares to Melissa, Ltd. in 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 experienced a non-cash charge to operations of approximately
$1,494,684 which will be classified as "interest expense" in the Company's
financial statements.
As of June 30, 2012 and December 31, 2011, respectively, the outstanding balance
on the Melissa Note is approximately $626,524 and $615,025, 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 June 30, 2012 and December 31, 2011, respectively, an aggregate of
approximately $242,367 and $236,359 has been advanced against this note.
11
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE G - DEBT FINANCING ARRANGEMENTS - CONTINUED LCII DEBENTURES
During the quarter ending September 30, 2007, the Company entered into a
Securities Purchase Agreement with La Jolla Cove Investors, Inc. ("LCII")
providing for two convertible debentures totaling $400,000 with two
corresponding sets of non-detachable warrants totaling 4,000,000 shares with an
exercise price of $1.00. The convertible debentures accrue interest at 6-1/4%
until converted or the expiration of their three year term. The respective
debentures matured in August 2010; however, in the absence of a formal extension
agreement, both parties have agreed to stay the maturity and allow future
conversions and warrant exercises to occur.
The debentures and warrants have mandatory conversion features. These conversion
features becomes effective in the first full calendar month after the common
stock underlying the debenture is either i) registered under the Securities Act
of 1933 (the "Act"), which is at the Company's option, or ii) available by LCII
to be resold pursuant to Rule 144 of the Act. If the conversion feature becomes
effective, LCII is obliged to convert an average of 10% of the face value of the
debenture each calendar month into a variable number of shares of the Company's
common stock. The number of shares is determined by a formula where the dollar
amount of the debenture being converted is multiplied by eleven, from which the
product of the conversion price and ten times the dollar amount of the debenture
being converted is then subtracted, all of which is then divided by the
conversion price. The conversion price is equal to the lesser of (i) $1.00, or
(ii) 80% of the average of the 3 lowest volume weighted average prices during
the twenty trading days prior to the conversion election. The Company can
prevent conversion if the trading price falls below $0.30 per share on the date
LCII elects to convert. Under certain provisions, if LCII does not convert an
average of at least 5% of the face value of the debenture, the Company may
prepay portions of the debenture. As contractually linked, if LCII converts a
portion of the debenture, LCII must also exercise a proportionate amount of the
warrants.
In the event that the entire $400,000 of the convertible debentures is converted
in conjunction with the required exercise of warrants, the Company will receive
a total of $4.4 million from LCII. The aggregate number of shares issuable to
LCII in this event is dependent on the trading price of the Company's common
stock over the term of the conversion process.
The Company allocated the proceeds from the debentures between the warrants and
the debt based on the estimated relative fair value of the warrants and the
debt. The value of the warrants was calculated at $273,634 using the
Black-Scholes model and the following assumptions: discount rate of 4.1%,
volatility of 156% and expected term of three years. The Company also calculated
a beneficial conversion feature totaling $126,366. The Company is amortizing
both the warrant value and value attributed to the beneficial conversion feature
(total $400,000) over the term of the debentures. This non-cash charge to income
is included in interest expense.
On June 13, 2012, the Company entered into a Settlement Agreement and Addendum
to Securities Repurchase Agreement with LJII . On December 8, 2011, LJII sued
the Company in regards to a claimed breach of a convertible debenture dated
August 29 and October 9, 2007. The Company filed its answer and cross complaint
in the lawsuit. In June 2012, both parties determined that it would be in their
best interest to
settle the suit and cross complaint. As part of the settlement LJII agreed to
extend the Maturity Date of the Debentures to December 31, 2013 and to exercise
approximately 2,800,000 Common Stock Warrants at One Dollar ($1.00) per Share as
the Debentures are converted. This
Settlement Agreement and Addendum effectively cancelled the initial warrant(s)
(approximately 145,613 warrants exercisable at $20.00 as effected by the
Company's 2010 reverse stock split) and issued 2,912,260 new warrants reflecting
the restructured warrant(s), pricing and expiration date. The Company recognized
no effect in the accompanying financial statements as a result of this
transaction; however, the
Company will experience a "cheap stock" charge equivalent to the difference
between the "fair value" of the shares issued and the contractual blended
conversion/exercise price on the date of each future conversion transaction.
