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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 March 31, 2008
 OR
 o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number: 002-41703
 THE X-CHANGE CORPORATION
  Nevada
    
    90-0156146(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 710 Century Parkway, Allen, TX 75013
 (972) 747-0051  (Registrants telephone number)
 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 March 31, 2008 and December 31, 2007
    
    
    3Unaudited Consolidated Statements of Operations for the three months ended March 31, 2008
and 2007
    
    
    4Unaudited Consolidated Statement of Stockholders Deficit for the three months ended
March 31, 2008
    
    
    5Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2008
and 2007
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 4T Controls and Procedures
    
    
    20PART II  OTHER INFORMATIONItem 1A Risk Factors
    
    
    24Item 6 Exhibits
    
    
    24SIGNATURES
    
    
    24Exhibit 31.1 - Certification pursuant to Section 302Exhibit 31.2 - Certification pursuant to Section 302Exhibit 32.1 - Certification pursuant to Section 906Exhibit 32.2 - Certification pursuant to Section 906
   2




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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED BALANCE SHEETS
 March 31, 2008
    
    
    December 31, 2007ASSETSCurrent assets:Cash
    
    $
    147,653
    
    
    $
    739,869Accounts receivable, net of allowance for doubtful accounts of
$35,663 at March 31, 2008 and December 31, 2007
    
    
    211,549
    
    
    
    79,729Prepaid expenses
    
    
    34,930
    
    
    
    1,339Deposits
    
    
    35,770
    
    
    
    40,770Total current assets
    
    
    429,902
    
    
    
    861,707Property and equipment, net
    
    
    46,503
    
    
    
    51,976Debt issuance costs, net
    
    
    576,575
    
    
    
    608,648TOTAL ASSETS
    
    $
    1,052,980
    
    
    $
    1,522,331LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Convertible note payable
    
    $
    797,794
    
    
    $
    797,794less unamortized discount on convertible debt
    
    
    (146,285
    )
    
    
    (243,039
    )Accounts payable
    
    
    309,570
    
    
    
    461,660Accrued expenses
    
    
    75,597
    
    
    
    38,413Customer deposits
    
    
    30,000
    
    
    
    30,000Total current liabilities
    
    
    1,066,676
    
    
    
    1,084,828Long-term liabilities:Convertible long-term notes payable
    
    
    2,246,016
    
    
    
    2,221,600less unamortized discount on convertible debt
    
    
    (2,008,914
    )
    
    
    (2,133,620
    )TOTAL LIABILITIES
    
    
    1,303,778
    
    
    
    1,172,808Commitments and contingenciesStockholders equity (deficit):Preferred stock, par value $.001, authorized 10,000,000 shares,
none issued at March 31, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, par value $.001, authorized 100,000,000 shares, issued
31,589,501 at March 31, 2008 and December 31, 2007
    
    
    31,590
    
    
    
    31,590Additional paid-in capital
    
    
    15,826,481
    
    
    
    15,748,998Accumulated deficit
    
    
    (16,108,869
    )
    
    
    (15,431,065
    )Total stockholders equity (deficit)
    
    
    (250,798
    )
    
    
    349,523TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    1,052,980
    
    
    $
    1,522,331
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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended March 31,2008
    
    
    2007Revenues
    
    $
    343,607
    
    
    $
    316,053ExpensesResearch & development
    
    
    252,086
    
    
    
    253,497Sales & marketing
    
    
    69,298
    
    
    
    63,405General & administrative
    
    
    426,718
    
    
    
    617,035Total operating expenses
    
    
    748,102
    
    
    
    933,937Operating loss
    
    
    (404,495
    )
    
    
    (617,884
    )Other income (expense)Interest expense including $117,811 to
a related party
for the three months ended March 31, 2007
    
    
    (274,941
    )
    
    
    (117,828
    )Interest income
    
    
    1,632
    
    
    
    978Net loss
    
    $
    (677,804
    )
    
    $
    (734,734
    )Loss per share, basic & diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )Weighted average shares outstanding, basic and
diluted
    
    
    31,589,501
    
    
    
    28,427,000
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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
 Three months ended March 31, 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
    )
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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three
Months Ended March 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (677,804
    )
    
    $
    (734,734
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    5,473
    
    
    
    5,990Stock based compensation expense
    
    
    77,483
    
    
    
    Amortization of financing fees
    
    
    32,073
    
    
    
    Amortization of debt discount (including $96,572 to a
related party for the three months ended March 31, 2007)
    
    
    221,460
    
    
    
    96,572Change in operating assets and liabilities:Accounts receivable
    
    
    (131,820
    )
    
    
    1,695Deposits
    
    
    5,000
    
    
    
    5,115Prepaid expenses
    
    
    (33,591
    )
    
    
    Accounts payable
    
    
    (152,090
    )
    
    
    120,692Accrued expenses
    
    
    37,184
    
    
    
    79,138Deferred revenue
    
    
    
    
    
    
    (27,000
    )Customer deposits
    
    
    
    
    
    
    30,000Net cash used by operations
    
    
    (616,632
    )
    
    
    (422,532
    )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
    
    
    
    
    
    
    550,000Payments on debt
    
    
    (1,000
    )
    
    
    (120,000
    )Proceeds from notes payable
    
    
    25,416
    
    
    
    Net cash provided by financing activities
    
    
    24,416
    
    
    
    430,000Net increase (decrease) in cash
    
    
    (592,216
    )
    
