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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended June 30, 2008
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 Commission file number: 002-41703
 THE X-CHANGE CORPORATION
  Nevada
    
    90-0156146(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 710 Century Parkway, Allen, TX 75013
 (972) 747-0051
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ




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##### 



THE X-CHANGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1 Consolidated Financial StatementsUnaudited Consolidated Balance Sheets at June 30, 2008 and December 31, 2007
    
    
    3Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2008 and 2007
    
    
    4Unaudited Consolidated Statement of Stockholders Deficit for the six months ended June 30, 2008
    
    
    5Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 4 Controls and Procedures
    
    
    19PART II OTHER INFORMATIONItem 1A Risk Factors
    
    
    21Item 6 Exhibits
    
    
    21SIGNATURES
    
    
    21Certification pursuant to Section 302Certification pursuant to Section 302Certification pursuant to Section 906Certification pursuant to Section 906
   2




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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED BALANCE SHEETS
 June 30, 2008
    
    
    December 31, 2007ASSETSCurrent assets:Cash
    
    $
    10,988
    
    
    $
    739,869Accounts receivable, net of allowance for doubtful accounts of
$1,208 at June 30, 2008 and $35,663 at December 31, 2007
    
    
    17,450
    
    
    
    79,729Prepaid expenses
    
    
    24,158
    
    
    
    1,339Deposits
    
    
    37,500
    
    
    
    40,770Total current assets
    
    
    90,096
    
    
    
    861,707Property and equipment, net
    
    
    41,063
    
    
    
    51,976Debt issuance costs, net
    
    
    598,729
    
    
    
    608,648TOTAL ASSETS
    
    $
    729,888
    
    
    $
    1,522,331LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Convertible note payable
    
    $
    804,794
    
    
    $
    797,794less unamortized discount on convertible debt
    
    
    (49,710
    )
    
    
    (243,039
    )Accounts payable
    
    
    510,248
    
    
    
    461,660Accrued expenses
    
    
    144,733
    
    
    
    38,413Customer deposits
    
    
    30,000
    
    
    
    30,000Total current liabilities
    
    
    1,440,065
    
    
    
    1,084,828Long-term liabilities:Convertible long-term notes payable
    
    
    2,260,957
    
    
    
    2,221,600less unamortized discount on convertible debt
    
    
    (1,871,482
    )
    
    
    (2,133,620
    )TOTAL LIABILITIES
    
    
    1,829,540
    
    
    
    1,172,808Commitments and contingenciesStockholders equity (deficit):Preferred stock, par value $.001, 10,000,000 shares authorized,
none issued and outstanding at June 30, 2008 and
December 31, 2007
    
    
    
    
    
    
    Common stock, par value $.001, 100,000,000 shares authorized,
31,589,501 issued and outstanding at June 30, 2008 and
December 31, 2007
    
    
    31,590
    
    
    
    31,590Additional paid-in capital
    
    
    15,833,081
    
    
    
    15,748,998Accumulated deficit
    
    
    (16,964,323
    )
    
    
    (15,431,065
    )Total stockholders equity (deficit)
    
    
    (1,099,652
    )
    
    
    349,523TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    729,888
    
    
    $
    1,522,331
   3




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UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    35,372
    
    
    $
    698,448
    
    
    $
    378,979
    
    
    $
    1,014,501ExpensesResearch & development
    
    
    218,929
    
    
    
    597,543
    
    
    
    471,015
    
    
    
    851,039Sales & marketing
    
    
    50,900
    
    
    
    39,055
    
    
    
    120,199
    
    
    
    102,460General & administrative
    
    
    335,647
    
    
    
    513,337
    
    
    
    762,365
    
    
    
    1,130,372Total expenses
    
    
    605,476
    
    
    
    1,149,935
    
    
    
    1,353,579
    
    
    
    2,083,871Operating loss
    
    
    (570,104
    )
    
    
    (451,487
    )
    
    
    (974,600
    )
    
    
    (1,069,370
    )Other income (expense)Interest expense
    
    
    (285,537
    )
    
    
    (123,258
    )
    
    
    (560,477
    )
    
    
    (241,086
    )Interest income
    
    
    187
    
    
    
    2,798
    
    
    
    1,819
    
    
    
    3,775Net income (loss)
    
    $
    (855,454
    )
    
    $
    (571,947
    )
    
    $
    (1,533,258
    )
    
    $
    (1,306,681
    )Loss per share, basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )Weighted average shares
outstanding, basic and diluted
    
    
    31,589,501
    
    
    
    29,989,500
    
    
    
    31,589,501
    
    
    
    29,314,500
   4




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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
 Six months ended June 30, 2008
 Common Stock
    
    
    Paid-in
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Capital
    
    
    DeficitBalance at December 31, 2007
    
    
    31,589,501
    
    
    $
    31,590
    
    
    $
    15,748,998
    
    
    $
    (15,431,065
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    77,483
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (677,804
    )Balance at March 31, 2008
    
    
    31,589,501
    
    
    
    31,590
    
    
    
    15,826,481
    
    
    
    (16,108,869
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    23,578
    
    
    
    Allocation to note
discount on prepayment
    
    
    
    
    
    
    
    
    
    
    (16,978
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (855,454
    )Balance at June 30, 2008
    
    
    31,589,501
    
    
    $
    31,590
    
    
    $
    15,833,081
    
    
    $
    (16,964,323
    )
   5




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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six months ended June 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,533,258
    )
    
    $
    (1,306,681
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    10,913
    
    
    
