FORM 10-KSB/A
AMENDMENT #1
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2005
Commission file number: 000-29621
XSUNX, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1384159
------------------------ --------------------
(State of incorporation) (I.R.S. Employer Identification No.)
65 Enterprise, Aliso Viejo, CA 92656
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 330-8060
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None Name of each exchange on which registered: N/A
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: None
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 the filing
requirements for at least the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $0
Transitional Small Business Disclosure Format: Yes [_] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [_] No [X]
Aggregate market value of the authorized voting stock held by non-affiliates of
the registrant as of September 30, 2005: $36,816,026 based on the last sale
price at year end of $.36 as reported by OTCBB.
Number of authorized outstanding shares of the registrant's no par value common
stock, as of January 9, 2006: 123,917,080
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 4
Item 2. Description of Property 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 17
Item 7. Financial Statements F-1 - F-14
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 21
Item 8A. Controls and Procedures 21
Item 8B. Other Information 21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 22
Item 10. Executive Compensation 24
Item 11. Security Ownership of Certain Beneficial Owners and Management 27
Item 12. Certain Relationships and Related Transactions 28
PART IV
Item 13. Exhibits and Reports on Form 8-K 30
Item 14. Principal Accountant Fees and Services 31
SIGNATURES 33
CERTIFICATES
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, and Section 27A of the Securities
Act of 1933 that reflect its current expectations about its future results,
performance, prospects and opportunities. These forward-looking statements are
subject to significant risks, uncertainties, and other factors, including those
identified in Risk Factors (see Item 1 "Description of Business - Risk Factors")
below, which may cause actual results to differ materially from those expressed
in, or implied by, any forward-looking statements. The forward-looking
statements within this Form 10-KSB may be identified by words such as
"believes," "anticipates," "expects," "intends," "may," "would," "will" and
other similar expressions. However, these words are not the exclusive means of
identifying these statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. Except as expressly required by
the federal securities laws, the Company undertakes no obligation to publicly
update or revise any forward-looking statements to reflect events or
circumstances occurring subsequent to the filing of this Form 10-KSB with the
SEC or for any other reason. You should carefully review and consider the
various disclosures the Company make in this report and its other reports filed
with the SEC that attempt to advise interested parties of the risks,
uncertainties and other factors that may affect its business.
For further information about these and other risks, uncertainties and factors,
please review the disclosure included in this report under Item 1 "Description
of Business - Risk Factors and Item 6 "Management's Discussion and Analysis or
Plan of Operation - Cautionary and Forward Looking Statements."
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY HISTORY
XsunX, Inc. ("XsunX," the "Company" or the "issuer") is a Colorado corporation
formerly known as Sun River Mining Inc. "Sun River"). The Company was originally
incorporated in Colorado on February 25, 1997. Effective September 24, 2003, the
Company completed a Plan of Reorganization and Asset Purchase Agreement (the
"Plan") with Xoptix, Inc., a California corporation.
Pursuant to the Plan the Company acquired the following three patents for
Seventy Million (70,000,000) shares (post reverse split one for twenty): No.
6,180,871 for Transparent Solar Cell and Method of Fabrication (Device), granted
on January 30, 2001; No. 6,320,117 for Transparent Solar Cell and Method of
Fabrication (Method of Fabrication), granted on November 20, 2001; and No.
6,509,204 for Transparent Solar Cell and Method of Fabrication (formed with a
Schottky barrier diode and method of its manufacture), granted on January 21,
2003.
Pursuant to the Plan, the Company authorized the issuance of 110,530,000 (post
reverse split) common shares. Prior to the Plan the Company had no tangible
assets and insignificant liabilities. Subsequent to the Plan the Company
completed its name change from Sun River Mining, Inc. to XsunX, Inc. The
transaction was completed on September 30, 2003.
GENERAL OVERVIEW
XsunX, Inc. is developing new and innovative thin film solar cell designs and
manufacturing process with the intent to provide commercially viable solar cell
designs that convert sun light into electrical energy. The process for producing
electricity from sunlight is known as Photovoltaics. Photovoltaic ("PV") is the
science of capturing and converting sun light into electricity.
The Company is focusing its research and product development efforts on thin
film PV devices in an effort to capitalize on what it perceives as cost and
application diversity advantages to current rigid multi-crystalline silicon
wafer technologies. The Company's current thin film cell designs employ between
.2 microns to 1.5 microns of material thickness as opposed to an approximate 400
microns of material thickness for multi-crystalline cell designs. This
significant reduction in cell thickness and flexibility of the completed cell
structure leads to the use of "thin film" terminology in describing the solar
cell design.
The focus of the Company's development efforts is to deliver two aspects of
technologies in the form of an integrated solution providing, a) commercially
scalable manufactured processes and equipment designed for the specific
manufacture of the Company's thin film solar technologies, and, b) proprietary
thin film solar cell designs that address new application opportunities in the
growing field of Building Integrated Photovoltaics.
Building Integrated Photovoltaics ("BIPV"), in concept, allows photovoltaic
material, in the form of photoelectric panels, to be incorporated into the
design of building materials; thus, providing a way to integrate additional
sources of power production into the operation of buildings. As the BIPV
category of the photovoltaic industry is beginning its growth into the US and
worldwide markets, XsunX intends to attpemt to achieve commercialization of BIPV
through a combination of innovation and patented thin film designs and
manufacturing techniques.
4
BIPV technology might eventually enable every building to be a virtual power
plant by utilizing the power of the sun, through the skin of the building, in an
aesthetically sound and structurally safe environment if its economics and
productability can be proven.
PRODUCT DEVELOPMENT
The first of its product development efforts is Power Glass(TM) - an innovative
thin film solar technology that is intended to allow windows to produce
electricity from the power of the sun without significantly altering the
appearance or use of the window or transparent surface. Using proprietary and
patented solar cell designs and manufacturing processes, the Company is focused
on the development of thin film solar cell designs for semi-transparent coatings
on thin flexible plastics that create large area monolithic in appearance solar
cell structures that you can see through.
The design of the Power Glass solar cell provides for the manufacture of
numerous small cells on thin transparent flexible plastics. As part of the
manufacturing process numerous individual cells are produced simultaneously on
rolls of thin plastic substrates and interconnected using minimally apparent
segmentations. The result is a large area integrated solar cell device that is
monolithic or uniform in appearance and simulates tinted solar control films
used in window shading applications. The Company believes the advantages to the
use of its films in solar glass designs, over current solar glass designs, lie
in improved esthetic appearance, reduced manufacturing or assembly requirements,
and lower finished product costs.
These cells are single-junction amorphous silicon based (a-Si) solar cells that
depending on the degree of light transmission, or transmisivity, are expected to
operate at 4% + efficiencies. That is approximately 4 or more watts of direct
current can be produced per square foot of Power Glass film. While lower in
efficiency than opaque thin film multi-junction amorphous silicon at
approximately 5-7%, and rigid silicon wafers at 12-15% efficiencies the Power
Glass films benefit from cost reductions in the manufacturing process. The
Company believes that the following combined attributes will provide Power Glass
films a competitive advantage while at the same time addressing architectural
glass facade applications that have been under utilized as a platform for the
integration of photovoltaic technologies;
o Low temperature processing techniques of (<150C) allow the use less
expensive plastic or polyester substrates that will not be exposed to
higher temperature manufacturing processes of multi-junction
amorphous at (250C) and silicon wafer at (600-800C)
o Significant reductions in the amount of silicon used with only .2
microns for Power Glass as compared to 1 micron for multi-junction
amorphous, and 400 microns for silicon wafers.
o Fully integrated large area solar modules as part of the
manufacturing process on rolled substrate materials that can be
integrated into glass assemblies.
5
As part of the Company's plan to develop new and innovative solar cell designs
and use applications, the Company expanded its business focus in October 2005 to
include the development of thin film opaque solar cell designs and manufacturing
methods. The focus of this product development will be aimed at the
commercialization of U.S. Provisional Patent Application serial number
60/536,151 - three terminal and four terminal solar cells, solar cell panels,
and method of manufacture. The Company refers to the design of this solar cell
as a 4 terminal solar cell and believes that it may provide a number of
improvements over current multi-junction solar cell deigns.
This unique 4 terminal solar cell design uses a combination of thin film
transparent cell technology, derived from the Company's Power Glass initiative,
with that of a thin film nano-crystalline solar cell structure. XsunX believes
that the combination of these two technologies into a single device holds an
opportunity to deliver low cost, high efficiency, flexible, and light weight
solar cells providing performance characteristics commonly found only in various
forms of expensive crystalline wafer technologies.
Preliminary and rudimentary laboratory tests of this technology have produced
conversion efficiencies of 9.9%. The Company believes that through the further
refinement of the cell structure deposition processes and enhanced material,
open circuit voltage, and band gap properties the 4 terminal thin film device
may provide conversion efficiencies approaching 14-15% although this is not
assured nor is it proven in lab tests.
The design of the 4 terminal thin film solar cell provides several advantages to
existing multi-junction solar cell designs. A primary benefit is that the 4
terminal cell does not require electrical current matching between each cell.
This circumvents a common problem plaguing multi-junction devices that can cause
reduced overall solar cell power output. Stability issues are also addressed
through the use of low band gap nano-crystalline junction materials and
ultra-thin amorphous silicon materials to create a stable and efficient solar
cell stack. Low temperature processing capabilities of this design may further
increase manufacturing efficiencies allowing the use of less expensive substrate
materials.
The decision to diversify the Company's product development efforts to include
opaque solar cell designs was fueled by what the Company sees as opportunities
for domestic and international demand in opaque solar cell products and
applications. In countries such as China, Japan, Germany, and the U.S., there is
a growing trend supporting the increased use of green building designs promoting
the use of integrated solar technologies within building materials. XsunX
believes that the development of a stable, high efficiency, thin film solar cell
could provide building material manufacturers with a preferred alternative to
the use of lower efficiency multi-junction thin films and the more costly
multi-crystalline solutions.