At June 30, 2012 and December 30, 2011, respectively, the outstanding principal
amount of convertible debentures totaled approximately $285,225.
12
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE H - INCOME TAXES
The components of income tax (benefit) expense for each of the six months ended
June 30, 2012 and 2011, respectively, are as follows:
Six months Six months
ended ended
June 30, June 30,
2012 2011
-------- --------
Federal:
Current $ -- $ --
Deferred -- --
-------- --------
-- --
-------- --------
State:
Current -- --
Deferred -- --
-------- --------
-- --
-------- --------
Total $ -- $ --
======== ========
As of June 30, 2012, the Company has a cumulative net operating loss
carryforward of approximately $4,059,600 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 six months ended June 30,
2012 and 2011, respectively, differed from the statutory federal rate of 34
percent as follows:
Six months Six months
ended ended
June 30, June 30,
2012 2011
---------- ----------
Statutory rate applied to loss before
income taxes $ (466,000) $ (61,000)
Increase (decrease) in income taxes
resulting from:
State income taxes -- --
Nondeductible charge for stock issued
at less than "fair value" 440,000 3,700
Nondeductible charge for non-operating
asset impairment -- 14,000
Other, including use of net operating
loss carryforward and reserve for
deferred tax asset 26,000 43,300
---------- ----------
Income tax expense $ -- $ --
========== ==========
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 June 30, 2012 and December 31, 2011,
respectively:
June 30, December 31,
2012 2011
------------ ------------
Deferred tax assets
Net operating loss carryforwards $ 1,380,000 $ 1,354,000
Stock based compensation -- --
Debt discount amortization 657,000 657,000
Other -- --
------------ ------------
2,037,000 2,011,000
Less valuation allowance (2,037,000) (2,011,000)
------------ ------------
Net Deferred Tax Asset $ -- $ --
============ ============
13
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE H - INCOME TAXES - CONTINUED
During the six months ended June 30, 2012 and the year ended December 31, 2011,
respectively, the valuation allowance for the deferred tax asset increased
(decreased) by approximately $26,000 and $(6,000), respectively.
NOTE I - PREFERRED STOCK
The Company is authorized to issue up to a total of 75,000,000 shares of $0.001
par value Preferred Stock. The Company's Board of Directors has designated
250,000 shares as "Series A Convertible Preferred Stock".
The Company is under no obligation to pay dividends or to redeem the Series A
Convertible Preferred Stock. This series of stock is convertible into 10 shares
of Common Stock at the option of the shareholder or upon automatic conversion.
In the event of any liquidation, dissolution or winding-up of the Company, the
holders of outstanding shares of Series A Preferred shall be entitled to be paid
out of the assets of the Corporation available for distribution to shareholders,
before any payment shall be made to or set aside for holders of the Common
Stock, at an amount of $1 per share.
As of June 30, 2012 and December 31, 2011, respectively, there were no shares of
preferred stock issued and outstanding.
NOTE J - COMMON STOCK TRANSACTIONS AMENDMENT TO THE ARTICLES OF INCORPORATION
On January 31, 2011, the Board of Directors of the Company and its majority
shareholder approved an amendment to its Articles of Incorporation increasing
the authorized capital of the Company from 37,500,000 shares of common stock,
par value $.001 and 3,750,000 shares of preferred stock, par value $.001, to
750,000,000 shares of common stock and 75,000,000 share of preferred stock. The
Amended Articles were filed with the Nevada Secretary of State on March 22,
2011, the effective date of the amendment.
