10QSB 1 form10qsb093006.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ------------ TO ------------. COMMISSION FILE NUMBER 002-41703 THE X-CHANGE CORPORATION (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) NEVADA 90-0156146 (STATE OR OTHER JURISDICTION (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 710 CENTURY PARKWAY, ALLEN, TX 75013 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (972) 747-0051 ISSUER'S TELEPHONE NUMBER APPLICABLE ONLY TO CORPORATE ISSUERS STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON EQUITY, AS OF THE LATEST PRACTICAL DATE: NOVEMBER 15, 2006 27,754,500 INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT.) YES ; NO X TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE). YES ; NO X ITEM 1. FINANCIAL STATEMENTS THE X-CHANGE CORPORATION CONSOLIDATED BALANCE SHEETS
(Unaudited) September 30, December 31, 2006 2005 --------------- --------------- ASSETS Current Assets: Cash $ 12,112 $ 5,847 Deposits 235,065 10,270 Accounts Receivable 29,995 - Employee Advances 500 338 --------------- --------------- Total Current Assets 277,672 16,455 --------------- --------------- Fixed Assets Computer Equipment 32,368 12,396 Furniture and Fixtures 65,119 30,173 Less Accumulated Depreciation (26,115) (11,369) --------------- --------------- Total Fixed Assets 71,372 31,200 --------------- --------------- Other Assets Net Assets of Discountined Operations - 10,221 --------------- --------------- TOTAL ASSETS $ 349,044 $ 57,876 =============== =============== LIABILITIES Current Liabilities: Accounts Payable $ 117,375 $ 103,253 Accrued Expenses 108,880 11,415 Due to Shareholders 633,446 155,742 --------------- --------------- Total Current Liabilities 859,701 270,410 --------------- --------------- STOCKHOLDERS' EQUITY (DEFICIT) Preferred Stock, Par Value $.001, Series A Convertible - 5,000,000 Shares Authorized, 0 Issued at September 30, 2006 and December 31, 2005 Common Stock, Par value $.001, Authorized 100,000,000 Shares, Issued 27,494,500 and 26,712,000 at September 30, 2006 and December 31, 2005 27,495 26,712 Paid-In Capital 1,078,975 793,399 Retained Deficit (1,617,127) (1,032,645) --------------- --------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (510,657) (212,534) --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 349,044 $ 57,876 =============== ===============
See Accompanying Notes THE X-CHANGE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30, September 30, 2006 2005 2006 2005 --------------- --------------- ---------------- ---------------- Revenues $ 187,322 $ 408,906 $ 862,578 $ 414,203 Costs of Operations 117,698 90,865 226,939 88,070 --------------- --------------- ---------------- ---------------- Net Operating Income 69,624 318,041 635,639 326,133 Expenses Consulting 96,866 183,588 96,866 194,496 General & Administrative 399,048 281,163 1,083,773 311,183 --------------- --------------- ---------------- ---------------- Net Income (Loss) from Continuing Operations (426,290) (146,710) (545,000) (179,546) --------------- --------------- ---------------- ---------------- Other Income (Expense) Interest Income (Expense) (19,010) (21,451) (29,293) (25,384) Interest Income 32 128 32 190 --------------- --------------- ---------------- ---------------- Net Income (Loss) from Continuing Operations (445,268) (168,033) (574,261) (204,740) Discontinued Operations Net Income (Loss) from Discontinued Operations - (4,419) (2,192) 161,878 Loss from Disposal of Discontinued Operations - - (8,029) - --------------- --------------- ---------------- ---------------- Total Income (Loss) from Discontinued Operations - (4,419) (10,221) 161,878 --------------- --------------- ---------------- ---------------- Net Income (Loss) $ (445,268) $ (172,452) $ (584,482) $ (42,862) =============== =============== ================ ================ Earnings per Share from Continuing Operations $ (0.02) $ (0.01) $ (0.02) $ (0.01) =============== =============== ================ ================ Earnings per Share from Discontinued Operations $ - $ - $ - $ 0.01 =============== =============== ================ ================ Weighted Average Shares Outstanding 27,404,350 23,256,786 27,306,200 17,730,788 =============== =============== ================ ================
