Omnicanna Health Solutions 10-Q 2008 Q1 Quarterly report

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

(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
(Address of principal executive offices)

(972) 747-0051

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yesþ Noo

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 filero Accelerated filero Non-accelerated filero Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

As of April 30, 2008 there were 31,589,501 shares of the registrant’s common stock outstanding.

THE X-CHANGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Unaudited Consolidated Balance Sheets at March 31, 2008 and December 31, 2007	3
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007	4
Unaudited Consolidated Statement of Stockholders’ Deficit for the three months ended March 31, 2008	5
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007	6
Notes to Unaudited Consolidated Financial Statements	7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 4T Controls and Procedures	20
PART II — OTHER INFORMATION
Item 1A Risk Factors	24
Item 6 Exhibits	24
SIGNATURES	24
Exhibit 31.1 - Certification pursuant to Section 302
Exhibit 31.2 - Certification pursuant to Section 302
Exhibit 32.1 - Certification pursuant to Section 906
Exhibit 32.2 - Certification pursuant to Section 906

2

THE X-CHANGE CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

	March 31, 2008			December 31, 2007
ASSETS
Current assets:
Cash	$	147,653		$	739,869
Accounts receivable, net of allowance for doubtful accounts of $35,663 at March 31, 2008 and December 31, 2007		211,549			79,729
Prepaid expenses		34,930			1,339
Deposits		35,770			40,770
Total current assets		429,902			861,707
Property and equipment, net		46,503			51,976
Debt issuance costs, net		576,575			608,648
TOTAL ASSETS	$	1,052,980		$	1,522,331
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Convertible note payable	$	797,794		$	797,794
less unamortized discount on convertible debt		(146,285	)		(243,039	)
Accounts payable		309,570			461,660
Accrued expenses		75,597			38,413
Customer deposits		30,000			30,000
Total current liabilities		1,066,676			1,084,828
Long-term liabilities:
Convertible long-term notes payable		2,246,016			2,221,600
less unamortized discount on convertible debt		(2,008,914	)		(2,133,620	)
TOTAL LIABILITIES		1,303,778			1,172,808
Commitments and contingencies
Stockholders’ 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			31,590
Additional paid-in capital		15,826,481			15,748,998
Accumulated deficit		(16,108,869	)		(15,431,065	)
Total stockholders’ equity (deficit)		(250,798	)		349,523
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	1,052,980		$	1,522,331

See accompanying notes to the consolidated financial statements.

3

THE X-CHANGE CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,
	2008			2007
Revenues	$	343,607		$	316,053
Expenses
Research & development		252,086			253,497
Sales & marketing		69,298			63,405
General & administrative		426,718			617,035
Total operating expenses		748,102			933,937
Operating 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			978
Net 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

See accompanying notes to the consolidated financial statements.

4

THE X-CHANGE CORPORATION

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

Three months ended March 31, 2008

	Common Stock				Paid-in		Accumulated
	Shares		Par Value		Capital		Deficit
Balance 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	)

See accompanying notes to the consolidated financial statements.

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THE X-CHANGE CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2008			2007
CASH 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			5,990
Stock 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			96,572
Change in operating assets and liabilities:
Accounts receivable		(131,820	)		1,695
Deposits		5,000			5,115
Prepaid expenses		(33,591	)		—
Accounts payable		(152,090	)		120,692
Accrued expenses		37,184			79,138
Deferred revenue		—			(27,000	)
Customer deposits		—			30,000
Net 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		—			550,000
Payments on debt		(1,000	)		(120,000	)
Proceeds from notes payable		25,416			—
Net cash provided by financing activities		24,416			430,000
Net increase (decrease) in cash		(592,216	)		6,628
Cash at beginning of period		739,869			1,955
Cash at end of period	$	147,653		$	8,583

See accompanying notes to the consolidated financial statements.

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THE X-CHANGE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Background and Summary of Significant Accounting Policies

This summary of accounting policies for the X-Change Corporation and subsidiaries (collectively the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies conform to generally accepted accounting principles for the United States and have been consistently applied in the preparation of the financial statements.