REVERSE STOCK SPLIT
Effective August 9, 2010, Company's Board of Directors declared a 1-for-20
reverse split of the issued and outstanding shares of common stock. The reverse
stock split was implemented by adjusting the stockholders' book entry accounts
to reflect the number of shares held by each stockholder following the split. No
fractional shares were issued in connection with the reverse stock split and any
fractional shares resulting from the reverse split were rounded up to the
nearest whole share. The reverse stock split reduced the number of the Company's
issued and outstanding shares of common stock on this date from 136,089,746 to
approximately 5,513,000.
On January 31, 2011, the Company's Board of Directors and its majority
shareholder approved an amendment to its Articles of Incorporation increasing
the authorized capital of the Company from 37,500,000 shares of $0.001 par value
common stock and 3,750,000 shares of $0.001 par value preferred stock to
750,000,000 shares of $0.001 par value common stock and 75,000,000 shares of
$0.001 par value preferred stock. The Amended Articles were filed with the
Nevada Secretary of State on March 22, 2011, the effective date of the
amendment.
The effects of these actions are reflected in the accompanying financial
statements as of the first day of the first period presented. (Remainder of this
page left blank intentionally)
14
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE J - COMMON STOCK TRANSACTIONS - CONTINUED
Stock issuances
On October 7, 2010, the Company issued 1,000,000 shares of restricted,
unregistered post-reverse split shares, valued at approximately
$530,000 which was equal to the closing quotation of the Company's securities on
the transaction date, to 21-Century Silicon, Inc. (a Texas corporation) to
license the use of 21-Century's technology and to secure an exclusive right to
negotiate to acquire certain intellectual property from 21-Century. On January
28, 2011, concurrent with the abandonment of the 21-Century transaction, the
Company rescinded the October
2010 transaction where 1,000,000 shares of restricted, unregistered common stock
was issued to license the use of 21-Century's technology and to secure an
exclusive right to negotiate to acquire certain intellectual property from
21-Century. Further, concurrent with this action, the Company executed its lien
on the assets pledged by 21-Century in satisfaction of a note receivable and
accrued interest totaling approximately $41,200. Upon foreclosure on said
assets, the Company's management elected to take a 100% impairment against the
foreclosed value resulting
in a charge to operations in the first quarter of 2011 of approximately $41,200.
Any gain, if any, upon the ultimate disposition of said assets will be
recognized at the point of future sale.
On January 3, 2011, LJII issued a Debenture Conversion Notice to the Company for
the conversion of $1,000 of the outstanding debenture balance into 21,375 shares
of the Company's common stock. Additionally, LJII exercised 10,000 outstanding
warrants to obtain 10,000 shares of the Company's common stock for $10,000 cash.
This conversion was completed on January 5, 2011 with the delivery of the shares
to LJII. As the aggregate conversion and exercise price was below the "fair
value" of the securities issued, the Company experienced a non-cash charge to
operations of approximately $10,962 which was classified as "interest expense"
in the accompanying financial statements.
In May 2011, the Company issued an aggregate 575,000 restricted, unregistered
post-reverse split shares to Melissa CR 364 LTD. to retire a combination of
approximately $75,000 on the aforementioned notes and approximately $40,000 in
accumulated accrued interest. As the valuation of the conversion as stated in
the separate note agreements was below the "fair value" of the securities
issued, the Company experienced a non-cash charge to operations of approximately
$115,000 which was classified as "interest expense" in the accompanying
financial statements.
In July 2011, in connection with the execution of a Letter of Intent ("LOI")
with George J. Akmon and Jerry Monday & Associates, LLC (collectively referred
to as "Operators") to operate "The Texas Star Casino" outside the nine mile
territorial waters of Texas, in international waters, as a casino ship, the
Company issued 100,000 shares of restricted, unregistered common stock as an
inducement to execute the LOI. This transaction was valued at approximately
$25,000 which approximated "fair value" of the Company's securities on the date
of issuance.