    11,874Stock based compensation expense
    
    
    101,061
    
    
    
    24,620Amortization of financing fees
    
    
    64,146
    
    
    
    Amortization of debt discount (including $193,145 to a
related party for the six months ended June 30, 2007)
    
    
    438,489
    
    
    
    193,145Paid in kind interest accrued
    
    
    62,357
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    62,279
    
    
    
    (69,490
    )Deposits
    
    
    3,270
    
    
    
    5,115Prepaid expenses
    
    
    (22,819
    )
    
    
    61,000Accounts payable
    
    
    48,588
    
    
    
    377,155Accrued expenses
    
    
    106,320
    
    
    
    124,291Deferred revenue
    
    
    
    
    
    
    (6,063
    )Customer deposits
    
    
    
    
    
    
    30,000Net cash used by operations
    
    
    (658,654
    )
    
    
    (555,035
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    
    
    
    
    (840
    )Net cash used in investing activities
    
    
    
    
    
    
    (840
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from common stock issued
    
    
    
    
    
    
    700,000Payments on debt
    
    
    (16,000
    )
    
    
    (120,000
    )Debt financing costs
    
    
    (54,227
    )
    
    
    Net cash provided by financing activities
    
    
    (70,227
    )
    
    
    580,000Net increase (decrease) in cash
    
    
    (728,881
    )
    
    
    24,125Cash at beginning of period
    
    
    739,869
    
    
    
    1,955Cash at end of period
    
    $
    10,988
    
    
    $
    26,080NON-CASH FINANCING ACTIVITIES:Accrued interest added into note principal
    
    $
    62,357
    
    
    $
    Debt discount relieved from prepayment of principal
    
    $
    12,727
    
    
    $
    
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THE X-CHANGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1 Background and Summary of Significant Accounting Policies
  Organization and History
  Nature of Business
  Basis of Presentation
   7




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Nature of Operations and Going Concern
      Loss per Share
   8




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Recent Accounting Pronouncements
 Fair Value Measurements
 Effective Date of FASB Statement No. 157 Accounting for the Impairment or
Disposal of Long-Lived Assets.
  The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 11
  9




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Non-Controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51
 Business Combinations
 Note 2 Stock Compensation
   Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term
    
    
    ValueOptions outstanding
at January 1, 2008
    
    
    4,475,000
    
    
    $
    0.21Options granted
    
    
    100,000
    
    
    
    0.20Options exercised
    
    
    Options forfeited
    
    
    662,500
    
    
    
    0.20Options outstanding
at June 30, 2008
    
    
    3,912,500
    
    
    
    0.21
    
    
    
    9
    
    
    $
    Options exerciseable
at June 30, 2008
    
    
    2,062,500
    
    
    
    0.20
    
    
    
    9
    
    
    $
    Options available
for grants as of
June 30, 2008
    
    
    2,087,500
  10




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Options Outstanding
    
    
    Options ExercisableWeighted Average
    
    
    Weighted
    
    
    Number
    
    
    Weighted Average
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Of
    
    
    Remaining
    
    
    AverageRange of
    
    of
    
    
    Contract Term
    
    
    Exercise
    
    
    Options
    
    
    Contract Term
    
    
    ExerciseExercise Price
    
    Options
    
    
    (in years)
    
    
    Price
    
    
    Exercisable
    
    
    (in years)
    
    
    Price$0.20 - $0.22
    
    
    3,912,500
    
    
    
    9
    
    
    $
    0.21
    
    
    
    2,062,500
    
    
    
    9
    
    
    $
    0.20
  Three months ended
    
    
    Six months endedJune 30, 2008
    
    
    June 30, 2008Research and development
    
    $
    
    
    
    $
    (5,469
    )Sales and marketing
    
    
    (13,128
    )
    
    
    12,472General and administrative
    
    
    36,706
    
    
    
    94,058$
    23,578
    
    
    $
    101,061
   Six months endedJune 30, 2008Weighted average assumptions usedVolatility
    
    
    155.12
    %Expected option term (years)
    
    
    6 yearsRisk-free interest rate
    
    
    2.50
    %Expected dividend yield
    
    
    
   11




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Note 3 Concentration of Risk
  Note 4 Subsequent Events
     12




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-Looking Statements
     13




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Risk Factors
  Recent Developments: Going Concern and Liquidity Problems
      14




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Results of Operations
       15




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Liquidity and Capital Resources
  Cash Flows
     2007 PPM Financing
   16




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Convertible Debt Financing  Melissa Note
   Convertible Debt Financing  La Jolla Debentures
 1 4
    17




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Convertible Debt Financing  SIJ Financing
        18




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Going Concern
  Off-Balance Sheet Arrangements
  
 Item 4T Controls and Procedures
   Internal
ControlIntegrated Framework
  19




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20




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Part II    Other Information
 
 Item 1A Risk Factors
  
 Item 6 Exhibits
  31.1
    
    
    Certification of Chief
Executive Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
    
    Included in this filing31.2
    
    
    Certification of Chief
Financial Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
    
    Included in this filing32.1
    
    
    Certification of Chief
Executive Officer pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
    
    Included in this filing32.2
    
    
    Certification of Chief
Financial Officer pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
    
    Included in this filing
 
 SIGNATURES
  THE X-CHANGE CORPORATION(Registrant)DATE: August 19, 2008By:
    
    /s/ Michael L. SheriffMichael L. SheriffChief Executive Officer and ChairmanDATE: August 19, 2008By:
    
    /s/ George DeCourcyGeorge DeCourcyChief Financial Officer
  21




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EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
  22