Organization and History

The X-Change Corporation was incorporated under the laws of the State of Delaware on February 5, 1969, and changed its domicile to the State of Nevada on October 4, 2000. We were originally organized to seek merger and/or acquisition candidates. In this respect, we have engaged in numerous transactions since our inception. As of June 30, 2006, we have disposed of all of the assets and liabilities of all of our subsidiaries with the exception of AirGATE Technologies, Inc. (“AirGATE”).

Nature of Business

The Company’s business model is focused on furthering the success of its wholly owned subsidiary AirGATE. AirGATE is an end-to-end, solution-based company specializing in wireless technologies including radio frequency identification (“RFID”) for the business-to-business customer. The Company focuses on products and services in vertical markets, especially the oil and gas industry. The Company intends to deliver wireless solutions in selected vertical markets built around a strategy focused on high-value, high-return, recurring revenue opportunities.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements include the accounts of The X-Change Corporation and its wholly-owned subsidiary AirGATE (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in these consolidated financial statements. The Company’s consolidated balance sheet at March 31, 2008 and consolidated statements of operations and consolidated statements of cash flows for the three months ended March 31, 2008 and 2007 are unaudited. In the opinion of management, these financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the periods presented in this Quarterly Report on Form 10-Q are not necessarily indicative of the results that may be expected for the entire year. Additional information is contained in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 which was filed with the SEC on April 14, 2008 and should be read in conjunction with this Quarterly Report on Form 10-Q.

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Nature of Operations and Going Concern

The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assume that the Company will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Several conditions and events cast doubt about the Company’s ability to continue as a going concern. The Company has incurred substantial net losses in the periods being reported on. The Company is dependent upon the expected cash flow of several ongoing development contracts, and requires additional financing in order to fund its business activities on an ongoing basis. During 2007, the Company raised approximately $3 million in three separate transactions including a private placement and two financings structured as convertible debt.

The Company’s future capital requirements will depend on numerous factors including, but not limited to, its ability to perform on current and future development contracts and the commercialization thereof.

These financial statements do not reflect adjustments that might be necessary if the Company were unable to continue as a going concern. While management believes that the actions already taken or planned will mitigate the adverse conditions and events which raise doubt about the validity of the going concern assumption used in preparing these financial statements, there can be no assurance that these actions will be successful.

If the Company were unable to continue as a going concern, then substantial adjustments could be necessary to the reported carrying values of assets and the reported amounts of its liabilities.

8

Loss per Share

Basic loss per share is calculated by dividing the net loss by the weighted average common shares outstanding for the period. The effects of common stock equivalents are anti-dilutive and accordingly are excluded from the diluted loss per share computation. Therefore, diluted loss is equal to basic loss per share. If all potentially dilutive instruments (warrants, options and convertible notes) were converted to common shares, total outstanding shares are estimated to be approximately 89.4 million shares at March 31, 2008, subject to conversion terms on certain convertible notes.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of this information. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.

In February, 2008, FASB issued a staff position,Effective Date of FASB Statement No. 157(FSP 157-2) which defers the effective date of SFAS 157 to fiscal years beginning after December 15, 2008 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP 157-2 are non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets such as property plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.

The partial adoption of SFAS 157 on January 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis is not expected to have a material impact on the Company’s consolidated financial statements. The Company is in the process of analyzing the potential impact of SFAS 157 relating to our planned January 1, 2009 adoption of the remainder of the standard.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 11”, (SFAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of an entity’s fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”. The Company has not yet determined the impact, if any, that SFAS 159 will have on its financial position or results of operations.

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Note 2 Stock Compensation

In June 2007, the Board of Directors approved and adopted the 2007 Stock Incentive Plan (“2007 Plan”). The 2007 Plan provides for the issuance of incentive stock options and non-statutory stock options to the Company’s employees, directors and consultants. Under the 2007 Plan, the Company may grant up to 6,000,000 shares of common stock to its employees or directors. The exercise price of each option may not be less than the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. The options generally vest over a four year service period. The Plan has not yet been submitted for a vote of stockholders.

The following table summarizes stock options outstanding and changes during the quarter ended March 31, 2008.