In August 2011, the Company issued an aggregate 12,252,136 shares of restricted,
unregistered common stock to Old West, Molina and the Bogat Trust, as previously
discussed. Concurrent with the rescission of this transaction, the Company
recovered 11,000,000 shares of the
12,252,136 shares originally issued. Approximately 1,252,136 shares remained in
the possession of Old West, Molina and/or the Bogat Trust. These net 1,252,136
shares remaining outstanding were initially valued at an agreed-upon value of
approximately $25,042. As the agreed-upon transaction valuation was below the
"fair value" of the shares issued, the Company experienced an additional
non-cash charge to operations of approximately $475,812. The aggregate
approximately $500,854 was charged to operations as "Loss on rescinded
acquisition of Old West Entertainment Corp." in the accompanying financial
statements to reflect the net economic event related to these transactions.
In October and November 2011, the Company issued an aggregate 6,800,000 shares
of free-trading common stock in settlement of approximately $13,600 of debt on
the books of Old West Entertainment Corp. while Old West was an operating
component of the Company and prior to the March 2012 rescission of the entire
transaction. As the debt reduction was less than the "fair value" of the shares
issued, the Company recognized an additional non-cash charge to operations of
approximately $1,091,000 was recognized as "Loss on rescinded acquisition of Old
West Entertainment Corp." during the 4th quarter.
On March 20, 2012, the Company issued 8,747,864 shares of restricted,
unregistered shares to Melissa, Ltd. in 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 experienced a non-cash charge to operations of approximately
$1,494,684 which will be classified as "interest expense" in the Company's
financial statements.
15
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
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 2010 reverse stock split and the June 2012 litigation
settlement with LJII.
Number of Weighted
Warrant Average
Shares Price
------ -----
Balance at January 1, 2011 607,016 $ 5.72
========== ==========
Issued -- --
Exercised (10,000) $ 1.00
Expired -- --
---------- ----------
Balance at December 31, 2011 597,016 $ 5.72
========== ==========
Issued 2,912,260 $ 1.00
Cancelled (145,613) $ 20.00
Exercised -- --
Expired (73,438) $ 1.74
---------- ----------
Balance at June 30, 2012 3,290,225 $ 0.99
========== ==========
As of June 30, 2012, the warrants break down as follows:
# warrants exercise price
---------- --------------
305,840 $ 0.70
2,912,260 $ 1.00
58,825 $ 1.40
13,300 $ 4.00
---------- ----------
3,290,225 $ 0.99
---------- ----------
# warrants expiring in
---------- -----------
340,840 2012
2,912,260 2013
37,125 2018
---------- ----------
3,290,225
==========
NOTE L - LITIGATION
"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.
16
The X-Change Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
NOTE L - LITIGATION - CONTINUED
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.
On June 13, 2012, the Company entered into a Settlement Agreement and Addendum
to Securities Repurchase Agreement with LJII . On December 8, 2011, LJII sued
the Company in regards to a claimed breach of a convertible debenture dated
August 29 and October 9, 2007. The Company filed its answer and cross complaint
in the lawsuit. In June 2012, both parties determined that it would be in their
best interest to
settle the suit and cross complaint. As part of the settlement LJII agreed to
extend the Maturity Date of the Debentures to December 31, 2013 and to exercise
approximately 2,800,000 Common Stock Warrants at One Dollar ($1.00) per Share as
the Debentures are converted.
NOTE M - SUBSEQUENT EVENTS
In August 2012, LJII issued a Debenture Conversion Notice to the Company for the
conversion of $1,000 of the outstanding debenture balance into 187,713 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.
Management has evaluated all activity of the Company through August 17, 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.
(Remainder of this page left blank intentionally)
17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(1) CAUTION REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this quarterly filing, including, without
limitation, statements containing the words "believes", "anticipates",
"expects", "aims" 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; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-Q 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) GENERAL
The X-Change Corporation (Company) was incorporated under the laws of the State
of Delaware on February 5, 1969 and changed its corporate domicile to the State
of Nevada on October 4, 2000. We were originally organized to seek merger and/or
acquisition candidates and engaged in various transactions since our inception.