See Accompanying Notes THE X-CHANGE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2006 2005 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (584,483) $ (42,862) Adjustments to reconcile net loss to net cash Provided by operating activities: Depreciation 14,746 9,857 Stock Issued for Services 50,950 131,000 Loss on Disposal of Discontinued Operations 8,029 - Change in Operating Assets and Liabilities: (Increase) Decrease in Employee Advances (162) (2,030) (Increase) Decrease in Accounts Receivable (29,995) (42,158) (Increase) Decrease in Prepaid Expenses - (9,250) (Increase) Decrease in Deposits (5,615) - Increase (Decrease) in Accounts Payable 14,122 33,943 Increase (Decrease) in Accrued Expenses 97,465 27,339 --------------- --------------- Net Cash Used in Continuing Operations (434,943) 105,839 Net Cash Used in Discontinued Operations 2,192 (38,586) --------------- --------------- Net Cash Used in Operating Activities (432,751) 67,253 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Computer Equipment (19,972) (28,509) Purchase of Furniture and Fixtures (34,945) - Purchase of Goodwill - (174,587) --------------- --------------- Net Cash Provided by Investing Activities (54,917) (203,096) Net Cash Used in Discontinued Operations - (258,922) --------------- --------------- Net Cash Provided by Investing Activities (54,917) (462,018) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Loans - 200,000 Proceeds from Shareholder Loan 477,704 148,298 Proceeds from Stock Issued - 10,000 Capital Contributed 16,229 60,412 --------------- --------------- Net Cash Provided by Financing Activities 493,933 418,710 Net Cash Used in Discontinued Operations - 25,702 --------------- --------------- Net Cash Provided by Financing Activities 493,933 444,412 --------------- --------------- Net (Decrease) Increase in Cash 6,265 49,647 Cash at Beginning of Period 5,847 4,902 --------------- --------------- Cash at End of Period $ 12,112 $ 54,549 =============== ===============
THE X-CHANGE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
For the Nine Months Ended September 30, 2006 2005 --------------- --------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ - $ - Franchise and income taxes $ - $ - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common Stock Exchanged for Services $ 50,950 $ 131,000 Common Stock Exchanged for Expected Development Costs $ 219,180 $ -
See Accompanying Notes THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of accounting policies for The X-Change Corporation (A Development Stage Company) is presented to assist in understanding the Company's financial statements. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. 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. Several conditions and events cast doubt about the Company's ability to continue as a "going concern". The Company has incurred net losses of approximately $ 1,617,000 for the period from February 5, 1969 (inception) to September 30, 2006, and may require additional financing, developmental contracts, and the commencement of product deliveries in order to finance its business activities on an ongoing basis. The Company is actively pursuing additional development contracts, commercializing its current contracts as well as alternative financing, and has had discussions with various third parties regarding financing, although no firm commitments have been obtained. In the interim, current development contracts and loans from shareholders of the Company are meeting the operating expenses. The Company's future capital requirements will depend on numerous factors including, but not limited to their ability to perform on current and future development contracts and the commercialization thereof. These financial statements do not reflect adjustments that would 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 would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported expenses, and the balance sheet classifications use THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interim Reporting The unaudited financial statements as of September 30, 2006 and for the nine month period then ended, reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the nine months. Operating results for interim periods are not necessarily indicative of the results, which can be expected for full years. Organization and Basis of Presentation The Company 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. The company was originally organized to seek merger and/or acquisition candidates. In this respect the Company has engaged in numerous transactions since inception and is now intent on furthering the business interest of the most recent acquisition, AirGATE Technologies, Inc. Nature of Business The Company's business model is focused on furthering the success of its wholly owned subsidiary AirGATE Technologies, Inc. AirGATE Technologies, Inc. is an early-stage company and is a provider of wireless solutions utilizing radio frequency identification (RFID), 802.15.4 (Zigbee) low power, mesh-based networks and SAW (surface acoustic wave) technologies. AirGATE Technologies, is a full-solution company that handles business assessment, technology selection, including proprietary AirGATE technology, and integration and support. AirGATE applies its skill and expertise to unique, vertical market applications utilizing RFID and wireless, intelligent, sensor technology. The Company has, in an environment of technology cost compression, built a stable of technology partners that are best in class and span a wide range of solutions to support small, medium and large enterprises. AirGATE is a founding member of the DFW-based RFID HUB. Principals of Consolidation The consolidated financial statements include the accounts for The X-Change Corporation and its wholly owned subsidiary, AirGATE Technologies, Inc. The results of THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) subsidiaries acquired during the year are consolidated from their effective dates of acquisition. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents For the purpose of reporting cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. Depreciation Fixed assets are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Asset Rate ------------------------------------------------ ------------------- Office equipment 5 years Furniture and Fixtures 5 years Computer Equipment 3 years Maintenance and repairs are charged to operations; betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the property and related accumulated depreciation accounts, and any resulting gain or loss is credited or charged to income. Concentrations of Credit Risk The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Compensation for Non-Employees The Company accounts for the fair value of its stock compensation grants for non-employees in accordance with FASB Statement 123. The fair value of each grant is equal to the market price of the Company's stock on the date of grant if an active market exists or at a value determined in an arms length negotiation between the Company and the non-employee. Earnings (Loss) per Share Basic loss per share has been computed by dividing the loss for the year applicable to the common stockholders by the weighted average number of common shares outstanding during the years. The effects of common stock equivalents are anti-dilutive and thus are not considered. Recent Accounting Standards In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS - AN AMENDMENT OF ARB NO. 43, CHAPTER 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4 previously stated that"...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs maybe so abnormal as to require treatment as current period charges..." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company. On December 16, 2004, the FASB issued SFAS No. 123 ( R ), SHARE-BASED PAYMENT, which is an amendment to SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. This new standard eliminates the ability to account for share-based compensation transactions using THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Standards (Continued) Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and generally requires such transactions to be accounted for using a fair-value based method and the resulting cost recognized in our financial statements. This new standard is effective for awards that are granted, modified or settled in cash in interim and annual periods beginning after June 15, 2005. In addition, this new standard will apply to unvested options granted prior to the effective date. We will adopt this new standard effective for the fourth fiscal quarter of 2006, and have not yet determined what impact this standard will have on our financial position or results of operations. In December 2004, the FASB issued SFAS No. 152, ACCOUNTING FOR REAL ESTATE TIME-SHARING TRANSACTIONS, which amends FASB statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this Statement will have no impact on the financial statements of the Company. In December 2004, the FASB issued SFAS No. 153, EXCHANGE OF NONMONETARY ASSETS. This Statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion NO. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary assets exchanges incurred during fiscal years beginning after the date of this statement is issued. Management believes the adoption of this Statement will have not impact on the financial statements of the Company. THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Standards (Continued) In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error Corrections - a replacement of APB No. 20 and FASB Statement No. 3." This statement modifies the reporting of changes in accounting principles, reclassifies changes and principle in the absence of explicit transition guidance. This statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable. This statement is effective for accounting changes and corrections for fiscal years beginning after December 15, 2005. Management does not believe that the adoption of this policy will have any effect on its financial statements. In February 2006, The FASB issued SFAS No. 155 "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140." This statement amends FASB 133, Accounting for Derivative Instruments and Hedging Activities and Statement and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation, clarifies which interest only strips and principal are not subject to the requirements of Statement 133, establishes a requirement to evaluate interest in securitized financial