    
    6,628Cash at beginning of period
    
    
    739,869
    
    
    
    1,955Cash at end of period
    
    $
    147,653
    
    
    $
    8,583
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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
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Nature of Operations and Going Concern
       8




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Loss per Share
  Recent Accounting Pronouncements
 Fair Value Measurements
 Effective Date of FASB Statement No. 157 Accounting for the Impairment or Disposal of
Long-Lived Assets.
    9




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Note 2 Stock Compensation
   Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term
    
    
    ValueOptions outstanding at January 1, 2008
    
    
    4,475,000Options granted
    
    
    100,000
    
    
    $
    0.20Options exercised
    
    
    Options forfeited
    
    
    112,500
    
    
    
    0.20Options outstanding at March 31, 2008
    
    
    4,462,500
    
    
    
    0.21
    
    
    
    9.2
    
    
    $
    Options exerciseable at March 31, 2008
    
    
    2,350,000
    
    
    
    0.20
    
    
    
    9.2
    
    
    $
    Options available for grants as of March 31, 2008
    
    
    1,525,000
  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
    
    
    4,462,500
    
    
    
    9.2
    
    
    $
    0.21
    
    
    
    2,350,000
    
    
    
    9.2
    
    
    $
    0.20
  Quarter endedMarch 31, 2008Weighted average grant date fair value
    
    $
    0.19Total intrinsic value of options exericised during the period
    
    $
    Total fair value of options vested during the period
    
    $
    242,948
  Weighted Averagegrant-dateNon-vested Shares
    
    Shares
    
    
    fair valueNon-vested at January 1, 2008
    
    
    3,262,500
    
    
    $
    0.18Granted
    
    
    100,000
    
    
    
    0.19Vested
    
    
    (1,137,500
    )
    
    
    0.18Forfeited
    
    
    (112,500
    )
    
    
    0.18Non-vested at March 31, 2008
    
    
    2,112,500
    
    
    
    0.18
  Quarter endedMarch 31, 2008Research and development
    
    $
    (5,469
    )Sales and marketing
    
    
    25,600General and administrative
    
    
    57,352$
    77,483
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Quarter endedMarch 31, 2008Weighted average assumptions usedVolatility
    
    
    155.12
    %Expected option term (years)
    
    6 yearsRisk-free interest rate
    
    
    2.50
    %Expected dividend yield
    
    
    
   Note 3 Concentration of Risk
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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
 Three months ended March 31, 2008 compared to three months ended March 31, 2007
      Liquidity and Capital Resources
 Cash Flows
    15




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2007 PPM Financing
  Convertible Debt Financing  Melissa Note
    16




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Convertible Debt Financing  LCII Debentures
 1 4
    Convertible Debt Financing  SIJ Financing
   17




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Going Concern
  Off-Balance Sheet Arrangements
   19




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Item 4T Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
  (1)
    
    pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of our assets;
 (2)
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. GAAP, and that our receipts and
expenditures are being made only in accordance with the authorization of our management and
directors; and
 (3)
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
  20




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Internal ControlIntegrated Framework
 Identified Material Weaknesses
  1.
    
    We did not have effective comprehensive entity-level internal controls specific to
the structure of our board of directors;
 2.
    
    We did not have formal policies governing certain accounting transactions and
financial reporting processes;
 3.
    
    We did not obtain attestations by all employees regarding their understanding of and
compliance with policies related to their employment;
 4.
    
    We had not adopted a formal Code of Ethics and accordingly did not obtain
attestations by all members of our board of directors, our executive officers and our
senior financial officers regarding their compliance with a Code of Ethics and a Code of
Ethics did not formally apply to our other employees. However we do maintain an employee
handbook which is executed by all employees and is intended to fulfill this purpose.
 5.
    
    We did not perform adequate oversight of certain accounting functions and maintained
inadequate documentation of management review and approval of accounting transactions and
financial reporting processes.
 6.
    
    Due to the limited size of the Companys staff, there is inherently a lack of
segregation of duties related to the authorization, recording, processing, and reporting
of transactions.
  21




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7.
    
    We had not fully implemented certain control activities and capabilities included in
the design of our financial system primarily due to lack of personnel.
 8.
    
    We had not identified certain accounting issues which resulted in the need to restate
the financial statements for 2006 and 2005 and do not have assurance that additional
complex accounting issues or reporting requirements will not result in future issues.
  Managements Remediation Initiatives
   1.
    
    Identify and retain at least two new directors for our board of directors including a
member who is appropriately credentialed as a financial expert with a goal of having
sufficient independent board of directors oversight;
 2.
    
    Enhance entity level controls by instituting more formal documentation of management
and board meetings.
 3.
    
    Establish comprehensive formal general accounting policies and procedures and require
employees to sign off such policies and procedures as documentation of their understanding
of and compliance with Company policies;
  22




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4.
    
    Develop and insure all employees are subject to our Code of Ethics and require all
employees and directors to sign our Code of Ethics on an annual basis and retain the
related documentation;
 5.
    
    Supplement appropriate management oversight and approval activities in the areas of
vendor bill payments, employee expense reimbursements, customer invoicing, and period-end
closing processes.
  Conclusion
  Changes in Internal Control over Financial Reporting
   23




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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: May 19, 2008By:
    
    /s/ Michael L. Sheriff

Michael L. SheriffChief Executive Officer and ChairmanDATE: May 19, 2008By:
    
    /s/ George DeCourcy

George DeCourcyChief Financial Officer
  24