As of December 31, 2008, the Company disposed of all of the assets and
operations.
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.
(3) PLAN OF BUSINESS
On August 18, 2011, the Company entered into an Asset Purchase Agreement with
Old West Entertainment Corp. (Old West), a corporation formed February 3, 2011
in accordance with the Laws of the State of Nevada. Prior to this transaction,
Old West was not affiliated with or related to the Company or its management. As
part of the Agreement, the Company acquired all rights, 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 also assumed 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." In exchange, the Company
issued 1,000,000 shares of restricted, unregistered shares of the Company's
common stock to Old West.
As part of the Agreement, Molina/Frost was issued 5,000,000 shares of
restricted, unregistered shares of the Company's common stock and was appointed
President and CEO of the Company. The Company also issued 5,000,000 shares of
restricted, unregistered shares of common stock to the Bogat Family Trust as
consideration for the management services that beneficiaries of the Trust was to
provide to the Company in operating the music and entertainment portion of the
business.
18
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 is transferred all of the aforementioned
assets back to Old West in exchange for Old West returning the shares which the
Company issued to it as part of the original Asset Purchase Agreement. A
complete copy of the Repurchase Agreement was attached as an exhibit to a
Current Report on Form 8-K on or about March 5, 2012 and the effect of the
Repurchase Agreement was to make the initial agreement null and void Ab Initio.
On April 12 and May 14, 2012, respectively, the Company through a concurrently
formed wholly owned subsidiary, Cress Oil and Natural Gas Company (Cress),
entered into Purchase and Sale Agreements with Granite Group Energy (a Delaware
Limited Liability Company hereafter referred to as "Granite") and Wexco
Resources, LLC (a Colorado Limited Liability Company hereafter referred to as
"Wexco"). As part of the Granite Agreement, the Company is acquiring from
Granite approximately 21,111 net acres of mineral interests in return for the
payment of approximately $15,000,000. As part of the Wexco Agreement, the
Company is acquiring from Wexco approximately 50,000 net acres of mineral
interests in Teton County, Montana in return for the payment of approximately $
7,500,000. As of the date of this filing, neither Agreement has been consummated
through the payment of the required consideration.
On May 10, 2012, the Company through Cress entered into an Agreement (the
"Agreement") with Diverse Energy Investments, LLC ("Diverse"). As part of the
Agreement, the Company is acquiring from Diverse approximately 15,000 net acres
of mineral interests in Roosevelt and Daniels Counties, Montana in return for
the payment of approximately $8,812,500. As of the date of this filing, this
Agreement has not been consummated through the payment of the required
consideration.
Diverse Energy Investments, LLC transferred the ownership of the leases to
M.L.H. LLC and signed a new Purchase and Sale agreement with Big Sky Oil, Inc.,
a new subsidiary of The X-Change Corporation. That Purchase and Sale Agreement
has a closing date of December 20, 2012 and the acreage has increased to
19,499.28 net acres. The price has been increased to $11,455,827.00. Diverse
Energy transferred the leases to M.L.H. because of a dispute as to the ownership
of Diverse. The dispute does not involve the leases or The X-Change Corporation.
In November, 2012, the Company closed on the M.L.H. leases through a farm out
agreement. The Company has agreed to pay $500,000 for each 640 acre lease site
drilled. The Company plans to approach interested working interest investors
with a drilling program to start drilling a portion of the M.L.H. leases.
The Investor who agreed to fund Cress declined to fund the purchase of the
Diverse leases. The Granite Group leases expired on July 20, 2012 when the
closing did not take place. The closing did not take place because the
individual who incorporated Cress Oil and agreed to fund the purchase informed
Granite that he had changed his mind and was going to not transfer ownership of
Cress to The Company. The Wexco leases expired by the terms of the Purchase and
Sale Agreement. The Company is still seeking alternative funding on the Wexco
leases even though the Purchase and Sale Agreement has expired. No assurances
can be made that the Company will be able to finance the Wexco leases.