The process of integrating renewable power generating properties into building
materials such as glass and onto buildings is known as Building Integrated
Photovoltaics or "BIPV." If its research efforts produce a design that provides
more efficiency of power production at economic costs, XsunX intends to be a
leader in the design and delivery of BIPV thin film designs and manufacturing
methods.
The Company believes that its thin film design research may provide a solution
for the wide scale integration of BIPV energy producing products into living and
working environments. If the Company can achieve commercialization of its
research designs, the Company anticipates the majority of revenues will be
derived from the sale and licensure of its manufacturing process equipment and
solar cell designs, rather than acting as a manufacturer of product.
6
COMPANY SPONSORED RESEARCH AND DEVELOPMENT
Management has established a plan under which the Company is conducting research
to commercialize its technologies and developing new technology through the
contracting for research, development and planning for commercialization
processes with certain qualified facilities that specialize in the Company's
technology. Management believes this product development process provides the
Company with the fastest path to marketable products, the maximization of
corporate resources, and, the broadest access to capable device, optical and
material engineering facilities, and technical expertise.
In June 2004 XsunX established, and continues to maintain, a primary strategic
relationship with Colorado based MVSystems, Inc. that designs, builds, and
delivers state-of-the-art manufacturing tools designed specifically for the thin
film semiconductor market. MVSystems, Inc. ("MVSystems") is equipped with both
the technical staff and tools necessary for the development and
commercialization of XsunX technologies. The terms of the working relationship
provide XsunX with complete R&D facilities without mark-up for profit on the use
of staff and equipment. In return MVSystems has received warrants for the
purchase of common stock in XsunX. The objective of this ongoing plan is to
provide the Company with technical expertise necessary for the development of
manufacturing techniques and thin film solar cell designs.
In September 2004 XsunX increased its patent and technology assets by acquiring
an exclusive royalty free license from MVSystems to a suite of patents and
technologies specific to the design and manufacture of its semi-transparent
solar electric glazing initiative, "Power Glass." In October of 2005 the Company
further expanded its licensing rights with MVSystems to include the design and
manufacture of opaque solar cell designs which also expanded the Company's
intended product design base to include both semi-transparent and
non-transparent thin film solar cell designs, and manufacturing methods, (see
Item 8B "Other Information - Expanded License and Warrants"). The Company
believes that the licensed technologies provide them with key aspects to
facilitate development efforts, and which may enable designs for the commercial
viability of future products.
As part of the October 2005 license expansion with MVSystems the Company also
received the benefit of equipment manufacturing services from MVSystems under an
"at cost, without mark up for profit, plus ten percent" pricing structure. This
provided the Company with access to equipment manufacturing facilities and the
ability to market and deliver integrated manufacturing systems capable of
producing its thin film solar cell designs. During its operating history
MVSystems has designed, constructed, installed, and provided support for over 70
systems ranging from small research and development systems to multi-megawatt
production systems.
For the year ended September 30, 2005, the Company committed 36% or $501,423 of
its operating budget towards product development and another $181,995 was used
for the addition of development equipment. The Company intends to continue to
focus on the development and refinement of solar cell designs, proprietary
manufacturing processes, and facilities design that could be provided to its
future licensees as turnkey solutions for the core requirements necessary for
the mass production of the Company's thin film designs. A large part of the
Company's capital is used for on going product design development efforts.
At present the Company continues to develop the XsunX Power Glass(TM) process
for future commercial applications. Areas of current process development
include:
(a) Process development on thin-film sheet and rolled polymers,
plastics, and metals
(b) Qualify deposition processes and enhance material, open circuit
voltage, and band gap properties
(c) Complete the integration of reel-to-reel processing systems into
the manufacturing process; and
(d) Refine and integrate cell segmentation process into manufacturing
process
7
The Company has and continues to make investments in the development of
intellectual property assets as part of its business plan. For the year ending
September 30, 2006 the Company has developed a plan of operations that commits
34% of its budget or $1,535,000 to research and development, and another 37% of
its budget or $1,700,000 to the manufacture of its first production line system
for eventual re-sale to future licensees. The purpose of these investments is to
develop and market patented and proprietary solar electric thin film designs and
manufacturing processes for sale and licensure to target markets.
PRODUCT DESIGN STRATEGY
The Company's development effort is intended to deliver two aspects of
marketable technologies in the form of an integrated solution providing, a)
commercially scalable manufactured processes and equipment designed for the
specific manufacture of the Company's thin film solar technologies, and b)
proprietary thin film solar cell designs that address new application
opportunities. The manufacture and sale of these items as a system provide the
Company with the ability to deliver its thin films technologies as an integrated
licensable design.
The Company's manufacturing systems design is based upon its licenses from
MVSystems to combine the industry standards of in-line roll-to-roll processing
techniques with the exact processing capabilities of vacuum deposition cluster
tool systems. While in-line roll-to-roll processing systems are widely used in
the manufacture of thin film solar cells, their ability to provide higher unit
volumes comes at the cost of reduced solar cell efficiency due to cross
contamination of materials, the inefficient use of materials, and a
manufacturing design that is rigid and not easily adaptable to increased scale
and the introduction of new technologies.
Conversely, multi-chamber based cluster tool systems are modular in design
allowing for expandability, the introduction of new technologies, provide the
extreme control and exacting standards necessary to produce such high value
items as thin film transistors, and rigid crystalline solar cells, but cluster
tool systems sacrifice throughput resulting in lower unit volumes and yield.
The Company believes that the selective integration of the better attributes of
each of these separate system types provides a hybrid type of system for use in
the fabrication of an array of new thin film devices on flexible substrates. It
is this design that the Company has an exclusive license for from MVSystems,
among other technology. The Company believes that these patented manufacturing
designs may offer economies of increased throughput resulting in yield
advantages, while providing expandability of manufacturing capabilities and the
introduction of new technologies at reduced cost from present models.
An additional benefit to the hybrid system is the ability to employ the use of a
smaller initial foot print, or facilities area, requiring less initial capital
expenditure. As production requirements increase, the efficiencies of
replicating only portions of the systems design to move from single to
multi-megawatt capabilities may provide, in theory, improved
cost-competitiveness. Ultimately, multi-megawatt factories producing thin film
solar cells may be an enabling factor in achieving the necessary price
thresholds required for solar to compete with traditional power generation
choices.
8
TRADEMARK, PROPRIETARY TECHNOLOGY AND PATENTS
The Company entered into an agreement for the purchase of the U.S. registered
trademark "Power Glass(TM)" and Internet domain name PowerGlass.com in May 2004
from Western Gas and Electric Company, a California corporation. The Company has
not been issued registered trademarks for its "XsunX" trade name. The Company
may file trademark and trade name applications with the United States Office of
Patents and Trademarks for its proposed trade names and trademarks.
In September 2003 the Company was assigned the rights to three patents as part
of an Asset Purchase Agreement with Xoptix Inc., a California corporation. The
patents acquired were No. 6,180,871 for Transparent Solar Cell and Method of
Fabrication (Device), granted on January 30, 2001; No. 6,320,117 for Transparent
Solar Cell and Method of Fabrication (Method of Fabrication), granted on
November 20, 2001; and No. 6,509,204 for Transparent Solar Cell and Method of
Fabrication (formed with a Schottky barrier diode and method of its
manufacture), granted on January 21, 2003.
In addition, XsunX licensed the patent and technology portfolio of MVSystems,
Inc., a Colorado corporation ("MVSystems") in September 2004. The license
granted XsunX the royalty free exclusive rights for use by XsunX in its attempt
to establish a commercially viable process for the manufacture of
semi-transparent solar cells and solar electric glazing processes and,
accordingly, included all MVSystems technology, know how, and resources which
are part of or related to the licensed patents and technology that was then or
may become applicable or beneficial to the furtherance of the business
objectives of XsunX in the future. The license was exclusive as to technology
pertaining to the XsunX field of use as it pertains to the business of
developing, commercializing and licensing processes for the manufacture of
semi-transparent (greater than 5% transparency) solar cells or photovoltaic
glazing technologies.
In October of 2005 the Company further expanded its licensing rights with
MVSystems to include the design and manufacture of opaque solar cell designs
thereby also expanding the Company's intended product base to include both
semi-transparent and non-transparent thin film solar cell designs, and
manufacturing methods, (see Item 8B "Other Information - Expanded License and
Warrants"). The Company believes that the licensed technologies provide them
with key aspects to successful completion of its product development efforts,
the commercial viability of future products, and the ability to deliver those
products.
The following are two of the patents licensed from MVSystems that are management
believes to be beneficial to the development of scalable manufacturing processes
for its thin film technology. Semiconductor Vacuum Deposition System And Method
Having A Reel-To-Reel Substrate Cassette: US6, 258,408 B1: July 10th, 2001.
(Method of Fabrication); and US Provisional Patent Application serial number
60/536,151- three terminal and four terminal solar cells, solar cell panels, and
method of manufacture. (Device and Method of Fabrication)
As part of the October 2005 license expansion with MVSystems the Company also
received the benefit of equipment manufacturing services from MVSystems under a
pricing structure of cost, without mark up for profit, plus ten percent. This
provided the Company with access to initial equipment manufacturing facilities
and an initial ability to market and deliver integrated manufacturing systems
capable of producing its thin film solar cell designs. During its operating
history MVSystems has designed, constructed, installed, and provided support for
over 70 systems ranging from small research and development systems to
multi-megawatt production systems. The Company may have to seek additional
facilities if demand were to exceed MVSystems' delivery capacity.
9
The Company continues to develop additional processes, techniques, and device
designs. These research and development efforts may provide the Company with
additional proprietary technology that may lead to the filing of new provisional
and patent applications.
