##### Table of Contents



United States
Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-QSB
 þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2007
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 Commissionfilenumber:002-41703
 THE X-CHANGE CORPORATION
 (Exact name of small business issuer as specified in its charter)
 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  (Issuers telephone number)
 þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS
  o þ




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##### 



THE X-CHANGE CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1 Consolidated Financial StatementsUnaudited Consolidated Balance Sheets at September 30, 2007 and December 31, 2006
    
    
    3Unaudited Consolidated Statements of Operations for the three months and nine months ended
September 30, 2007 and 2006
    
    
    4Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2007
and 2006
    
    
    5Unaudited Consolidated Statement of Stockholders Deficit for the nine months ended September
30, 2007
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    15Item 3 Controls and Procedures
    
    
    25PART II OTHER INFORMATION
    
    
    26Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 6 Exhibits
    
    
    27SIGNATURES
    
    
    28Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED BALANCE SHEETS
 September 30, 2007
    
    
    December 31, 2006(Restated)ASSETSCurrent assets:Cash
    
    $
    349,946
    
    
    $
    1,955Accounts receivable, net of allowance of zero for both
periods
    
    
    126,115
    
    
    
    119,053Prepaid expenses
    
    
    1,339
    
    
    
    61,000Deposits
    
    
    10,770
    
    
    
    15,886Total current assets
    
    
    488,170
    
    
    
    197,894Property, plant and equipment, net
    
    
    56,474
    
    
    
    69,009Deferred debt issuance costs
    
    
    32,000
    
    
    
    TOTAL ASSETS
    
    $
    576,644
    
    
    $
    266,903LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Related party loans payable
    
    $
    
    
    
    $
    120,000Accounts payable
    
    
    661,996
    
    
    
    297,557Accrued expenses
    
    
    184,466
    
    
    
    139,933Deferred revenue
    
    
    50,838
    
    
    
    27,000Customer deposits
    
    
    30,000
    
    
    
    Related party note payable, net of unamortized discount of $339,613
    
    
    458,181
    
    
    
    Total current liabilities
    
    
    1,385,481
    
    
    
    584,490Long-term liabilities:Long-term note payable, net of unamortized discount of
$393,056 at September 30, 2007
    
    
    6,944
    
    
    
    Long-term related party note payable, net of unamortized
discount of $629,331 at December 31, 2006
    
    
    
    
    
    
    168,463TOTAL LIABILITIES
    
    
    1,392,425
    
    
    
    752,953Commitments and contingenciesStockholders deficit:Preferred stock, par value $.001, authorized 10,000,000
shares none issued at September 30, 2007 and December 31,
2006
    
    
    
    
    
    
    Common stock, par value $.001, authorized 100,000,000
shares, issued 31,589,501 and 27,764,500 at September 30, 2007 and
December 31, 2006 respectively
    
    
    31,590
    
    
    
    27,765Additional paid-in capital
    
    
    3,814,477
    
    
    
    1,992,867Accumulated deficit
    
    
    (4,661,848
    )
    
    
    (2,506,682
    )Total stockholders deficit
    
    
    (815,781
    )
    
    
    (486,050
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    576,644
    
    
    $
    266,903
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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Restated)
    
    
    
    
    
    
    (Restated)Revenues
    
    $
    345,514
    
    
    $
    240,774
    
    
    $
    1,360,422
    
    
    $
    890,672ExpensesResearch & development
    
    
    303,702
    
    
    
    156,947
    
    
    
    1,155,148
    
    
    
    566,193Sales & marketing
    
    
    46,706
    
    
    
    7,885
    
    
    
    149,167
    
    
    
    60,418General & administrative
    
    
    719,074
    
    
    
    457,751
    
    
    
    1,849,398
    
    
    
    1,053,183Operating expenses
    
    
    1,069,482
    
    
    
    622,583
    
    
    
    3,153,713
    
    
    
    1,679,794Operating loss
    
    
    (723,968
    )
    