(4) RESULTS OF OPERATIONS
The Company had no revenue for either of the six or three month periods ended
June 30, 2012 and 2011, respectively.
General and administrative expenses for the six months ended June 30, 2012 and
2011 were approximately $21,600 and $75,400, respectively. During the first
quarter of 2012, the Company was virtually dormant due to the inaction of former
management. During the first quarter of 2011, the Company experienced somewhat
higher expenditure levels due to various due diligence activities related to the
proposed acquisitions of 21-Century and Surrey, as discussed in previous
filings. Current management continues to focus on exploring possible candidates
for a business combination transaction, including the completion of the oil &
gas lease acquisitions in eastern-Montana and western-North Dakota. Accordingly,
future expenditure levels will fluctuate depending on the Company's acquisition
endeavors and the stated objective of remaining current with the Company's
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended.
19
On January 28, 2011, concurrent with the abandonment of the 21-Century Silicon
transaction, the Company rescinded the December 2011 transaction where 1,000,000
shares of restricted, unregistered common stock was issued to the shareholders
of 21-Century Silicon to license the use of 21-Century Silicon's technology and
to secure an exclusive right to negotiate to acquire certain intellectual
property from 21-Century Silicon. Additionally, concurrent with this action, the
Company 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 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
was 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 to purchase a Casino Ship located
in Freeport, Texas. The original transaction was valued at approximately
$1,750,000 (which approximated 21.9% of a November 8, 2006 independent
third-party appraisal by Cruise Research and Management of the casino ship) (see
Exhibit 99.1 of the Company's Current Report on Form 8-K filed on or about June
2, 2011) and consideration of 2,000,000 shares of the Company's restricted,
unregistered common stock was issued to the seller. Concurrent with the
execution of the July 25, 2011 Repurchase Agreement, the 2,000,000 shares of the
Company's common stock held by the CJP Entertainment LLC was returned to the
Company and cancelled. As the Company retained no rights to own or operate the
cruise ship, no further action was taken by Management, George J. Akmon and/or
Jerry Monday & Associates, LLC with regard to the June 6, 2011 LOI to operate
said casino ship and said negotiations and obligations ceased on the part of all
parties. Pursuant to the appropriate accounting literature, this transaction was
reflected in the restated financial statements net of all the aforementioned
events as of June 30, 2011, as reported on Form 10-Q/A.
On August 18, 2011, the Company entered into an Asset Purchase Agreement with
Old West Entertainment Corp. (Old West), a corporation formed February 3, 2011
in accordance with the Laws of the State of Nevada. Prior to this transaction,
Old West was not affiliated with or related to the Company or its management. As
part of the Agreement, the Company acquired all rights, 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 also assumed 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." In exchange, the Company
issued 1,000,000 shares of restricted, unregistered shares of the Company's
common stock to Old West.
As part of the Agreement, Molina/Frost was issued 5,000,000 shares of
restricted, unregistered shares of the Company's common stock and was appointed
President and CEO of the Company. The Company also issued 5,000,000 shares of
restricted, unregistered shares of common stock to the Bogat Family Trust as
consideration for the management services that beneficiaries of the Trust was to
provide to the Company in operating the music and entertainment portion of the
business.
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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.
The Company recognized interest accruals, amortization of debt financing fees
and accretion of debt discounts of approximately $1,344,000 and $63,000 during
the six months ended June 30, 2012 and 2011, respectively. Included in the June
30, 2012 expenses is a non-cash charge of approximately $1,295,000 related to
the issuance of restricted, unregistered common stock at less than `fair value'
for the payment of approximately $17,500 in principal to Melissa CR 364, Ltd.