APPLICATIONS FOR XSUNX PHOTOVOLTAIC THIN FILMS
The Company's thin film solar cell designs are intended to provide benefits
associated with the use of light weight materials, the use of low processing or
manufacturing temperatures providing diversity in the use of substrates
necessary to meet specific application requirements, flexibility for molding to
shapes, and semi-transparency provide characteristics beneficial in the design
of diverse use applications.
The first of the Company's product development efforts is Power Glass(TM) - an
innovative thin film solar technology that is intended to allow windows to
produce electricity from the power of the sun without significantly altering the
appearance or use of the window or transparent surface. Using proprietary and
patented solar cell designs and manufacturing processes, the Company is focused
on the development of thin film solar cell designs for semi-transparent coatings
on thin flexible plastics that create large area monolithic in appearance solar
cell structures that you can see through. The Company believes that Power
Glass(TM) may have ubiquitous applications -- including, but not limited to:
Large Buildings - Architectural Glass:
Power Glass thin films could be applied to the windows in the manufacture of
large buildings, turning these structures into virtual power plants. Electrical
power generated can be used to run building systems augmenting other power
sources.
Industrial, Agricultural, and Public Facilities - Canopy, Skylight, & Roofs:
Power Glass thin films could be applied to the various transparent surfaces of
manufacturing, green house, and public facilities to supply a clean and
renewable portion of electrical power. XsunX believes that these types of
products and applications will provide economic incentives for the wide scale
adoption of the integrated use of Power Glass(TM) thin film technologies. Film
produced by Company licensees using the XsunX process could be supplied to
building material manufacturers worldwide for development and use in numerous
applications.
GROWTH, REVENUE AND DISTRIBUTION PLAN
The Company intends to market integrated manufacturing systems as turnkey
solutions for the manufacture it's current and future PV thin films designs. The
manufacturing systems will be sold to manufacureres as modular systems and
licensed for use in the manufacture the Company's thin film designs.
Manufactureres would in turn agree to manufacture and distribute the Company's
PV thin films, or incorporate the thin film PV technology into their product
manufacturing process as an "original equipment manufacturer" (OEM) and sell the
finished product to their consumers. No licenses or contracts now exist with any
manufacturer.
The Company intends to also target customers who are developing their own
technology platforms in which the manufacture of or the integration of its thin
film solar cells could play an important role. The Company intends to offer
non-exclusive manufacturing licenses and expects to earn a royalty on thin films
manufactured under any licenses. In selling the manufacturing equipment and
licensing the technology to manufacturers, the Company reduces operating
expenses and saves capital in plant, property and equipment. As a result, should
the Company realize earnings it intends to reinvest its retained earnings in R&D
in an effort to continuously develop related new technologies that will help
achieve sustainable competitive advantages for the Company.
10
MARKET
The Company's thin film Power Glass technology, upon completion of
commercialization, may be applied to the large and established glass and
building material industries. That is, transparent photovoltaic glazing may
enable solar energy-production to enter mainstream markets because it can
integral to the designs of buildings. Builders and manufacturers already use
glass, plastic and other materials, so they may be attracted to the economic
benefits of using the same materials that also produce electrical energy.
Three key attributes of photovoltaics as an electricity source are fueling world
interest in photovoltaics "PV":
Environment: PV is a clean, emission-free renewable electrical
generation technology, with substantial potential for a supply
rate in the world's future energy demands.
Technology: PV is reliable, manufacturable, consumer-friendly,
and can be deployed in a wide range of applications.
National Interest: PV is critical to energy security, strategic
technology, and long-term economic growth. As a "distributed"
generation source, this technology acts as a network--not a
grid--and is much less susceptible to large-scale outages caused
by disasters of natural or human origin. It mitigates its
dependence on foreign energy supplies, while providing distinct
benefits to its domestic economy.
According to the Energy Information Administration of the US Department of
Energy, the global photovoltaic industry reached $4.7 billion in worldwide sales
in 2003 and is expected to grow at a rate in excess of 15-20% per year over the
next several decades. The department further estimates that between the years
2000 and 2020 the demand for electrical power in the United States will require
the addition of approximately 355 gigawatts of new energy production capacity.
This presents a 40% increase over present electrical energy production capacity.
In the long view, the Company believes solar energy production is intrinsically
attractive, not only environmentally but also economically. Sunlight is readily,
regularly, and widely available; it is renewable; and it is easily accessible
without the massive expense of mining, drilling, or constructing huge dams or
other facilities. Tapping the sun directly, rather than through the solar energy
stored in fossil fuels, wood, or ethanol, makes too much economic sense not to
be inevitable.
MARKETING STRATEGY
The Company intends to enhance and promote the idea that XsunX manufacturing
systems and thin film technologies, when ready to market, present a compelling
and efficient solution for the manufacture of photovoltaic thin films. In order
to create a favorable environment for sales, the Company plans to undertake
advertising and promotion efforts. These efforts may be outsourced and will
require the services of an advertising relations firm. The Company plans to
interview various firms and select those most capable of assisting us with
comprehensive advertising and promotion plans. The Company intends to commence
building and staffing a marketing department to accelerate these efforts in the
first part of 2006. The Company has not yet finalized the potential costs of
this marketing strategy.
The Company, will invest in small test campaigns before committing to large
promotions or marketing campaigns. The initial marketing strategy The Company
will be to market to potential manufacturer partners in target markets
representing solar device manufactures, glass, and building materials
manufacturers.
BACKLOG OF ORDERS
There are currently no orders for sales at this time.
GOVERNMENT CONTRACTS
There are no government contracts at this time.
11
COMPETITIVE CONDITIONS
Currently, management is not aware of other products substantially similar to
those of the company on the market. However, a number of solar cell technologies
have and are being developed by a number of companies. Such technologies include
amorphous silicon, cadmium telluride, copper-indium-gallium-selenide (CIGS), and
copper indium diselenide as well as advanced concepts in thin film crystalline
silicon, and the use of organic materials. Given the benefit of time,
investment, and advances in manufacturing technologies any of these competing
technologies may achieve manufacturing costs per watt lower than the cost per
watt to manufacture its thin film solar cells.
In accessing the principal competitive factors in the market for solar electric
power products the Company uses price per watt, stability and reliability,
conversion efficiency, diversity in use applications and other performance
metrics such as scalability of manufacturing processes and the ability to adapt
new technologies into cell designs and the manufacturing process without
antiquation of existing infrastructure. If the Company does not compete
successfully with respect to these or other factors, it could materially and
adversely affect its business, results of operations, and financial condition.
A number of large companies are actively engaged in the development,
manufacturing and marketing of solar electric power products. The five largest
PV cell suppliers are Q-Cells Shell Solar, Sharp Corporation, BP Solar, and
Kyocera Corporation, which together supply the significant portion of the
current PV cell market. All of these companies have greater resources to devote
to research, development, manufacturing and marketing than the Company does.
Other competitive factors lie in the current use of other clean renewable energy
technologies such as wind, ocean thermal, ocean tidal, and geo-thermal power
sources, and conventional fossil fuel based technologies for the production of
electricity. The Company expects its primary competition will be within the
solar cell marketplace itself. Barriers to entering the solar cell manufacturing
industry include the technical know-how required to produce solar cells that
maintain acceptable efficiency rates and the design of efficient and scalable
manufacturing processes.
COMPLIANCE WITH ENVIROMENTAL LAWS AND REGULATIONS
The operations of the Company are subject to local, state and federal laws and
regulations governing environmental quality and pollution control. To date,
compliance with these regulations by the Company has had no material effect on
the Company's operations, capital, earnings, or competitive position, and the
cost of such compliance has not been material. The Company is unable to assess
or predict at this time what effect additional regulations or legislation could
have on its activities.
ADMINISTRATIVE OFFICES
As of September 30, 2005 the Company leased administrative office facilities
located at 65 Enterprise, Aliso Viejo CA 92656 for approximately $750 per month
pursuant to a six month lease agreement renewable in 6 month or greater
increments thereafter.
12
EMPLOYEES AND CONSULTANTS
The Company is a development stage company and as of September 30, 2005 had one
salaried employee. Through a strategic technology sharing and facilities use
relationship with MVSystems, Inc. the Company uses the services of 15 additional
technologists and support staff. The Company retains its current President and
Chief Executive Officer, Mr. Tom M. Djokovich, since October 1, 2003. The
Company projects that during the next 12 months the Company's workforce is
likely to increase to 8, with 3 of the new employees being in Administrative,
and 4 in marketing and sales positions. It is anticipated that MVSystems will
also expand the number of employees by 2. In addition to the anticipated
retention of new employees the Company expects to continue to use outside
consultants, subcontract labor, attorneys and accountants as necessary, and may
find a need to engage additional full-time employees as necessary.
ADVISORY BOARD
In September 2004 the Company established the XsunX Scientific Advisory Board to
attract qualified specialists from the fields of material and device
engineering, and, industry specialists representing expertise in manufacturing,
design, certification and applications associated with glass, plastics and
building materials. It is anticipated that panel members will be engaged for a
period of two years. The advisory board retained a chairman, Dr. Arun Madan to
lead the panel, advise the development process and recommend additional
candidates for inclusion on the panel.