assets, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument to a beneficial interest other than another derivative financial instrument. The statement is effective for fiscal years beginning after September 15, 2006. Management does not expect this statement to have any material effect on its financial statements. In March 2006 the FASB issued SFAS No. 156 " Accounting for Servicing of Financial Instruments - an amendment of FASB No.140, Accounting for Transfers and Servicing of Financial Instruments and Extinguishments of Liabilities. The statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service an asset by entering into a servicing contract, requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair market value, permits an entity to choose either the amortization method or fair market value measurement method for subsequent measurement periods for each class of separately recognized servicing assets and servicing liabilities, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights at its initial adoption, and requires separate presentation of servicing assets and servicing THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Standards (Continued) liabilities subsequently measured at fair value. The statement is effective for fiscal years beginning after September 15, 2006. Management does not expect this statement to have any material effect on its financial statements. NOTE 2 - INCOME TAXES As of December 31, 2005, the Company had a net operating loss carryforward for income tax reporting purposes of approximately $1,032,645 that may be offset against future taxable income through 2025. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carryforwards will expire unused. Accordingly, the potential tax benefits of the loss carryforwards are offset by a valuation allowance of the same amount. NOTE 3 - COMMITMENTS On November 4, 2005, The Company entered into a commercial lease agreement (the "Lease") with Armet Bethany Limited Partnership (the "Landlord") for approximately 11,400 square feet of rentable area in Bethany Tech Center at 710 Century Parkway in Allen, Texas. The term of the Lease is 62 months commencing on November 1, 2005 and ending on December 31, 2010. The Company has no option to extend the Lease. The base rent under the Lease is as follows: November 1, 2005 to November 30, 2005: $0; December 1, 2005 to December 31, 2005: $6,650; January 1, 2006 to December 31, 2006: $7,600 per month; and January 1, 2007 to December 31, 2010: $8,075 per month. In addition to base rent, the Company will be responsible for certain costs and expenses specified in the Lease, including, without limitation, certain utility, HVAC service, insurance, maintenance, repair, tax, insurance and CAM (common area maintenance) costs and expenses. THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 4 - PREFERRED STOCK The Company has authorized a total of 10,000,000 shares of Preferred Stock. Series A Convertible Preferred Stock is the initial series of Preferred Stock. This series shall consist of 5,000,000 shares with a par value of $.001. The Corporation is under no obligation to pay dividends or to redeem the Series A Convertible Preferred Stock. This series of stock is convertible into 10 shares of Common Stock at the option of the shareholder or upon automatic conversion. In the event of any liquidation, dissolution or winding-up of the Corporation, the holders of outstanding shares of Series A Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, before any payment shall be made to or set aside for holders of the Common Stock, at an amount of $1 per share. As of September 30, 2006, there are no preferred shares issued. NOTE 5 - STOCK TRANSACTIONS As of January 11, 2005, the Company issued 1,120,000 shares of restricted common stock for consulting services. In connection with the issuance of the shares, $84,000 was recorded as consulting expense. As of March 31, 2005, the Company issued 100,000 shares of restricted common stock to an outside investor for $1 per share. As of March 31, 2005, the Company issued 70,000 shares of restricted common stock for consulting services. In connection with issuance of the shares, $1,000 was recorded as consulting expense. On July 20, 2005, the Company reacquired AirGATE Technologies, Inc. for 10,000,000 restricted shares of common stock. After the AirGATE acquisition, the Company issued 650,000 shares of restricted common stock to consultants of AirGATE Technologies, Inc. In connection with issuance of the shares, $130,000 was recorded as a one time consulting expense. On November 11, 2005, the Company issued 20,000 shares of restricted common stock to engineer employees of the Company. In connection with issuance of the shares, $1,500 was recorded as consulting expense. THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 - STOCK TRANSACTIONS (Continued) On January 5, 2006, the Company issued 10,000 shares of restricted common