    
    (381,809
    )
    
    
    (1,793,291
    )
    
    
    (789,122
    )Other income (expense)Interest expense including $116,518 and $357,495 to
related party for the three and nine months ended Sept.
30, 2007
    
    
    (124,764
    )
    
    
    (53,132
    )
    
    
    (365,897
    )
    
    
    (63,445
    )Interest income
    
    
    247
    
    
    
    2
    
    
    
    4,022
    
    
    
    32Net loss from continuing operations
    
    
    (848,485
    )
    
    
    (434,939
    )
    
    
    (2,155,166
    )
    
    
    (852,536
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,221
    )Net loss
    
    $
    (848,485
    )
    
    $
    (434,939
    )
    
    $
    (2,155,166
    )
    
    $
    (862,757
    )Loss per share, basic & diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.03
    )Weighted average shares outstanding, basic and diluted
    
    
    30,949,917
    
    
    
    27,449,500
    
    
    
    29,880,333
    
    
    
    27,265,000
   4




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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30,2007
    
    
    2006(Restated)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,155,166
    )
    
    $
    (862,757
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    17,272
    
    
    $
    14,745Amortization of deferred cost
    
    
    
    
    
    
    290,000Stock issued for services
    
    
    
    
    
    
    50,950Stock based compensation expense
    
    
    307,935
    
    
    
    Amortization of debt discount (related party amounts of
$289,718 and $34,151 respectively)
    
    
    296,662
    
    
    
    34,151Net cash used in discontinued operations
    
    
    
    
    
    
    (28,460
    )Change in operating assets and liabilities:Accounts receivable
    
    
    (7,061
    )
    
    
    (58,252
    )Deposits
    
    
    5,115
    
    
    
    (5,615
    )Prepaid expenses
    
    
    59,661
    
    
    
    Accounts payable
    
    
    364,439
    
    
    
    141,616Accrued expenses
    
    
    44,533
    
    
    
    (33,101
    )Deferred revenue
    
    
    23,838
    
    
    
    Customer deposits
    
    
    30,000
    
    
    
    Net cash used by operations
    
    
    (1,012,772
    )
    
    
    (456,723
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    (4,737
    )
    
    
    (54,915
    )Net cash used in investing activities
    
    
    (4,737
    )
    
    
    (54,915
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from common stock issued
    
    
    1,117,500
    
    
    
    Payments on related party note
    
    
    (120,000
    )
    
    
    Proceeds from related party note
    
    
    
    
    
    
    517,903Proceeds from other notes payable, net of fees
    
    
    368,000
    
    
    
    Net cash provided by financing activities
    
    
    1,365,500
    
    
    
    517,903Net (decrease) increase in cash
    
    
    347,991
    
    
    
    6,265Cash at beginning of period
    
    
    1,955
    
    
    
    5,847Cash at end of period
    
    $
    349,946
    
    
    $
    12,112
   5




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THE X-CHANGE CORPORATION
 
 UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
 Common Stock
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Capital
    
    
    DeficitBalance at December 31, 2006 (Restated)
    
    
    27,764,500
    
    
    $
    27,765
    
    
    $
    1,992,867
    
    
    $
    (2,506,682
    )Shares issued for cash
    
    
    1,100,000
    
    
    
    1,100
    
    
    
    548,900
    
    
    
    Shares issued for services
    
    
    100,000
    
    
    
    100
    
    
    
    (100
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (734,734
    )Balance at March 31, 2007
    
    
    28,964,500
    
    
    
    28,965
    
    
    
    2,541,667
    
    
    
    (3,241,416
    )Shares issued for cash
    
    
    1,233,333
    
    
    
    1,233
    
    
    
    148,767
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (571,947
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    24,620
    
    
    
    Balance at June 30, 2007
    
    
    30,197,833
    
    
    
    30,198
    
    
    
    2,715,054
    
    
    
    (3,813,363
    )Shares issued for cash
    
    
    1,391,668
    
    
    