In February and March of 2005 the Company added a total of three additional
members to the Scientific Advisory Board representing specialists in the fields
of material sciences specific to the its thin films development efforts, (see
Item 5 "Market for Registrants Common Equity and Related Stockholder Matters -
Grant of Options/Warrants"). The qualifications and biographical information for
the members of the panel are as follows:
Dr. Arun Madan, Chairman Scientific Advisory Board
Dr. Madan is a Research Professor in the Department of Metallurgical and
Materials Engineering at The Colorado School of Mines, President of
MVSystems Inc. and an adjunct professor at The University of Waterloo,
Canada. He became one of the originators of Amorphous Silicon technologies
in 1970 and fabricated the first TFT (thin film transistor) as part of his
Ph.D thesis. With over 30 years of leading edge scientific accomplishments
he has published well over one hundred scientific papers, published a
textbook now in use at several universities and holds fourteen patents on
thin film semiconductor technology as well as advanced vacuum semiconductor
deposition systems. In addition to his recognized leadership in the fields
of thin film semiconductors and solar cells, he is the founder of two
firms, Glasstech Solar Inc. in 1985 and MVSystems, Inc. in 1989. As founder
of these firms he has gained over twenty years of international business,
marketing and management experience successfully establishing technology
sales exceeding $150 million dollars. Leveraging his extensive scientific,
business and leadership capabilities he has led teams of
scientists/engineers in multi-disciplinary programs providing contract
research and development work for a multitude of domestic and international
agencies and firms including the National Renewable Energy Laboratory
(USA), BP-Solar (USA), Shell (The Netherlands), Kovio (USA), Zettacore
(USA), QinetiQ (UK), ENEA (Italy) and Pacific Solar (Australia) etc. Dr
Madan received his Ph.D. - Physics from the University of Dundee, Scotland.
13
Dr. John Moore, Member Scientific Advisory Board
Dr. John J. Moore is a Materials Scientist who holds the position of
Trustees' Professor and Head of Department of Metallurgical and Materials
Engineering at the Colorado School of Mines. Dr. Moore is also Director of
the interdisciplinary graduate program in Materials Science and Director of
the Advanced Coatings and Surface Engineering Laboratory, ACSEL, at the
Colorado School of Mines in Golden. Dr. Moore established the Advanced
Coatings and Surface Engineering Laboratory (ACSEL) at the Colorado School
of Mines in 1994. The main objective of ACSEL is to perform fundamental
research in advanced PVD and CVD systems that will aid the U.S. thin films,
coatings and surface engineering industry. ACSEL is a national and
international leader in research on advanced coatings, surface engineering
and thin film processing. Dr. Moore was awarded a B.Sc. in Materials
Science and Engineering from the University of Surrey, UK, in 1966, a Ph.D.
in Industrial Metallurgy from the University of Birmingham, UK, in 1969,
and a D.Eng. from the School of Materials of the University of Birmingham,
UK, in 1996.
Dr. Arokia Nathan, Member Scientific Advisory Board
Arokia Nathan (SM) is a Professor in Electrical and Computer Engineering,
University of Waterloo, and holds the Canada Research Chair in Nanoscale
Elastic Circuits. He is also the chief technology officer of Ignis
Innovation Inc., Waterloo, Canada, a company he founded to commercialize
technology on thin film silicon backplanes and driving algorithms for
active matrix organic light emitting diode displays. Dr. Nathan has
extensive experience in device physics and modeling, and materials
processing and integration. He has published extensively in the field of
sensor technology and CAD, and thin film transistor electronics, and has
over 15 patents filed/awarded. He is a co-author of two books,
Microtransducer CAD and CCD Image Sensors in Deep-Ultraviolet. He is a
Senior Member of the IEEE and a member of the American Physical Society,
Electrochemical Society, Materials Research Society, Society for
Information Displays, International Society for Optical Engineering, and
the Institute of Electrical Engineers (UK). He chairs the 2005 IEEE Lasers
and Electro-Optics Society Technical Committee on Displays and the Displays
Sub-Committee in both 2004 and 2005. He serves as co-chair of the Fall 2005
Materials Research Society Symposium M: Flexible and Printed Electronics,
Photonics, and Biomaterials, and is currently a Guest Editor for a Special
Issue on Flexible Electronics Technology in IEEE Proceedings. He received
his PhD in Electrical Engineering from the University of Alberta, Edmonton,
Alberta, Canada, in 1988.
Dr. Richard Rocheleau, Member Scientific Advisory Board
Dr. Rocheleau is the director of the Hawaii Natural Energy Institute (HNEI)
of the University of Hawaii designated as a US Department of Energy Center
of Excellence. At HNEI Dr. Rocheleau has established the HNEI Thin Films
Laboratory and developed a research program focused on thin film
photovoltaics and renewable hydrogen production having near-term
applications in both the commercial and military sectors. Dr. Rocheleau
also serves as the PI of several programs including the Hawaii Energy and
Environmental Technology Initiative; and the Hawaii Hydrogen Center for the
Development and Deployment of Distributed Energy Systems. He is the author
of over 30 publications in peer reviewed journals and over 20 conference
proceedings in the areas of photovoltaics, photo electrochemical hydrogen
production, and thin-film electronic materials. Dr. Rocheleau also holds
six patents and three patent disclosures. Leveraging his extensive
scientific and leadership capabilities he has led teams of
scientists/engineers in multi-disciplinary programs providing contract
research and development of PV and semiconductor manufacturing processes
for a number of domestic and international firms including, Chronar
Corporation, Solarex, First Solar, Trex Enterprises, and Global Solar Inc.
Dr. Rocheleau received his BChE and PhD (1980) in Chemical Engineering from
the University of Delaware and a M.S. in Ocean Engineering (1977) from the
University of Hawaii.
14
RISK FACTORS
Need For Additional Financing. The Company has very limited funds, and such
funds may not be adequate to develop the Company's current business plan. The
ultimate success of the Company may depend upon its ability to raise additional
capital. If additional capital is needed, there is no assurance that funds will
be available from any source or, if available, that they can be obtained on
terms acceptable to the Company. If not available, the Company's operations will
be limited to those that can be financed with its modest capital.
Regulation of Penny Stocks. The Company's securities, when available for
trading, will be subject to a Securities and Exchange Commission rule that
imposes special sales practice requirements upon broker-dealers who sell such
securities to persons other than established customers or accredited investors.
For purposes of the rule, the phrase "accredited investors" means, in general
terms, institutions with assets in excess of $5,000,000, or individuals having a
net worth in excess of $1,000,000 or having an annual income that exceeds
$200,000 (or that, when combined with a spouse's income, exceeds $300,000). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and also
may affect the ability of purchasers in this offering to sell their securities
in any market that might develop therefore.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act
of 1934, as amended. Because the securities of the Company may constitute "penny
stocks" within the meaning of the rules, the rules would apply to the Company
and to its securities. The rules may further affect the ability of owners of
Shares to sell the securities of the Company in any market that might develop
for them.
Shareholders should be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differentials and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. The
Company's management is aware of the abuses that have occurred historically in
the penny stock market. Although the Company does not expect to be in a position
to dictate the behavior of the market or of broker-dealers who participate in
the market, management will strive within the confines of practical limitations
to prevent the described patterns from being established with respect to the
Company's securities.
Lack of Profitable Operating History. The Company was formed in 1997 and has had
an unprofitable operating history. The re-organization of the Company and the
acquisition of solar electric glazing technology have provided the Company with
a new opportunity for business development which carries continued special risks
inherent in a new business opportunity. The Company must be regarded as a new or
start-up venture with all of the unforeseen costs, expenses, problems, and
difficulties to which such ventures are subject.
15
No Assurance of Success or Profitability. There is no assurance that the Company
will successfully commercialize its proprietary technology. Even if the Company
should successfully commercialize its proprietary technology, there is no
assurance that it will generate significant revenues or profits, or that the
market price of the Company's common stock will be increased thereby.
Lack of Diversification. Because of the limited financial resources that the
Company has, it is unlikely that the Company will be able to diversify its
operations. The Company's probable inability to diversify its activities into
more than one area will subject the Company to economic fluctuations within a
particular business or industry and therefore increase the risks associated with
the Company's operations.
Dependence upon Management. The Company currently has only two (2) individuals
who are serving as its officers and three (3) persons as directors. The Company
will be heavily dependent upon their skills, talents, and abilities to implement
its business plan.
Indemnification of Officers and Directors. The Colorado Business Corporation Act
provides for the indemnification of its directors, officers, employees, and
agents, under certain circumstances, against attorney's fees and other expenses
incurred by them in any litigation to which they become a party arising from
their association with or activities on behalf of the Company. The Company will
also bear the expenses of such litigation for any of its directors, officers,
employees, or agents, upon such person's promise to repay the Company therefore
if it is ultimately determined that any such person shall not have been entitled
to indemnification. This indemnification policy could result in substantial
expenditures by the Company which it will be unable to recoup.
Directors' Liability Limited. The Colorado Business Corporation Act excludes
personal liability of its directors to the Company and its stockholders for
monetary damages for breach of fiduciary duty except in certain specified
circumstances. Accordingly, the Company will have a much more limited right of
action against its directors than otherwise would be the case. This provision
does not affect the liability of any director under federal or applicable state
securities laws.
Dependence upon Outside Advisors. To supplement the business experience of its
officers and directors, the Company employ's accountants, technical experts,
appraisers, attorneys, or other consultants or advisors. The selection of any
such advisors will be made by the Company's President without any input from
stockholders. Furthermore, it is anticipated that such persons may be engaged on
an "as needed" basis without a continuing fiduciary or other obligation to the
Company. In the event the President of the Company considers it necessary to
hire outside advisors, he may elect to hire persons who are affiliates, if they
are able to provide the required services.
Competition. The Company expects to be at a disadvantage when competing with
many firms that have substantially greater financial and management resources
and capabilities than the Company.
No Foreseeable Dividends. The Company has not paid dividends on its common stock
and does not anticipate paying such dividends in the foreseeable future.
Limited Public Market. There is only a limited public market for the Company's
common stock, and no assurance can be given that a market will continue or that
a shareholder ever will be able to liquidate his investment without considerable
delay, if at all. If a market should continue, the price may be highly volatile.