stock to a consultant of the Company. $750 was booked as consulting expense. On January 5, 2006, the Company issued 500,000 shares of restricted common stock, $.001 par value, to Hexion Specialty Chemical, Inc. as consideration for Hexion's expected $219,180 increase in development costs and AirGATE's expected $219,180 decrease in development costs of the development contract between Hexion and AirGATE which was finalized in the first week of 2006. On June 1, 2006, the Company issued 40,000 shares of restricted common stock to a consultant of the Company. $2,700 was booked as a consulting expense and $900 was booked as a legal expense. On June 5, 2006, the Company issued 30,000 shares of restricted common stock to a consultant of the Company. $3,000 was booked as a consulting expense. On June 14, 2006, the Company issued 12,500 shares of restricted common stock to a consultant of the Company. $1,600 was booked as a marketing expense. On June 16, 2006, the Company issued 100,000 shares of restricted common stock to a consultant of the Company. $12,000 was booked as a consulting expense. On July 10, 2006, the Company issued 30,000 shares of restricted common stock to consultants of the Company. $4,320 was booked as a consulting expense. On August 16, 2006, the Company issued 30,000 shares of restricted common stock to consultants of the Company. $10,380 was booked as a consulting expense. On September 1, 2006, the Company issued 30,000 shares of restricted common stock to consultants of the Company. $15,300 was booked as a consulting expense. On October 1, 2006, the Company issued 30,000 shares of restricted common stock to consultants of the Company. $13,680 was booked as a consulting expense. On October 26, 2006, the Company issued 200,000 shares of restricted common stock a consultant of the Company. $58,000 was booked as a consulting expense. On November 1, 2006, the Company issued 30,000 shares of restricted common stock to consultants of the Company. $10,500 was booked as a consulting expense. THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 - LEGAL PROCEEDINGS On January 11, 2006, AirGATE Technologies, Inc. and Michael Sheriff commenced legal action against former employee and Chief Operations Officer, James E. Flowers, as well as against Logix Consulting, Inc. and WaveTrac, Inc. AirGATE and Mr. Sheriff are seeking damages against the Defendants as a result of their unlawful and malicious breach of contract (violation of non disclosure provisions); breach of fiduciary duty, misappropriation of trade secrets and other proprietary information; tortious interference with prospective business relationships, fraud in the inducement and fraud in stock transactions, theft of trade secrets, and injunctive relief. As part of the legal action, Mr. Sheriff is demanding the return of 4,250,000 shares of restricted common stock issued to Mr. Flowers. NOTE 7-DISCONTINUED OPERATIONS On June 30, 2006, Curado Energy Resources, Inc., a wholly owned subsidiary of the Company, was sold, and is no longer a subsidiary of the Company. The assets and liabilities of Curado Energy Resources, Inc., consisted of the following:
September 30, December 31, 2006 2005 ------------------- ------------------ Cash $ - $ 4,569 Oil Inventory - 4,657 Computer Equipment, net of $62 accumulated depreciation - 995 ------------------- ------------------ Total assets $ - $ 10,221 =================== ==================
On June 30, 2006, the Company sold its Curado subsidiary to a shareholder of the company for $10 and the assumption of any potential liability pertaining to the subsidiary. A loss has been recognized in connection with the disposal of $8,029. Net assets to be disposed of have been separately classified in the accompanying consolidated balance sheet at December 31, 2005. The December 31, 2005 balance sheet has been restated to conform with the current year's presentation. Operating results of this discontinued operation for the three and nine months ended September 30, 2006 are shown separately in the accompanying consolidated statement of operations. The operating statement for the three and nine months ended September 30, 2005 has been restated to conform with the current year's presentation and are also shown separately. The operating results of this discontinued operation for the three and nine months ended THE X-CHANGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 7-DISCONTINUED OPERATIONS (Continued) September 30, 2006 and 2005 consist of:
For the three months ended For the nine months ended September 30, September 30, 2006 2005 2006 2005 ------------------ ------------------ ----------------- ------------------ Revenue $ - $ 37,855 $ - $ 159,514 Cost of Sales - (32,896) (2,109) (74,167) General and Administrative - (9,378) (83) (23,469) Sale of Working Interest - - - 100,000 ------------------ ------------------ ----------------- ------------------ Net Income (Loss) $ - $ (4,419) $ (2,192) $ 161,878 ================== ================== ================= ==================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's annual report on Form 10-KSB for the year ended December 31, 2005. Plan of Operation The Company's current business model is focused on furthering the success of its wholly owned subsidiary, AirGATE Technologies, Inc. AirGATE Technologies is a growing company specializing in wireless technologies. Michael Sheriff incorporated the Company in 2001 to explore wireless opportunities. Due diligence and examination of wireless technologies led to an in-depth investigation of Radio Frequency Identification (RFID). The RFID business has been driven by mandates from retail giant Wal-Mart and the Department of Defense and is predicted to be a $4.7 billion dollar industry by 2007. Beginning in 2004, AirGATE has focused its efforts on emerging wireless technologies, including RFID. The Company delivers wireless solutions in selected vertical markets built around a data management and integration strategy. The Company focuses on high-value, high-return opportunities in "closed-loop" applications. This strategy is designed to ensure rapid market penetration and maximum return on investment. AirGATE began operations in February 2004. AirGATE's business model is strengthened by several key differentiators that set it apart from its competition. The Company's focus is to create long-term shareholder value by: (1) Pursuing intelligent, opportunistic, wireless and RFID applications in vertical industries; (2) Partnering with other wireless and RFID solution providers, both hardware and software; (3) Partnering with industry organizations, highlighting AirGATE's wireless solutions; (4) Partnering with strategic vendors and manufacturers; and (5) Building a recognizable brand identity for its subsidiary, AirGATE Technologies, Inc. AirGATE Technologies, Inc. specializes in wireless technology solutions based on RFID; surface acoustic wave ("SAW"); and Zigbee (802.15.4) wireless sensor networks. The Company is dedicated to the development and acquisition of leading-edge wireless technologies, which enables our Company to market products and services of unsurpassed convenience, performance, reliability and value. AirGATE is based in Allen Texas and is a founding member of the RFID Hub of Dallas/Ft. Worth. The Company is recognized for its expertise, and, as RFID continues to expand, AirGATE is well positioned to exploit its opportunities. To capture near term revenues, AirGATE has focused its expertise on closed-loop RFID applications in vertical markets. Because closed-loop applications are intrinsically results-oriented and are not dependent on EPCglobal RFID standards, Wal-Mart mandates or factors outside of AirGATE's control, the time to market and revenue for AirGATE is ultimately shorter and more controllable. AirGATE's business plan is based on creating long term, stable, recurring revenues. AirGATE, a full-solution provider, handles business assessment, process and technology blending, solution architecture, technology selection, including proprietary AirGATE technology, and integration and support AirGATE holds several lucrative development contracts with large companies, who are dominant in their field. These companies include Hexion Specialty Chemical and SECURUS Technologies, Inc. AirGATE has recently completed a development contract with Hitachi America, Ltd. The Company is in Phase 3 of its contract with Hexion, and, based on successful testing, should begin commercialization of the technology in 2007. AirGATE has completed the prototype of its RFID scanner design for installation in the prison phones managed by SECURUS. The Company expects to begin shipment to SECURUS for installation in the prison phones in the first quarter of next year. Based in Columbus, Ohio, Hexion Specialty Chemicals combines the former Borden Chemical, Bakelite, Resolution Performance Products and Resolution Specialty Materials companies into the global leader in thermoset resins. Hexion serves the global wood and industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. Hexion Specialty Chemicals is owned by an affiliate of Apollo Management, L.P. Additional information is available at www.hexion.com. For the year ended December 31, 2005, Hexion Specialty Chemicals posted total revenue of $4.5 Billion. SECURUS Technologies is the country's largest independent supplier of detainee telecommunications and information management solutions, serving over 3,100 correctional facilities nationwide. A recognized leader in providing comprehensive, innovative technical solutions and responsive customer service, SECURUS' sole focus is the specialized needs of the corrections and law enforcement communities. SECURUS is headquartered in Dallas, Texas, with offices in Selma, Alabama; Raleigh, North Carolina; Brantford, Ontario; Belleville, Ontario, and has application redundancy backup systems