    1,392
    
    
    
    416,108
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (848,485
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    283,315
    
    
    
    Debt discount on note payable
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    Balance at September 30, 2007
    
    
    31,589,501
    
    
    $
    31,590
    
    
    $
    3,814,477
    
    
    $
    (4,661,848
    )
   6




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THE X-CHANGE CORPORATION
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION
     SharesOutstandingandLossperShare
   7




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ConvertibleDebtFinancing
  GoingConcern
     8




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NOTE 2  DEFERRED COSTS  2006
  NOTE 3  DEBT FINANCING ARRANGEMENTS
 Melissa Note
    Convertible Debt Financing  LCII Debentures
 1 4
  9




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Other Related party Notes
    10




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NOTE 4  PRIVATE PLACEMENT STOCK TRANSACTIONS
  NOTE 5  NEW PRONOUNCEMENTS
  NOTE 6  RESTATEMENT  2006
  
    
    Revenue Recognition  The Company recognized revenue at the time of invoicing for
development contract scheduled payments, which should be recognized over the life of the
project.
    
    Deferred Costs Amortization  In connection with the issuance of 500,000 shares to
Hexion, $290,000 was previously recorded as a long-term asset. The Company subsequently
determined that the issuance of the shares should be accounted for as a deferred cost.
The Company has amortized the fair value of the shares over the life of the related
contract period from January to July 2006.
    
    Debt Discount  The Company established that its related party note payable had an
embedded beneficial conversion feature that had not been recorded in accordance with
Generally Accepted Accounting Principles. This beneficial conversion feature was
recorded and amortized over the term of the note.
  11




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Statement of Operations Data
 Three Months Ending
    
    
    Three Months Ending
    
    
    Nine Months Ending
    
    
    Nine Months EndingSeptember 30, 2006
    
    
    September 30, 2006
    
    
    September 30, 2006
    
    
    September 30, 2006Restated
    
    
    Previously Filed
    
    
    Restated
    
    
    Previously FiledRevenue
    
    $
    240,774
    
    
    $
    187,322
    
    
    $
    890,672
    
    
    $
    862,578Expenses
    
    
    622,583
    
    
    
    613,612
    
    
    
    1,679,794
    
    
    
    1,407,578Net loss
    
    $
    (381,809
    )
    
    $
    (426,290
    )
    
    $
    (789,122
    )
    
    $
    (545,000
    )
 Balance Sheet Data
 As of December 31,
    
    
    As of December 31,2006
    
    
    2006Restated
    
    
    Previously FiledAssets
    
    $
    266,903
    
    
    $
    483,347Liabilities
    
    
    752,953
    
    
    
    1,359,030Stockholders
Deficit
    
    $
    $(486,050
    )
    
    $
    $(875,683
    )
 NOTE 7  STOCK-BASED COMPENSATION
   12




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Outstanding OptionsWeighted
    
    
    Weighted AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contract Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in years)
    
    
    ValueOptions outstanding at Jan 1, 2007
    
    
    Options granted
    
    
    4,800,000
    
    
    
    0.21Options exercised
    
    
    Options forfeited
    
    
    325,000
    
    
    
    0.20Options outstanding at Sept 30, 2007
    
    
    4,475,000
    
    
    
    0.21
    
    
    
    9.72
    
    
    $
    134,250Options exerciseable at Sept 30, 2007
    
    
    156,250
    
    
    
    0.20
    
    
    
    9.72
    
    
    $
    6,250Options available for grants as of
Sept 30, 2007
    
    
    1,525,000
  Options Outstanding
    
    
    Options ExercisableWeighted Average
    
    Weighted
    
    Number
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Of
    
    Averageof
    
    Contract Term
    
    Exercise
    
    Options
    
    ExerciseRange of Exercise Price
    
    Options
    
    (in years)
    
    Price
    
    Exercisable
    
    Price$0.20 - $0.21
    
    
    4,475,000
    
    
    