Factors such as those discussed in this "Risk Factors" section may have a
significant impact upon the market price of the securities offered hereby. Due
to the low price of the securities, many brokerage firms may not be willing to
effect transactions in the securities. Even if a purchaser finds a broker
willing to effect a transaction in these securities, the combination of
brokerage commissions, state transfer taxes, if any, and any other selling costs
may exceed the selling price. Further, many lending institutions will not permit
the use of such securities as collateral for any loans.
16
ITEM 2. DESCRIPTION OF PROPERTY
As of September 30, 2005 the Company leased administrative office facilities
located at 65 Enterprise, Aliso Viejo CA 92656 for approximately $750 per month
pursuant to a six month lease agreement. The Company owns no real property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any pending legal proceedings, nor is
its property subject to such proceedings, at January 10, 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the period ended September 30, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the OTC Bulletin Board under the symbol
"XSNX." The range of high, low and close trade quotations for the Company's
common stock by fiscal quarter within the last two fiscal years, as reported by
the National Quotation Bureau Incorporated, was as follows:
Year Ended September 30, 2005 HIGH LOW CLOSE
-----------------------------
First Quarter ended December 31, 2004 $.51 $.33 $.33
Second Quarter ended March 31, 2005 $.40 $.08 $.11
Third Quarter ended June 30, 2005 $.19 $.08 $.15
Fourth Quarter ended September 30, 2005 $.30 $.13 $.36
Year Ended September 30, 2004
First Quarter ended December 31, 2003 $2.50 $.025 $.51
Second Quarter ended March 31, 2004 $1.00 $.25 $.47
Third Quarter ended June 30, 2004 $ .95 $.40 $.60
Fourth Quarter ended September 30, 2004 $ .65 $.30 $.45
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
NUMBER OF HOLDERS
As of September 30, 2005, there were approximately 612 record holders of the
Company's common stock, not counting shares held in "street name" in brokerage
accounts which is unknown. As of September 30, 2005, there were approximately
123,876,639 shares of common stock outstanding on record with the Company's
stock transfer agent, Mountain Share Transfer. On September 30, 2005 the last
reported sales price of its common stock on the OTCBB was $.36 per share.
DIVIDENDS
The Company has not declared or paid any cash dividends on its common stock and
does not anticipate paying dividends for the foreseeable future.
17
SALE OF UNREGISTERED SECURITIES
GRANT OF OPTIONS/WARRANTS
1. A Consultancy and Advisory agreement with Dr. Arokia Nathan for services to
the Company as a member of the Scientific Advisory Board was approved by the
Board on February 1, 2005. The Board issued a warrant agreement for the purchase
of common stock to Dr. Arokia Nathan in accordance with the provisions of the
Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000)
warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise
term and is subject to conditional vesting in accordance with the following
provisions:
(1) The Warrant will vest in the amount of 50,000 shares upon the
effective date of the Consultancy and Advisory Agreement which
was February 1, 2005. Thereafter, the Warrant will vest at the
rate of 25,000 Shares per calendar quarter, or any apportioned
amount thereof, during the term of two (2) year engagement by
XsunX, Inc. of Dr. Arokia Nathan.
2. A Consultancy and Advisory agreement with Dr Richard E. Rocheleau for
services to the Company as a member of the Scientific Advisory Board was
approved by the Board on February 1, 2005. The Board issued a warrant agreement
for the purchase of common stock to Dr. Richard E. Rocheleau in accordance with
the provisions of the Consulting and Advisory Agreement totaling two hundred
fifty thousand (250,000) warrants exercisable at $.20 each. The Warrant carries
a three (3) year exercise term and is subject to conditional vesting in
accordance with the following provisions:
(1) The Warrant will vest in the amount of 50,000 shares upon the
effective date of the Consultancy and Advisory Agreement which
was February 1, 2005. Thereafter, the Warrant will vest at the
rate of 25,000 Shares per calendar quarter, or any apportioned
amount thereof, during the term of two (2) year engagement by
XsunX, Inc. of Dr. Richard Rocheleau.
3. A Consultancy and Advisory agreement with Dr John J. Moore for services to
the Company as a member of the Scientific Advisory Board was approved by the
Board on March 8, 2005. The Board issued a warrant agreement for the purchase of
common stock to Dr. John J. Moore in accordance with the provisions of the
Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000)
warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise
term and is subject to conditional vesting in accordance with the following
provisions:
(1) The Warrant will vest in the amount of 50,000 shares upon the
effective date of the Consultancy and Advisory Agreement which
was March 8, 2005. Thereafter, the Warrant will vest at the rate
of 25,000 Shares per calendar quarter, or any apportioned amount
thereof, during the term of two (2) year engagement by XsunX,
Inc. of Dr. John Moore.
4. Warrant to Purchase Common Stock Cornell - On July 14, 2005, the Company
consummated a Securities Purchase Agreement (the "Purchase Agreement") with
Cornell providing for the sale by the Company to Cornell of its 12% secured
convertible debentures in the aggregate principal amount of $850,000. Under the
Purchase Agreement, the Company also issued to Cornell five-year warrants to
purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and $0.20,
respectively (collectively, the "Warrants").
During the years ended September 30, 2004, and September 30, 2005, the board of
directors approved the issuance of warrants to purchase an aggregate of
15,125,000 shares of the Company's common stock. Such warrants are exercisable
at prices ranging from $.15 to $.20 per share, vest over periods up to 60
months, and expire at various times through June 2010.
During the years ended September 30, 2004, and September 30, 20005, no warrant
holders exercised warrants to purchase the Company's common stock.
18
A summary of warrant activity for the year ended September 30, 2004 and 2005 is
as follows:
Weighted- Weighted-
Number of Average Average
Warrants Exercise Warrants Exercise
Price Exercisable Price
-------------- ------------- --------------- --------------
Outstanding, September 30, 2003 0 $0.0 0 $0.0
Granted 2004 8,000,000 $.15 6,700,000 $.15
Exercised 2004 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2004 8,000,000 $.15 6,700,000 $.15
Granted 2005 7,125,000 $.17 6,725,000 $.17
Exercised 2005 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2005 15,125,000 $.1595 14,450,000 $.1595
==============
At September 30, 2005, the range of warrant prices for shares under warrants and
the weighted-average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable
-------------------------------------------------- ---------------------------------
Weighted-
Weighted- Average Weighted-
Range of Number of Average Remaining Number Average
Warrant Warrants Exercise Contractual Of Exercise
Exercise Price Price Life Warrants Price
-------------------- ------------ -------------- ---------------- ---------------- -------------
$.15 8,000,000 $ .15 2 6,700,000 $ .15
.17 7,125,000 .17 2.8 6,725,000 .17
------------ ----------------
15,125.000 14,450,000
============ ================
SALES OF SHARES AND DEBENTURE
In a private placement of the Company's common stock pursuant to Regulation S of
the Act on November 8, 2004, the Company accepted an offer for the sale of
1,543,500 shares at a price of $.11 per share, which raised gross proceeds of
$169,785.00. This offer and sale was completed on November 8, 2004.
In a private placement of the Company's common stock made by the Company that
began on December 19, 2003 pursuant to Regulation S of the Act at a variable
price equal to 27% of the five (5) day average closing bid price, the Company
raised gross proceeds of $108,518.77 from the sale of 1,636,800 shares during
the quarter ending December 31, 2004. The offering was terminated on January 3,
2005.
In a private placement of the Company's common stock pursuant to Regulation S of
the Act that began on August 26, 2004 at a variable price equal to 25% of the
previous days closing bid price on the date of the purchase, the Company raised
gross proceeds of $192,764.35 from the sale 2,727,237 shares during the period
ending December 31, 2004. This offering was terminated on December 1, 2004.
19
In a private placement of the Company's common stock pursuant to Regulation S of
the Act on or about January 3, 2005 the Company accepted an offer for the sale
of 66,500 shares at a price of $.0944 per share, which raised gross proceeds of
$6,284.25. This offer and sale was completed on January 3, 2005.
On or about February 4, 2005 the Company issued 300,000 shares of common stock
pursuant to Rule 144 of the Act to 1 consultant as compensation for seven months
of services to be rendered to the company. The shares were valued at the market
price of the Company's common stock at the time of issuance which was $0.08 per
share for a total compensated value of $24,000.00.
In a private placement of the Company's common stock pursuant to Regulation S of
the Act on or about February 19, 2005, the Company accepted an offer for the
sale of 234,000 shares at a price of $.0589 per share, which raised gross
proceeds of $13,782.60. This offer and sale was completed on February 19, 2005.
In a private placement of the Company's common stock pursuant to Regulation S of
the Act on or about April 1, 2005, the Company accepted an offer for the sale of
327,000 shares at a price of $.0764 per share, which raised gross proceeds of
$24,980. This offer and sale was completed on April 1, 2005.
On or about May 5, 2005 the Company issued 125,000 shares of common stock
pursuant to Rule 144 of the Act to 1 consultant as compensation for three months
of services to be rendered to the company. The shares were valued at the market
price of the Company's common stock at the time of issuance which was $0.08 per
share for a total compensated value of $10,000.00.
In a private placement of the Company's common stock pursuant to Regulation S of
the Act on or about May 12, 2005, the Company accepted an offer for the sale of
200,000 shares at a price of $.0764 per share, which raised gross proceeds of
$15,280. This offer and sale was completed on May 12, 2005.
On or about July 21, 2005 the Company issued 49,231 shares of common stock
pursuant to Rule 144 of the Act to 1 consultant as compensation for three months
of services that had been rendered to the company. The shares were valued at the
average market price of the Company's common stock over the previous three month
period of services which was $0.1219 per share for a total compensated value of
$6,000.00.
In July 2005, the Company issued secured convertible debentures for aggregate
proceeds of $850,000. In connection with this transaction, the Company also
issued 2,609,263 shares of common stock and five-year warrants to purchase
4,250,000 shares and 2,125,000 shares at $0.15 and $0.20, respectively. All
securities were issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended. The Company's obligations under the Debenture Agreement are secured
by substantially all of the Company's assets. As further security for its
obligations thereunder, the Company has deposited into escrow 26,798,418 shares
of Common Stock. In addition, Tom Djokovich, the Company's Chief Executive
Officer, has granted a security interest in 925,000 shares of Common Stock that
he owns.