			Weighted		Weighted
			Average		Average		Aggregate
	Number of		Exercise		Remaining		Intrinsic
	Options		Price		Term		Value
Options outstanding at January 1, 2008		4,475,000
Options granted		100,000	$	0.20
Options exercised		—
Options forfeited		112,500		0.20
Options 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

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Information related to stock options outstanding at March 31, 2008 is summarized below:

Options Outstanding

Options Exercisable

Weighted Average

Weighted

Number

Weighted Average

Weighted

Number

Remaining

Average

Of

Remaining

Average

Range of

of

Contract Term

Exercise

Options

Contract Term

Exercise

Exercise 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

Additional information relating to stock options is presented below.

	Quarter ended
	March 31, 2008
Weighted average grant date fair value	$	0.19
Total intrinsic value of options exericised during the period	$	—
Total fair value of options vested during the period	$	242,948

A summary status of the Company’s nonvested shares as of March 31, 2008 and changes during the quarter is presented below:

				Weighted Average
				grant-date
Non-vested Shares	Shares			fair value
Non-vested at January 1, 2008		3,262,500		$	0.18
Granted		100,000			0.19
Vested		(1,137,500	)		0.18
Forfeited		(112,500	)		0.18
Non-vested at March 31, 2008		2,112,500			0.18

The following table summarizes non-cash stock-based compensation expense recorded under SFAS 123(R) for the quarter ended March 31, 2008.

	Quarter ended
	March 31, 2008
Research and development	$	(5,469	)
Sales and marketing		25,600
General and administrative		57,352
	$	77,483

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The fair values of option awards were estimated at the date of grant using a Black-Scholes option-pricing model which utilizes a number of assumptions as indicated below:

	Quarter ended
	March 31, 2008
Weighted average assumptions used
Volatility		155.12	%
Expected option term (years)	6 years
Risk-free interest rate		2.50	%
Expected dividend yield		—

The Company’s assumption of expected volatility is based on the historical volatility of the Company’s stock price subsequent to purchasing AirGATE Technologies, Inc. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life at the date of grant. The expected dividend yield is zero because the Company has not made any dividend payments in its history and does not plan to pay dividends in the foreseeable future.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee 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 employee stock options.

Note 3 Concentration of Risk

A substantial portion of the Company’s business has been concentrated with one customer, Hexion Specialty Chemicals, Inc.

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Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-KSB for the year ended December 31, 2007 (“Annual Report”) the financial statements and related notes in this Quarterly Report, the risk factors in our 2007 Annual Report and all of the other information contained elsewhere in this report. The terms “we”, “us”, “our”, “our Company” or “X-Change” refer to The X-Change Corporation and its subsidiary, unless the context suggests otherwise.

Forward-Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as, “may,” “expect,” “could,” “plan,” “seek,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereon or comparable terminology.

These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those referred to in the forward-looking statements and are made pursuant to the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management’s current expectations or beliefs as well as assumptions made by, and information currently available to, management.

A variety of factors could cause actual results to differ materially from those anticipated in the Company’s forward-looking statements, including the following factors: changes from anticipated levels of sales, access to capital, future national or regional economic and competitive conditions, changes in relationships with customers, difficulties in developing and marketing new products, marketing existing products, customer acceptance of existing and new products, validity of patents, technological change, dependence on key personnel, availability of key component parts, dependence on third party manufacturers, vendors, contractors, product liability, casualty to or other disruption of the production facilities, delays and disruptions in the shipment of the Company’s product, and the ability of the Company to meet its stated business goals. For a detailed discussion of these and other cautionary statements and factors that could cause actual results to differ from the Company’s forward-looking statements, please refer to the Company’s filings with the Securities and Exchange Commission, especially “Item 1. Description of Business” (including the “Risk Factors” section of Item 1) and “Item 6. Management’s Discussion and Analysis or Plan of Operation” of the Company’s 2007 Annual Report on Form 10-KSB.

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Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company does not undertake any obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission.

Risk Factors

An investment in our common stock is highly speculative, involves a high degree of risk, and should be made only by investors who can afford a complete loss. You should carefully consider the information in this report along with the risk factors disclosed in our Form 10-KSB for the year ended December 31, 2007, including our financial statements and the related notes, and our prior filings of Form 10-QSB before you decide to buy or continue to hold our common stock.