The Company's convertible debenture with La Jolla Cove Investors, Inc. matured
in August 2010. This debenture is discussed more fully in our Annual Report on
Form 10-K for the year ended December 31, 2010. 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).
Earnings per share for the respective six month periods ended June 30, 2012 and
2011, respectively, were $(0.05) and $(0.01) 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.
(5) LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2012 and December 31, 2011, respectively, the Company had a working
capital deficit of approximately $(1,292,000) and $(1,235,000).
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 its
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.
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While the Company is of the opinion that good faith estimates of the Company's
ability to secure additional capital in the future to reach its goals have been
made, there is no guarantee that the Company will receive sufficient funding to
sustain operations or implement any future business plan steps.
Regardless of whether the Company's cash assets prove to be inadequate to meet
the Company's operational needs, the Company might seek to compensate providers
of services by issuances of stock in lieu of cash.
(6) CRITICAL ACCOUNTING POLICIES
Our financial statements and related public financial information are based on
the application of accounting principles generally accepted in the United States
(GAAP). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported. These estimates can
also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We
believe our use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently and conservatively applied. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to
monitor significant estimates made during the preparation of our financial
statements.
Our significant accounting policies are summarized in Note D of our financial
statements. While all these significant accounting policies impact our financial
condition and results of operations, we view certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on our financial statements and require management to
use a greater degree of judgment and estimates. Actual results may differ from
those estimates. Our management believes that given current facts and
circumstances, it is unlikely that applying any other reasonable judgments or
estimate methodologies would cause effect on our consolidated results of
operations, financial position or liquidity for the periods presented in this
report.
(7) EFFECT OF CLIMATE CHANGE LEGISLATION
The Company currently has no known or identified exposure to any current or
proposed climate change legislation which could negatively impact the Company's
operations or require capital expenditures to become compliant. Additionally,
any currently proposed or to-be-proposed- in-the-future legislation concerning
climate change activities, business operations related thereto or a publicly
perceived risk associated with climate change could, potentially, negatively
impact the Company's efforts to identify an appropriate target company which may
wish to enter into a business combination transaction with the Company.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company may be subject to certain market risks, including changes in
interest rates and currency exchange rates. At the present time, the Company
does not undertake any specific actions to limit those exposures.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of 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 Quarterly 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 inherent weakness in our internal controls over financial reporting due
to our status as a shell corporation and having a sole officer and director.
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However, our Certifying Officer believe 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.
(b) Changes in Internal Controls
There were no significant changes (including corrective actions with regard to
significant deficiencies or material weaknesses) in our internal controls over
financial reporting that occurred during the quarter ended June 30, 2012 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - 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.
On June 13, 2012, the Company entered into a Settlement Agreement and Addendum
to Securities Repurchase Agreement with LJII . On December 8, 2011, LJII sued
the Company in regards to a claimed breach of a convertible debenture dated
August 29 and October 9, 2007. The Company filed its answer and cross complaint
in the lawsuit. In June 2012, both parties determined that it would be in their
best interest to settle the suit and cross complaint. As part of the settlement
LJII agreed to extend the Maturity Date of the Debentures to December 31, 2013
and to exercise approximately 2,800,000 Common Stock Warrants at One Dollar
($1.00) per Share as the Debentures are converted.
ITEM 1A - RISK FACTORS
Not applicable
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 experienced a non-cash charge to
operations of approximately $1,494,684 which was classified as "interest
expense" in the Company's financial statements.
In August 2012, LJII issued a Debenture Conversion Notice to the Company for the
conversion of $1,000 of the outstanding debenture balance into 187,713 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.
ITEM 3 - DEFAULTS ON SENIOR SECURITIES
None.
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ITEM 4 - MINE SAFETY DISCLOSURES
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE X-CHANGE CORPORATION
Dated: November 15, 2012 By: /s/ R. Wayne Duke
------------------------------------
R. Wayne Duke
Chairman, Chief Executive Officer,
Acting Chief Financial Officer and
Director
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