    9.72
    
    
    $
    0.21
    
    
    
    156,250
    
    
    $
    0.20
 Accounting Treatment  Application of SFAS 123R
 Share-Based Payment
  13




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Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    September 30, 2007Research and development
    
    $
    8,562
    
    
    $
    9,776Sales and marketing
    
    
    34,884
    
    
    
    37,191General and administrative
    
    
    239,869
    
    
    
    260,968$
    283,315
    
    
    $
    307,935
  Sept 30,2007Volatility
    
    
    157.77
    %Expected option term
    
    6 yearsRisk-free interest rate
    
    
    4.60
    %Expected dividend yield
    
    
    
    Weighted Averagegrant-dateNon-vested Shares
    
    Shares
    
    
    fair valueNon-vested at January 1, 2007
    
    
    0
    
    
    $
    Granted
    
    
    4,800,000
    
    
    
    0.18Vested
    
    
    (156,250
    )
    
    
    0.18Forfeited
    
    
    (325,000
    )
    
    
    0.18Non-vested at September 30, 2007
    
    
    4,318,750
    
    
    
    0.18
  14




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-Looking Statements
      15




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Risk Factors
  
    
    We need capital to avoid insolvency, sustain our operations and grow our business.
    
    Our near-term financial performance depends on the success of our strategic relationships
with a small group of customers and customer prospects.
    
    We expect that almost all the recurring revenue we project for the remainder of 2007 and
2008 will relate to products under development that we have not yet sold in volume to
customers. As a result, we have limited visibility regarding the length of our sales cycle,
which makes projecting revenue difficult and could otherwise adversely affect our business.
    
    Our success depends on our ability to generate recurring revenue streams, which depends in
large part on our customers ability to scale their sales and marketing efforts.
    
    The volatility of our stock price could subject us to an increased risk of securities
litigation.
    
    The market in which we operate is highly competitive, which could adversely affect our
ability to meet our financial objectives.
    
    Our current weak financial position may deter potential customers and strategic
relationships; may compromise our ability to attract additional investment funds and may deter
our vendors from continuing to provide commercial terms of credit.
    
    We have a history of losses, expect to incur additional losses in the future and may not be
able to achieve or sustain profitability.
    
    We will likely need to enter into additional strategic relationships to meet our customer
needs.
    
    To meet our financial objectives, we must grow rapidly. If we are unable to manage this
growth, we could incur costs that could adversely affect our operating results and financial
condition.
    
    If we overestimate customer demand, we may increase our cost structure unnecessarily.
    
    Although we are not targeting the supply chain RFID market, public perceptions of the
viability of RFID applications in the supply chain could adversely affect acceptance of RFID
in the vertical markets we are targeting.
  16




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
    
    Widespread adoption of our RFID solutions depends on many factors including declines in
selling prices for RFID tags such as Hitachis μ-Chip tag.
    
    Our products are new and evolving and our business model is unproven, which makes it
difficult to evaluate our current business and future prospects.
    
    Some of our products are part of larger solutions that are offered to end customers, and we
must work with third parties to ensure that our products inter-operate correctly.
    
    If our products and systems do not meet our customers needs or otherwise malfunction, our
business will be adversely affected.
    
    Fluctuations in quarterly and annual operating results may adversely affect our business,
and these fluctuations make evaluating our business difficult.
    
    If we are unsuccessful in developing and introducing new products and enhancements, we may
be unable to meet our financial goals.
    
    Our GenuDot System is a closed loop application for product authentication, meaning it
intentionally does not comply with the EPCglobal standards and is not intended to work with
third party readers. This could adversely affect market acceptance of the GenuDot System.
    
    We rely on patents, trademarks, licenses, copyrights and trade secrets to protect our
proprietary rights, which may not be sufficient to protect our intellectual property.
    
    We do not own several key technologies that we are developing for third parties such as
Hexion Specialty Chemicals, Inc., which may make us a less attractive acquisition candidate.
    