19
In July 2005, in association with the above referenced secured convertible
debenture the Company entered into a Standby Equity Distribution Agreement (the
"Distribution Agreement") with an investor providing for the sale and issuance
of up to $10,000,000 of Common Stock over a period of up to 24 months after the
signing of the Distribution Agreement. Under the Distribution Agreement, the
Company may sell up to $250,000 in shares of its common stock (the "Common
Stock") once every five trading days at a price of 96% of the lowest closing bid
price (as reported by Bloomberg L.P.), of the Common Stock on the principal
market where the Common Stock is traded for the five consecutive trading days
following a notice by the Company to the investor of its intention to sell
shares. The Company will also pay a 5% commitment fee upon each sale of shares
under the Distribution Agreement. The investor has agreed not to short any of
the shares of Common Stock. In connection with the Distribution Agreement, the
Company has issued to the investor 2,544,031 shares of Common Stock as a
commitment fee. It also issued 65,232 shares of Common Stock to a placement
agent as compensation for its services as the exclusive placement agent for the
sale of the Common Stock under the Distribution Agreement.
In regard to the above referenced Distribution Agreement the Company agreed to
file a registration statement registering the Common Stock issuable upon sales
under the Distribution Agreement and for the underlying shares associated with
the sale of a Convertible Secured 12% Debenture, (see above). On August 17, 2005
the Company filed a registration statement with the U.S. Securities and Exchange
Commission. On December 9, 2005 the Company and the investor agreed to the
termination of the Distribution Agreement and withdrawal of the registration
statement as part of a subsequent financing agreement, (see Item 8B "Other
Information - Funding Agreement"). No shares were sold under the Distribution
Agreement prior to its termination.
On or about December 5, 2005 the Company issued 40,441 shares of common stock
pursuant to Rule 144 of the Act to 1 consultant as compensation for three months
of services that had been rendered to the company for the periods between July
7, 2005 and October 6, 2005. The shares were valued at the average market price
of the Company's common stock over the three month period of services which was
$0.18559 per share for a total compensated value of $7,500.00.
USES OF PROCEEDS FROM SALES OF UNREGISTERED SECURITIES
The proceeds from the above sales of unregistered securities were used primarily
to fund the research and developments efforts and day-to-day operations of the
Company and to pay the accrued liabilities associated with these operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Form 10-KSB contains
forward-looking statements. The presentation of future aspects of XsunX, Inc.
("XsunX," the "Company" or "issuer") found in these statements is subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those reflected in such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," or "could" or the negative variations thereof or
comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause XsunX's actual results to be materially different
from any future results expressed or implied by XsunX in those statements.
Important facts that could prevent XsunX from achieving any stated goals
include, but are not limited to, the following:
20
Some of these risks might include, but are not limited to, the following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability to raise
additional capital or financing to implement its business plans;
(e) failure to commercialize its technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside parties;
(h) insufficient revenues to cover operating costs.
There is no assurance that the Company will be profitable, the Company may not
be able to successfully develop, manage or market its products and services, the
Company may not be able to attract or retain qualified executives and technology
personnel, the Company's products and services may become obsolete, government
regulation may hinder the Company's business, additional dilution in outstanding
stock ownership may be incurred due to the issuance of more shares, warrants and
stock options, or the exercise of warrants and stock options, and other risks
inherent in the Company's businesses.
The Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB
filed by the Company in 2005 and 2004 and any Current Reports on Form 8-K filed
by the Company.
For the year ended September 30, 2005, the Company had and continues to focus on
the development and refinement of commercially appealing solar cell designs,
proprietary manufacturing processes and facilities design that could be provided
to its future licensees as turn-key solutions for the mass production of Power
Glass(TM) thin films. A large part of the Company's capital was used for product
development. However, this may begin to shift towards marketing, sales, and
business development in this new fiscal year ending September 30, 2006.
GROWTH, REVENUE AND DISTRIBUTION PLAN
The Company intends to market its integrated manufacturing systems as turnkey
solutions for the manufacture of its current and future PV thin films designs.
The manufacturing systems will be sold to manufacturers as modular systems and
licensed for use in the manufacture the Company's thin film designs.
Manufacturers would in turn agree to manufacture and distribute the Company's PV
thin films, or incorporate the thin film PV technology into their product
manufacturing process as an "original equipment manufacturer" (OEM) and sell the
finished product to their consumers. No licenses or contracts now exist with any
manufacturer.
The Company intends to target customers who are developing their own technology
platforms in which the manufacture of or the integration of its thin film solar
cells could play an important role. The Company will offer non-exclusive
manufacturing licenses and expects to earn a royalty on thin films manufactured.
In selling the manufacturing equipment and licensing the technology to
manufacturers, the Company reduces operating expenses and saves capital in
plant, property and equipment. As a result, should the Company realize earnings,
it intends to reinvest its retained earnings in R&D in an effort to continuously
develop related new technologies that will help achieve sustainable competitive
advantages for the Company.
21
MARKETING STRATEGY
The Company intends to enhance, promote and support the idea that XsunX
manufacturing systems and thin film technologies present a compelling and
efficient solution for the scalable manufacture of diverse photovoltaic thin
films. In order to create a favorable environment for sales, the Company plans
to undertake advertising and promotion efforts. These efforts may be outsourced
and will require the services of an advertising relations firm. The Company
plans to interview various firms and select those most capable of assisting us
with comprehensive advertising and promotion plans. The Company intends to
commence building and staffing its marketing department to accelerate these
efforts in the first part of 2006. The Company has not yet finalized the
potential costs of its marketing strategy.
The Company will invest in small test campaigns before committing to large
promotions or marketing campaigns. The initial marketing strategy the Company
will be to market to potential manufacturer partners in its target markets
representing solar device manufactures, glass, and building materials
manufacturers.
PLAN OF OPERATIONS
XsunX anticipates the 12-month capital operational requirements of the company
to be $4,500,000 dollars. Since the reorganization of the Company on September
30, 2003 the Company has raised amounts necessary to finance operations through
the placement of equity capital in the form of one or more private offering's of
common stock to accredited investors. On July 14, 2005 and December 12, 2005 the
Company issued convertible debentures in the amount of $850,000, (see Item 5
"Market for Registrants Common Equity and Related Stockholder Matters - Sale of
Shares and Debenture") and $5,000,000, (see Item 8B "Other Invormation - Funding
Agreement") respectively to an accredited investor. The net proceeds from the
placement of equity capital and the debentures will be applied to its 12 month
plan of operations as follows: (i) approximately $550,000 will be used to pay
costs associated with completion of product development of the Power Glass(R)
product under its Phase III development plan, (ii) approximately $675,000 will
be used to pay costs associated with the development of a 4-Terminal
nano-crystalline solar cell patent for commercialization purposes, (iii)
approximately $1,700,000 will be used for the manufacture of a marketable
commercial scale manufacturing system, (iv) approximately $210,000 will be used
for the engineering and adaptation of certain manufacturing devices and
techniques to provide product manufacturing demonstration capabilities, (v)
approximately $50,000 will be used to purchase testing and development equipment
or expand existing facilities, (vi) approximately $100,000 will be used to pay
for third party engineering, testing, and consulting services, (vii)
approximately $485,000 will be used to pay salaries and general administrative
costs, and for intellectual property protection, (viii) approximately $225,000
will be used to pay for sales and market development, general competitive
research and publicity costs, and (v) approximately $505,000 will be used for
general working capital.
The Company may change any or all of the budget categories in the execution of
its business attempts. None of the items is to be considered fixed or
unchangeable.
The Company will need substantial additional capital to support its budget. The
Company has no revenues. No representation is made that any funds will be
available when needed. In the event funds cannot be raised when needed, the
Company may not be able to carry out its business plan, may never achieve sales
or royalty income, and could fail in business as a result of these
uncertainties.
The Company will need to seek additional financing for this budget. (See "Risk
Factors" at p. 14.
22
Management believes the summary data and audit presented herein is a fair
presentation of the Company's results of operations for the periods presented.
These historical results may not necessarily be indicative of results to be
expected for any future period. As such, future results of the Company may
differ significantly from previous periods.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005, COMPARED TO
FISCAL YEAR ENDED SEPTEMBER 30, 2004
The Company generated no revenues in the period ended September 30, 2005 as well
as for the same period in 2004.
The Company incurred expenses totaling $1,383,406 in 2005 compared to $1,528,193
in 2004. The decrease of $144,787 resulted from the absence of a one time
non-cash warrant issuance expense of $900,000 for the licensure of patents
accounted for in the period ended September 30, 2004. Excluding this non-cash
warrant expense in the comparative analysis between the periods results in an
increase of $755,213 in normal and customary operational expenses for the period
ending September 30, 2005 as compared to the same period 2004.
Primary sources for the increase to operating expense of $755,213 include: an
increase of $371,930 in Research and Development activities totaling $501,423 as
compared to $129,493 incurred for the same period in 2004, an increase of
$109,773 in Public Relations activity totaling $116,413 as compared to activity
totaling $6,640 for the same period in 2004, an increase of $35,900 in Salaries
totaling $155,236 as compared to Salaries totaling $119,336 for the same period
in 2004, an increase in consulting fees of $301,000 to $320,944 in the period in
2005 compared to $19,900 in the period in 2004, an increase of $80,046 in Legal
and Accounting expenses totaling $107,249 as compared to Legal and Accounting
totaling $27,203 for the same period in 2004, an increase of $115,000 for Loan
Origination and Service fees as compared to $0 expenses for the same period in
2004, and an increase of $42,564 in General and Administrative expenses related
to an increase in travel, advertising, depreciation and business development
expenses. The $1,383,406 in operating expenses includes non-cash charges of
$360,944 for the issuance of unregistered stock for public relations, advisory
services, and financing fees in lieu of cash payment for services and financing
fees.