Recent Developments: Going Concern and Liquidity Problems

Our auditors have included an explanatory paragraph in their audit opinion with respect to our consolidated financial statements at December 31, 2007. The paragraph states that our recurring losses from operations and resulting continued dependence on access to external financing raise substantial doubt about our ability to continue as a going concern. Furthermore, the factors leading to and the existence of our going concern status may adversely affect our relationship with customers and suppliers and have an adverse effect on our ability to obtain financing.

We do not have sufficient working capital to sustain our operations. We have been unable to generate sufficient revenues to sustain our operations. We will have to continue to obtain funds to meet our cash requirements through business alliances or financial transactions with third parties, the sale of securities or other financing arrangements, or we may be required to curtail our operations, seek a merger partner, or seek protection under federal bankruptcy laws. Any of the foregoing may be on terms that are unfavorable to us or disadvantageous to existing stockholders. In addition, no assurance may be given that we will be successful in raising additional funds or entering into business alliances.

14

Results of Operations

Three months ended March 31, 2008 compared to three months ended March 31, 2007

The Company generated revenues of $343,607 and 316,053 in the three months ending March 31, 2008 and 2007, respectively. The increase in sales was in line with the Company’s continuing development efforts relating to the down-hole tool project.

Research and development cost decreased to $252,086 from $253,497 in the first quarter of 2007 reflecting our consistent efforts on the Hexion tool and for the development of SAW and UWB applications.

Sales and marketing expenses increased from $63,405 in the first quarter of 2007 to $69,298 in the first quarter of 2008. The increase was in primarily a result of increased allocation of salaries. We expect to increase sales and marketing efforts in the future as our planned products get closer to commercialization.

General and administrative expenses decreased from $617,035 in the first quarter of 2007 to $426,718 in the same comparable period of 2008. The decrease is primarily due to reduced salary cost as we have lowered Company head count. This reduction was offset by increased non-cash charges for stock compensation which amounted to $57,352 in first quarter of 2008 versus none in the same period in 2007.

The Company’s interest expense increased from $117,828 for the three month period ending March 31, 2007 to $274,941 in the same period for 2008. Interest expense in the period ending March 31, 2008 includes interest on two financings done in the second half of 2007, however the increase is primarily due to the amortization of convertible note discounts treated as interest for accounting purposes. This non-cash charge amounted to $221,460 in the first quarter of 2008 versus $96,572 in the same period of 2007.

Liquidity and Capital Resources

Cash Flows

During the first quarter of 2008, our operations were financed through operating activities and a financing arrangement closed on December 4, 2007. At March 31, 2008, we had a working capital deficit of $636,774.

Our operations generated losses in 2007 and continue to generate losses in the first quarter of 2008. Our cash decreased by $592,216 during the three months ended March 31, 2008 with operating activities using $616,632 of cash. This compares with cash utilization from operations using $422,532 for the three months ended March 31, 2007.

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There were no cash flows from investing activities during the first quarter of 2008 whereas we had $840 of cash utilization from investing activities in the quarter ended March 31, 2007.

Cash flows from financing activities for the three months ending March 31, 2008 reflect a $1,000 prepayment on our LaJolla financing and the accrual of interest expense on our SIJ financing (see below) in accordance with our financing agreement. Additionally, we show a $25,416 cash flow adjustment relating to our ability to accrue interest on both the SIJ financing and the LaJolla financing. In the three months ended March 31, 2007 we raised $550,000 of equity capital and paid off $120,000 of loans.

Our working capital requirements depend on many factors including contract extensions and securing of additional development contracts. If losses continue as we expect, we will have to obtain additional funds to meet our ongoing business requirements.

2007 PPM Financing

During 2007, the Company raised $1,117,500 pursuant to a private placement of its common stock (“2007 PPM”). The Company currently has no additional committed funding amounts. As part of the documentation of the 2007 PPM, we have agreed to file a registration statement with the Securities and Exchange Commission covering the shares of common stock and the warrants provided in this transaction. We have extended the timeframe for this effort due to resource limitations and a change in regulations affecting holding periods for restricted stock transactions.