in Allen, Texas and Irving Texas. Please visit: http://www.securustech.net. Hitachi America, Ltd., a subsidiary of Hitachi, Ltd., markets and manufactures a broad range of electronics, computer systems and products, and consumer electronics, and provides industrial equipment and services throughout North America. For more information, visit http://www.hitachi.us. AirGATE is focused on obtaining development contracts with high profile corporations, such as Hexion, SECURUS, Intel and others. The development contracts create immediate cash flow for the company. However, the key to the long-term success of the Company is the built-in recurring revenue stream. Eachcontract establishes a recurring revenue stream whereby AirGATE is paid a portion of its corporate partners' revenue stream that is generated utilizing the AirGATE developed technologies upon commercialization and delivery of the finished technology. AirGATE currently has several patents pending on its technology and will continue to file additional patents to protect its intellectual property. The management team of AirGATE Technologies have over 125 years accumulated expertise in Radio Frequency (RF) solutions, services, middleware and network management systems including: >> Supply Chain Management >> Wireless and RF Engineering >> System Integration >> Network Management Systems >> Enterprise Databases >> Microsoft and UNIX Environments The team has a mix of financial, technical, network, and wireless backgrounds as well as a strong emphasis on operations and marketing with such companies as Northern Telecom, Texas Instruments, Sprint, MCI, Motorola, ActionFax International, Inc., and Ericsson. All are seasoned entrepreneurs. Management MICHAEL L. SHERIFF joined the Company immediately after the acquisition of AirGATE Technologies as Chairman and Chief Executive Officer. Michael Sheriff, president and chief executive officer, has over thirty-five years of experience in the computer and telecommunications industry. In 1998 Mr. Sheriff founded Net Access Exchange, Inc., dba YPAY. YPAY was a new Internet media network that provided advertisers with a unique and compelling value proposition to reach consumers via the Internet through use of broadband-like rich media, providing TV-like advertising without compromising or interfering with the user's Internet connection. YPAY utilized a patented message delivery system to harness the power of the Internet with multi-media and market-targeting capabilities not available in any other advertising medium. In 1995, Mr. Sheriff founded CyberQuest -- a full-service Internet development company -- focusing its efforts on Internet commerce in the business-to-business marketplace. Under Mr. Sheriff's leadership, the company's Internet e-commerce flagship, bid4it, was developed utilizing a revolutionary new, patent pending "bid-and-ask" matching technology. The site was launched in 1997 as one of the first commodity trading Internet applications. Mr. Sheriff sold CyberQuest in October 1998 to a NASD OTC:BB listed company. He then served as CEO of the public company, CBQ, Inc., as well as being Chairman of the company's Board of Directors. In 1994, Mr. Sheriff founded and developed Good Stuff Cheap (GSC), a first-to-market Internet-based retail site. The company was the first to use intelligent shopping agents and was featured in Wired Magazine in December 1994, GSC was also featured on the Discovery Channel in December 1996. Mr. Sheriff is also the former founder, President and CEO of ActionFax International, Inc. Action Fax operates one of the largest public fax/Internet kiosk networks in the world with locations in most world airports. Prior to ActionFax, Mr Sheriff was the founder and President of First National Computer Corporation, which pioneered the rental of personal computers. Under his direction, First National Computer became one of the largest PC rental firms in the United States. Mr. Sheriff has held senior sales, marketing and management positions with National Semiconductor, Northern Telecom, SYCOR, Inc. and SINGER. ROBERT BARBEE, VICE PRESIDENT AND DIRECTOR holds a Business Degree from Kilgore College, which he obtained in 1992. He has been actively involved in the oil and gas business in East Texas since 1989. Mr. Barbee has been Vice-President of Oil Patch Pipe & Supply since 2000. This entity is an independent oil field supply store which has obtained the distributorship for micro chemical applications for down hole well bore repair. Mr. Barbee acted as President of S&B Resources from 1991 until 2002, when he directed the sale of all its assets. S&B was a small, privately-held oil and gas company which owned and operated its own production. From 1992 through 1994 he directed LAZ Financial, a Russian company involved in oil and gas natural resources. From 1995 through 1998 Mr. Barbee was Operations Manager for 4-S Operating, one of the top ten operators in East Texas, where he