For the twelve months ended September 30, 2005, the Company's consolidated net
loss was $(1,400,839) including an interest expense of $17,433 as compared to a
consolidated net loss of $(1,509,068) for the same period ended September 30,
2004 including an interest expense of $251. The decrease of $108,229 resulted
from the absence of a one time non-cash warrant issuance expense of $900,000 for
the licensure of patents accounted for in the period ended September 30, 2004.
Excluding this one time non-cash warrant expense, in the comparative analysis
between the period's, results in an increase of $791,771 in net loss for the
period ended September 30, 2005 as compared to the same period 2004. The net
loss per share was less than $(0.02) for the twelve month period ended September
30, 2005 compared to ($.01) per share loss in the prior year.
23
Due to the Company's change in primary business focus in October 2003 and the
developing nature of its business opportunities these historical results may not
necessarily be indicative of results to be expected for any future period. As
such, future results of the Company may differ significantly from previous
periods. Since inception in 1997 the Company has accumulated deficits totaling
($6,204,284) to September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (deficit) at September 30, 2005 was $(718,380) as compared to
$(38,819) at September 30, 2004.
During the year ended, September 30, 2005, the Company used $1,049,650 net cash
in operating activities as compared to using $1,436,630 net cash for the year
ended, September 30, 2004. The decrease of $386,980 resulted from the absence of
a one time non-cash warrant issuance expense of $900,000 for the licensure of
patents accounted for in the period ended September 30, 2004. Excluding this one
time non-cash warrant expense, in the comparative analysis between the period's,
results in an increase of $513,020 in net cash used in operations for the period
ended September 30, 2005.This increase of net cash used in operations was
primarily a result of an increase of $371,930 in Research and Development
activities and an increase to operational costs associated with the development
of the Company's business plan.
For the twelve months ended, September 30, 2005, the Company's capital needs
have primarily been met from the proceeds of (i) private placement of common
stock made by the Company pursuant to Regulation S of the Act, as amended (the
"Act"), to an accredited investor at $0.15 per share which raised gross proceeds
of $169,785; (ii) private placements of common stock made by the Company
pursuant to Regulation S of the Act, at a variable price ranging from 25% to 30%
of the closing bid price on the date of the purchase of the stock, which raised
gross proceeds of $301,283; (iii) private placements of common stock made by the
Company pursuant to Regulation S of the Act, at prices ranging from $.0944 to
$.0589, which raised gross proceeds of $60,327; (iv) loans to the Company of
$3,775 with a remaining balance of $0.0; and (v) the sale of a secured
convertible 12% debenture in the amount of $850,000. Total cash provided by
financing activities during the year ended September 30, 2005 increased to
$1,385,170 from $283,895 during the period ended September 30, 2004. The
increase of $1,101,275 was mainly attributable to an increase of $248,725 in the
sale of unregistered securities and the sale of a $850,000 secured convertible
12% debenture by the Company.
Cash Flows
There were no cash flows provided by operations during the twelve months ended
September 30, 2005.
Cash and cash equivalents at September 30, 2005 were $255,853, an increase of
$198,509 from September 30, 2004.
During the year ended, September 30, 2005, the Company used $191,995 for
investing activities as compared to $12,267 for the year ended September 30,
2004. The increased use of cash for investing activities resulted from an
increase in the acquisition of assets in the form of equipment and trademark
rights.
The Company had, at September 30, 2005, working capital of $255,853. The Company
anticipates that there will not be sufficient cash generated from operations in
the current year necessary to fund its current and anticipated cash
requirements. The Company plans to obtain additional financing from equity and
debt placements. The Company has been able to raise capital in a series of
equity and debt offerings in the past. While there can be no assurances that it
will be able to obtain such additional financing, on terms acceptable to us and
at the times required, or at all, the Company believes that sufficient capital
can be raised in the foreseeable future. On December 12, 2005 the Company sold a
secured 10% convertible debenture in the amount of $5,000,000 (see "Item 8B
"Other Information - Funding Agreement").
24
NET OPERATING LOSS
For federal income tax purposes, the Company have net operating loss carry
forwards of approximately $6,204,284 as of September 30, 2005. These carry
forwards will begin to expire in 2010. The use of such net operating loss carry
forwards to be offset against future taxable income, if achieved, may be subject
to specified annual limitations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please refer to pages F-1 through F-14.
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Michael Johnson & Co., LLC, formerly auditors for the Company, was dismissed as
auditor on July 18, 2005. Jaspers + Hall, PC were engaged as auditors for
Company on July 18, 2005.
The Change of Accountants was approved by the Board of Directors. No audit
committee exists other than the members of the Board of Directors.
In connection with audit of the two most recent fiscal years, and through the
date of termination of the accountants, no disagreements exist with any former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure, which disagreements if not
resolved to the satisfaction of the former accountant would have caused them to
make reference in connection with his report to the subject of the
disagreement(s).
The audit report by Michael Johnson & Co., LLC. for the periods ended September
30, 2004 and September 30, 2003 contained an opinion which included a paragraph
discussing uncertainties related to continuation of the Registrant as a going
concern. Otherwise, the audit reports by Michael Johnson & Co., LLC for the
period September 30, 2004 and September 30, 2003 did not contain an adverse
opinion or disclaimer of opinion, nor was qualified or modified as to
uncertainty, audit scope, or accounting principles.
ITEM 8A. CONTROLS AND PROCEEDURES
The management of the Company has evaluated the effectiveness of the issuer's
disclosure controls and procedures as of the end of the period covered by the
report (evaluation date) and have concluded that the disclosure controls and
procedures are adequate and effective based upon their evaluation as of the
evaluation date.
There were no material changes in disclosure controls and procedures or in
internal controls or in other factors that could materially affect disclosure
controls and procedures or internal controls in the fourth fiscal quarter,
including any corrective actions with regard to material deficiencies and
material weaknesses.
ITEM 8B. OTHER INFORMATION
10% Secured Convertible Debenture
On December 12, 2005, the Company consummated a Securities Purchase Agreement
(the "Purchase Agreement") dated December 12, 2005 with Cornell Capital Partners
L.P. ("Cornell") providing for the sale by the Company to Cornell of its 10%
secured convertible debentures in the aggregate principal amount of $5,000,000
(the "Debentures") of which $2,000,000 was advanced immediately. The second
installment of $2,000,000 will be advanced immediately prior to the filing by
25
the Company with the Securities and Exchange Commission (the "Commissions") of
the Registration Statement (as defined below). The last installment of
$1,000,000 will be advanced three days prior to the date the Registration
Statement is declared effective by the Commission.
The Debentures mature on the third anniversary of the date of issuance (the
"Maturity Date") and the Company is not required to make any payments until the
Maturity Date.
Holders (the "Holders") of the Debentures may convert at any time amounts
outstanding under the Debentures into shares of Common Stock of the Company (the
"Common Stock") at a conversion price per share equal to the lesser of $0.38 or
95% of the lowest daily volume weighted average price of the Common Stock, as
quoted by Bloomberg, LP, for the 30 trading days immediately preceding the date
of conversion (the "Variable Market Price"). Unless waived by the Company, the
Holders may not, together with their affiliates, convert more than an aggregate
of $350,000 in any 30-day period of principal amount of the Debentures at the
Variable Market Price. Cornell has agreed not to short any of the shares of
Common Stock.
The Company has the right to redeem a portion or all amounts outstanding under
the Debenture prior to the Maturity Date at a 15% redemption premium provided
that the closing bid price of the Common Stock is less than $0.38.
Under the Purchase Agreement, the Company also issued to Cornell five-year
warrants to purchase 3,125,000 and 1,250,000 shares of Common Stock at $0.45 and
$0.55, respectively (collectively, the "Warrants").
In connection with the Purchase Agreement, the Company also entered into a
registration rights agreement (the "Registration Rights Agreement") providing
for the filing of a registration statement (the "Registration Statement") with
the Securities and Exchange Commission registering the Common Stock issuable
upon conversion of the Debentures and exercise of the Warrants. The Company is
obligated to use its best efforts to cause the Registration Statement to be
declared effective no later than April 11, 2006 and to insure that the
registration statement remains in effect until all of the shares of common stock
issuable upon conversion of the Debentures and exercise of the Warrants have
been sold. In the event of a default of its obligations under the Registration
Rights Agreement, including its agreement to file the Registration Statement
with the Securities and Exchange Commission no later than January 11, 2006, or
if the Registration Statement is not declared effective by April 11, 2006, it is
required pay to Cornell, as liquidated damages, for each month that the
registration statement has not been filed or declared effective, as the case may
be, either a cash amount or shares of our common stock equal to 2% of the
liquidated value of the Debentures.
Prior to executing the Purchase Agreement, the Company had withdrawn the
registration statement that included Common Stock issued to Cornell and Common
Stock to be issued upon the conversion of debentures and the exercise of
warrants previously sold to Cornell (collectively, the "Initial Securities")
pursuant to a securities purchase agreement executed on July 14, 2005 (the
"Prior Agreement") as well as Common Stock to be issued pursuant to the Standby
Equity Distribution Agreement dated July 14, 2005 between the Company and
Cornell (the "Distribution Agreement"). All Initial Securities will be included
in the Registration Statement. The Company and Cornell also agreed to terminate
the Distribution Agreement.
26
The Company's obligations under the Prior Agreement and the Purchase Agreement
are secured by substantially all of the Company's assets. As further security
for its obligations thereunder, the Company has deposited into escrow 26,798,418
shares of Common Stock. In addition, Tom Djokovich, the Company's Chief
Executive Officer, has granted a security interest in 925,000 shares of Common
Stock that he owns to secure the Company's obligations under the Prior Agreement
only.