Convertible Debt Financing — 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. The principal balance of the note is $797,794 at March 31, 2008 and the Company has agreed not to draw any further amounts on this facility.

The Melissa Note carries a term of 24 months with interest accruing at 10% per annum. Accrued interest under the note is payable quarterly beginning November 1, 2006, and the principal and any remaining accrued interest are due upon expiration, August 14, 2008. The Company has pledged 100% of the outstanding common stock of AirGATE as security for this obligation. At the discretion of Melissa Ltd, the Melissa Note may be converted into restricted common stock of the Company at any time at a conversion rate equal to $0.825 per share of the Company’s common stock. In addition, the Melissa Note may be prepaid at any time without penalty.

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Convertible Debt Financing — LCII Debentures

During 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 6¹/4 % until converted or the expiration of their three year term.

The debentures and warrants have mandatory conversion features and these conversion features became effective in the first quarter of 2008. Unless action is taken by the Company, 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 variable 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. Provisions exist whereby the Company can prevent conversion if the trading price falls below specified levels, generally $0.30 per share. 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. If LCII converts a portion of the debenture, a proportionate amount of the warrants must be similarly exercised.

During the first quarter of 2008, the Company exercised its rights to prevent LCII from converting its position and elected to prepay $1,000 of the obligation.

In the event that the entire remaining $399,000 of the convertible debentures is converted in concert with the required exercise of warrants, the Company will receive a total of approximately $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.

Convertible Debt Financing — SIJ Financing

On December 4, 2007, the Company entered into a Securities Purchase Agreement (“SPA”) with Samson Investment Company (“Samson”), Ironman PI Fund (QP), LP (“Ironman”), and John Thomas Bridge & Opportunity Fund, LP (“Opportunity Fund”) (“SIJ Investors”). In addition to the SPA, with each of the SIJ Investors the Company also entered into a Senior Secured Convertible Term Note—Tranche A (“Tranche A Notes”) and a Tranche A Warrant (“Tranche A Warrants”). The Company, the SIJ Investors and Tejas Securities Group, Inc. (“Tejas”) also executed a Registration Rights Agreement (“RRA”). Finally, the Company and the Investors executed a Security Agreement and a Guaranty Agreement.

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The SPA provides the terms on which the SIJ Investors provided the Company with $1.8 million in cash and the Company in return issuing the Tranche A Notes, Tranche A Warrants and providing certain registration obligations as set forth in the RRA. The SPA also affords the SIJ Investors with preemptive rights. A second, Tranche B, financing is addressed in the SPA and shall occur if and when X-Change enters into a definitive development agreement for an RFID drill pipe tagging system with an entity deemed acceptable to the SIJ Investors. If the Company achieves this milestone, the SIJ Investors shall provide an additional $1.8 million in cash and the Company shall issue Tranche B documents substantially similar to the Tranche A Notes and Tranche A Warrants.

The Tranche A Notes obligates the Company to repay to the SIJ Investors the aggregate principal amount of $1.8 million, together with interest at 8% per annum. Principal on these notes is due five years after issuance. Interest on the notes accrues and is payable quarterly, although the Company has the option to add accrued and unpaid interest to the outstanding principal amount of the notes. The Tranche A Notes are convertible at the option of the Investors at a conversion price of $0.20. An automatic conversion feature also exists at this same conversion price, and is applicable upon the Company’s achieving certain commercialization milestones.

As additional consideration for the $1.8 million cash, the Company issued the SIJ Investors Tranche A Warrants that are exercisable into 4.5 million shares of the Company’s common stock at $0.50 per share. These warrants are exercisable for five years. The Company also issued Tejas a warrant to purchase 630,000 shares of X-Change common stock at $0.20 per share.

All shares of the Company’s common stock issuable upon conversion of the Tranche A Notes and exercise of the Tranche A Warrants, as well as shares issuable to Tejas upon exercise of their warrant rights are subject to the RRA. Pursuant to the RRA, the Company agreed to register all such shares upon request of an SIJ Investor, provided that no demand may be made within 180 days of the date of the closing. In the event the Company and the SIJ Investors engage in a Tranche B financing, the Company’s common stock issuable upon conversion of any Tranche B Notes and exercise of any Tranche B Warrants shall also be registered in accordance with the RRA.