    We may need to license RFID-related patents from third parties, and we may not be able to
obtain these licenses on acceptable terms, or at all.
    
    We may become subject to intellectual property infringement claims and other litigation
that might be costly to resolve and, if resolved adversely, may harm our business.
    
    Complying with applicable governmental regulations could adversely affect our ability to
sell our products and impair operating results.
    
    We expect to depend on a limited number of suppliers and assemblers of our products.
    
    We expect to rely on third party manufacturers.
    
    If unauthorized access is obtained to our customers data as a result of our products,
including through breach of security measures or unauthorized encoding of RFID tags, we could
be subject to related legal claims, and customers may curtail or stop their use of our
products, which would harm the business, operating results and financial condition.
    
    Privacy concerns relating to elements of RFID technology could damage our reputation and
deter current and potential customers from using our products and systems.
    
    We depend on key personnel, including our chief executive officer, chief operations
officer, and chief financial officer to manage our business effectively. If any of these
executives departs, or if we are unable to hire, retain or motivate qualified personnel, we
will have trouble meeting our financial goals.
    
    Complying with Section 404 of the Sarbanes-Oxley Act, which we must do in connection with
our financial statements for the year ending December 31, 2007, will entail substantial cost,
expense, effort, and management distraction.
  17




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
    
    If we fail to maintain proper and effective internal controls, our ability to produce
accurate financial statements could be impaired.
    
    Until recently, no members of our board of directors were independent within the meaning of
federal securities laws.
    
    The costs of being a public company can be significant given the size and resources of the
Company.
    
    Our stock is not listed on a major stock market.
    
    If securities or industry analysts do not publish research or reports about us, we may not
be able to generate significant trading volume in our stock.
    
    Future sales of shares by existing stockholders, directors and employees or perceptions of
these sales, could cause the stock price to decline.
    
    Dilution aspects related to our current and future financing activities is likely to be
substantial.
    
    Our continuing operations depend on obtaining commercial credit terms from our vendors.
 Recent Developments: Going Concern and Liquidity Problems
   Overview
   18




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rd
 Stock Incentive Plan
   19




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Results of Operations
 Three months ended September 30, 2007 compared to three months ended September 30, 2006
       20




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Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
      Liquidity and Capital Resources
     21




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2007 PPM Financing
    Convertible Debt Financing  Melissa Note
    22




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Convertible Debt Financing  LCII Debentures
 1 4
   Other Financing
   23




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Going Concern
  Off-Balance Sheet Arrangements
   24




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Item 3 Controls and Procedures
  Evaluation of Disclosure Controls and Procedures
     Changes in Internal Controls
   25




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PART II  OTHER INFORMATION
 Item 1 Legal Proceedings
  
 Item 2 Unregistered Sales of Equity Securities
 2007 PPM
   Convertible Debentures
 1 4
  26




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Item 3 Defaults Upon Senior Securities
  Item 4 Submission of Matters to a Vote of Security Holders
  Item 5 Other Information
  
 Item 6 Exhibits
  Exhibits
 10.1
    
    August 30, 2007 Entry into
Material Definitive Contract
with La Jolla Cove Investors,
Inc.
    
    Incorporated by reference to
Form 8-K September 7, 2007 File
No.: 002-4170331.1
    
    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
  27




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SIGNATURES
  THE X-CHANGE CORPORATION
 November 13, 2007
 By:
    /s/ Michael  L, SheriffMichael L. SheriffPresident, Chief Executive Officer, and Chairman (Principal Executive Officer) November 13, 2007
 By:
    /s/ George DeCourcyGeorge DeCourcyChief Financial Officer (Principal Financial Officer)  28




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##### Table of Contents



EXHIBIT
INDEX
 10.1
    
    August 30, 2007 Entry into
Material Definitive Contract
with La Jolla Cove Investors,
Inc.
    
    Incorporated by reference to
Form 8-K September 7, 2007 File
No.: 002-4170331.1
    
    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
  29