oversaw the production of approximately 15,000 barrels of oil monthly. Mr. Barbee also worked with Gregg Industrial Insulators, Inc., where he increased sales by approximately $5,000,000 annually. Mr. Barbee also serves on the Board of Directors for Merritt Tool in Kilgore, Texas. This company is a privately owned machine tool shop that focuses principally on the aviation and oil and gas industries. SCOTT R. THOMPSON, SECRETARY, TREASURER, CFO, AND DIRECTOR joined the Company in the final quarter of 2004. He graduated from the University of Denver, Colorado, in 1985 with a Bachelor of Science Degree in Accounting, receiving his CPA in 1986 while working for Ernst & Whinney, a "Big 8" accounting firm. His clients at Ernst & Whinney included privately owned and emerging businesses as well as multinational corporations in the private and public sectors. Mr. Thompson has focused during the past 13 years on real estate sales and development and since 2000 has been a part owner and manager for a capital management company. He holds Series 7, 55, 63 and 65 securities licenses. Results of Operations The Company had $ 1,083,773 and $ 311,183 in general and administrative expenses for the nine month periods ended September 30, 2006 and 2005, respectively. The increase is primarily the result of ramping up the operations for AirGATE Technologies, Inc. For the nine month periods ended September 30, 2006 and 2005, the Company had revenues of $ 862,578 and $414,203, respectively. The loss on continuing operations was $528,772 and $179,546 for the nine month periods ended September 30, 2006 and 2005, respectively. Liquidity and Capital Resources At September 30, 2006, the Company had total current assets of $277,672 and total assets of $349,044 as compared to $16,455 current assets and $ 57,876 total assets at December 31, 2005. The Company had a net working capital deficit of $582,029 at September 30, 2006 and $253,955 at December 31, 2005. Net stockholders' deficit in the Company was and $ 510,657 as of September 30, 2006 and $212,534 at December 31, 2005. The Company continues to seek strategic financing alternatives, including discussions with current and future potential investors. The company has multiple short term notes with a shareholder of the company which amounted to $633,446 on September 30, 2006. The notes carry an interest rate of 10%. The accompanying quarterly financial statements have been prepared assuming the Company will continue as a going concern. The Company's ability to continue as a going concern, however, is dependent upon the Company's ability to implement its business objectives in order to generate cash flow. ITEM 3. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for the Company. (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon the evaluation, the Company's President concluded that, as of the end of the period, the Company's disclosure controls and procedures were effective in timely alerting him to material information relating to the Company required to be included in the reports that the Company files and submits pursuant to the Exchange Act. (b) Changes in Internal Controls Based on this evaluation as of September 30, 2006, there were no significant changes in the Company's internal controls over financial reporting or in any other areas that could significantly affect the Company's internal controls subsequent to the date of his most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On January 11, 2006, AirGATE Technologies, Inc. and Michael Sheriff commenced legal action against former employee and Chief Operations Officer, James E. Flowers, as well as against Logix Consulting, Inc. and WaveTrac, Inc. AirGATE and Mr. Sheriff are seeking damages against the Defendants as a result of their unlawful and malicious breach of contract (violation of non disclosure provisions); breach of fiduciary duty, misappropriation of trade secrets and other proprietary information; tortious interference with prospective business relationships, fraud in the inducement and fraud in stock transactions, theft of trade secrets, and injunctive relief. As part of the legal action, Mr. Sheriff is demanding the return of 4,250,000 shares of restricted common stock issued to Mr. Flowers. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS The following exhibits are included as part of this report: Exhibit Number Title of Document 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Reports on Form 8-K filed during 2006: January 3, 3006 Material Agreement, contract with Hexion Specialty Chemicals 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 this November 20, 2006 THE X-CHANGE CORPORATION (Registrant) DATE: November 20, 2006 By:/s/ Michael L, Sheriff Michael L. Sheriff, President, Chief Executive Officer , and Chairman (Principal Executive Officer) DATE: November 20, 2006 By:/s/ Scott R. Thompson Scott R. Thompson, Chief Financial Officer (Principal Financial Officer)