The obligations of the Company under the Tranche A Notes are secured by a lien on and security interest in all of AirGATE Technology Inc.’s assets.

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 $740,404 using the Black-Scholes model and the following assumptions: discount rate of 3.28%, volatility of 154% and expected term of five years. The Company also calculated a beneficial conversion feature totaling $1,059,596. The Company is amortizing both the warrant value and value attributed to the beneficial conversion feature (total $1,800,000) over the term of the debentures. Additionally, accrued interest is being capitalized to the note on a quarterly basis. As the accrued interest itself is convertible into common shares, additional beneficial conversion amounts are being calculated each quarter and amortized over the remaining term of the debentures. The non-cash charge to income for amortization of both warrant allocation and all beneficial conversion amounts is included in interest expense.

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The Company incurred debt issuance costs in connection with the SIJ Financing which included the value of warrants issued in connection with debt placement.

Going Concern

In connection with our Form 10-KSB for the year ended December 31, 2007, our Independent Registered Public Accountants included a paragraph in their opinion that referred to doubts about our ability to continue as a going concern. Several conditions and events cast doubt concerning the Company’s ability to continue as a going concern. The Company is dependent upon the expected cash flow of ongoing development contracts, and requires additional financing in order to fund its business activities on an ongoing basis. The Company has taken steps to provide additional financing to the Company and is actively in discussions with a number of capital sources. While management believes that the actions already taken or planned may mitigate the adverse conditions and events which raise doubt about the validity of the going concern assumption used in preparing these financial statements, there can be no assurance that these actions will be successful or that the Company will have sufficient funds to continue its operations. Over 90% of the Company’s first quarter revenues are concentrated with a single customer.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

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Item 4T Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2008 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(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.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2008. In making this assessment, management used the framework set forth in the report entitledInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.

Identified Material Weaknesses

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Management identified the following internal control deficiencies during its assessment of our internal control over financial reporting as of March 31, 2008:

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.

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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.

A regionally-recognized independent consulting firm assisted management with its assessment of the effectiveness of our internal control over financial reporting, including scope determination, planning, staffing, documentation and overall program management of the assessment project. In conclusion, our Chief Executive Officer and Chief Financial Officer concluded we did not maintain effective internal control over financial reporting as of March 31, 2008 within the framework of the COSO guidelines.

Management’s Remediation Initiatives

We are in the process of evaluating material deficiencies. We have already begun to remediate many of the deficiencies. However, others will require additional personnel and financial resources. In addition, it will take time to add to our board of directors, which is necessary to remediate certain issues. The Company will continue periodically assessing the cost versus benefit of adding the resources that would improve segregation of duties and additional accounting resources necessary to assure adequate compliance. Currently, with the concurrence of the board of directors, the Company does not consider the benefits to outweigh the costs of adding additional staff in light of the limited number of transactions related to the Company’s operations.

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

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;

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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.

We anticipate that the above initiatives will be at least partially implemented during 2008. Additionally, we plan to test our updated controls by December 31, 2008.

Conclusion

The above identified material weaknesses did not result in any material audit adjustments to financial statements for the year ended December 31, 2007 or those for the quarter ended March 31, 2008. However, it is reasonably possible that, if not remediated, one or more of the identified material weaknesses noted above, could result in a material misstatement in a future annual or interim period.

Changes in Internal Control over Financial Reporting

The changes noted above, are the only changes during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

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Part II — Other Information

Item 1A Risk Factors

There have been no material changes from our risk factors as previously disclosed in our 10-KSB for the year ended December 31, 2007.

Item 6 Exhibits

The following exhibits are furnished as part of this report or incorporated herein as indicated:

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Included in this filing
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Included in this filing
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Included in this filing
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Included in this filing

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	THE X-CHANGE CORPORATION
	(Registrant)
DATE: May 19, 2008
	By:	/s/ Michael L. SheriffMichael L. Sheriff
		Chief Executive Officer and Chairman
DATE: May 19, 2008
	By:	/s/ George DeCourcyGeorge DeCourcy
		Chief Financial Officer

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