Standby Equity Distribution Agreement
On July 14, 2005, XsunX, Inc. (the "Company") entered into a Standby Equity
Distribution Agreement (the "Distribution Agreement") with Cornell Capital
Partners LP ("Cornell") providing for the sale and issuance to Cornell of up to
$10,000,000 of Common Stock over a period of up to 24 months after the signing
of the Distribution Agreement. Under the Distribution Agreement, the Company may
sell to Cornell up to $250,000 in shares of its common stock (the "Common
Stock") once every five trading days at a price of 96% of the lowest closing bid
price (as reported by Bloomberg L.P.), of the Common Stock on the principal
market where the Common Stock is traded for the five consecutive trading days
following a notice by the Company to Cornell of its intention to sell shares.
The Company will also pay a 5% commitment fee upon each sale of shares under the
Distribution Agreement. Cornell has agreed not to short any of the shares of
Common Stock The Company has agreed to file a registration statement registering
the Common Stock issuable upon sales under the Distribution Agreement and no
sale will be made to Cornell unless and until such registration statement has
been declared effective. In connection with the Distribution Agreement, the
Company has issued to Cornell 2,544,031 shares of Common Stock as a commitment
fee. It also issued to Newbridge Securities Corporation, a registered broker
dealer, 65,232 shares of Common Stock as compensation for its services as the
exclusive placement agent for the sale of the Common Stock under the
Distribution Agreement. The Distribution Agreement was terminated on December
12, 2005.
12% Secured Convertible Debentures
Also on July 14, 2005, the Company consummated a Securities Purchase Agreement
(the "Purchase Agreement") dated July 14, 2005 with Cornell providing for the
sale by the Company to Cornell of its 12% secured convertible debentures in the
aggregate principal amount of $850,000 (the "Debentures") of which $400,000 was
advanced immediately. The balance of $450,000 will be advanced two business days
prior to the filing by the Company with the Securities and Exchange Commission
of the Registration Statement (as defined below). The Debentures mature on the
first anniversary of the date of issuance and bear interest at the annual rate
of 12% in cash. The Company is required to make monthly principal and interest
commencing on the first day of the month following the declaration of
effectiveness of the Registration Statement or 120 days from the date of
issuance of the Debentures, whichever occurs first. Holders may convert, at any
time, the principal amount outstanding under the Debentures into shares of
Common Stock, at a conversion price per share equal to $0.10, subject to
27
adjustment. Upon three-business day advance written notice, the Company may
redeem the Debentures, in whole or part. In the event that the closing bid price
of the Common Stock on the date that the Company provides advance written notice
of redemption or on the date redemption is made exceeds the conversion price
then in effect, the redemption will be calculated at 120% of the Debentures face
value.
Under the Purchase Agreement, the Company also issued to Cornell five-year
warrants to purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and
$0.20, respectively (collectively, the "Warrants"). In connection with the
Purchase Agreement, the Company also entered into a registration rights
agreement (the "Registration Rights Agreement") providing for the filing of a
registration statement (the "Registration Statement") with the Securities and
Exchange Commission registering the Common Stock issuable upon conversion of the
Debentures and exercise of the Warrants. The Company is obligated to use its
best efforts to cause the Registration Statement to be declared effective no
later than November 28, 2005 and to insure that the registration statement
remains in effect until all of the shares of common stock issuable upon
conversion of the Debentures and exercise of the Warrants have been sold. In the
event of a default of its obligations under the Registration Rights Agreement,
including its agreement to file the Registration Statement with the Securities
and Exchange Commission no later than August 29, 2005, or if the Registration
Statement is not declared effective by November 28, 2005, it is required pay to
Cornell, as liquidated damages, for each month that the registration statement
has not been filed or declared effective, as the case may be, either a cash
amount or shares of our common stock equal to 2% of the liquidated value of the
Debentures.
The Company's obligations under the Purchase Agreement are secured by
substantially all of the Company's assets. As further security for its
obligations thereunder, the Company has deposited into escrow 26,798,418 shares
of Common Stock. In addition, Tom Djokovich, the Company's Chief Executive
Officer, has granted a security interest in 925,000 shares of Common Stock that
he owns.
XsunX, Inc. announed today that its Phase III development program is set to
expand R&D capabilities through the addition of new laser development equipment,
necessary in the development of key licensable manufacturing techniques.
28
The Company determined that to ensure performance characteristics of solar film,
it needed to bring this phase of development in-house. Over the next month it
plans to complete the installation of the laser and move as rapidly as possible
into developing key manufacturing techniques.
Michael Johnson & Co., LLC, formerly auditors for the Company, was dismissed as
auditor on July 18, 2005. Jaspers + Hall, PC were engaged as auditors for
Company on July 18, 2005.
The Change of Accountants was approved by the Board of Directors. No audit
committee exists other than the members of the Board of Directors.
In connection with audit of the two most recent fiscal years and through the
date of termination of the accountants, no disagreements exist with any former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure, which disagreements if not
resolved to the satisfaction of the former accountant would have caused them to
make reference in connection with his report to the subject of the
disagreement(s).
The audit report by Michael Johnson & Co., LLC.for the period ended September
30, 2004 and September 30, 2003 contained an opinion which included a paragraph
discussing uncertainties related to continuation of the Registrant as a going
concern. Otherwise, the audit report by Michael Johnson & Co., LLC for the
period September 30, 2004 and September 30, 2003 did not contain an adverse
opinion or disclaimer of opinion, nor was qualified or modified as to
uncertainty, audit scope, or accounting principles.
XsunX, Inc. announced on September 7, 2005 that the design of its mass
production systems for the manufacture of its proprietary Power Glass
photovoltaic "PV" films will provide for modular expansion capabilities.
The system design will provide for production capacities of as little as 1
megawatt annually while maintaining expansion capabilities, allowing
manufacturers to ramp up to meet increasing production requirements
incrementally through 20 megawatts or more. The Company believes that this
modular approach may best suit the needs of manufacturers and their markets as
the demand for building integrated PV increases.
The core design is based on a patented multi-chamber cluster tool approach using
cassettes to control or handle rolls of thin plastic films. The rolls of
material (transparent plastic films) are loaded into the cassettes and
robotically moved between chambers or stations. Layers of transparent
semiconductor and conducting materials are deposited onto the plastics in a
manner which prevents cross contamination between chambers to achieve high
performance, semi-transparent, large area solar cell devices. The system design
allows for co-joining of cluster tool systems and hence, increased output, which
can be a limiting factor in conventional in-line systems.
The modular cluster design may also provide manufacturers additional advantages
such as reduced facility costs due to the smaller footprint size of systems,
added redundancy allowing production throughput to continue even when a
processing chamber fails, reductions in material costs through the use of
inexpensive plastics, and the reduction of processing gases which further
reduces material costs.
Expanded License and Warrants
Expanded Use License stock warrant MVSystems, Inc. - As consideration for the
grant of an Expanded Use License on October 12, 2005, granting XsunX additional
benefits for use of licensed technologies and patents, XsunX granted MVS a
warrant (the "Expanded Use License Stock Warrant") for the purchase of up to
Seven Million (7,000,000) shares of common stock of XsunX, the warrant will
expire five (5) years after the date of the grant and is subject to the
following vesting provisions:
(1) The Expanded Use License Stock Warrant allowed for the vesting of
one million (1,000,000) warrants on the effective date of the
agreements.
29
(2) Another one million (1,000,000) warrants will vest upon the
satisfactory completion of a Phase 4 development program for the
development of technologies licensed under the Expanded Use
License.
(3) The balance of five million (5,000,000) warrants will vest upon
the date the technologies licensed within the Expanded Use
License are licensed to a third party in a bona fide arms-length
commercial setting.
Issuance of Shares For Services
On or about December 5, 2005 the Company issued 40,441 shares of common stock
pursuant to Rule 144 of the Act to 1 consultant as compensation for three months
of services that had been rendered to the company for the periods between July
7, 2005 and October 6, 2005. The shares were valued at the average market price
of the Company's common stock over the three month period of services which was
$0.18559 per share for a total compensated value of $7,500.00.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a)
The following table lists the executive offices and directors of the Company as
of September 30, 2004:
NAME Age POSITION HELD TENURE
Brian Altounian 42 Secretary, Director Since September 2003
Tom Djokovich 48 President, CEO, CFO, Director Since September 2003
Thomas Anderson 40 Director Since August 2001
The directors named above will serve until the next annual meeting of the
Company's stockholders. Thereafter, directors will be elected for one-year terms
at the annual stockholders' meeting. Officers will hold their positions at the
pleasure of the board of directors, absent any employment agreement, of which
none currently exists or is contemplated. There is no arrangement or
understanding between the directors and officers of the Company and any other
person pursuant to which any director or officer was or is to be selected as a
director or officer.
The directors of the Company will devote such time to the Company's affairs on
an "as needed" basis, but typically less than 20 hours per month. As a result,
the actual amount of time which they will devote to the Company's affairs is
unknown and is likely to vary substantially from month to month.
BIOGRAPHICAL INFORMATION
BRIAN ALTOUNIAN, age 42, Chairman of the Board, and Secretary as of September
30, 2003;
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Mr. Altounian has over 16 years of experience in the area of finance,
administration and operations. He is currently Chief Operating Officer of
Platinum Studios, a Beverly Hills-based entertainment company that controls the
world's largest independent library of comic book characters, which it adapts
and produces for film, television and all other media. In addition to managing
fiscal growth and staffing, he is spearheading the company's digital strategy,
overseeing business development and acquisitions in the online, interactive, and
wireless industries. Mr. Altounian previously served as the Vice President of
Finance for Lynch Entertainment, a producer of family television series' for the
Nickelodeon and Disney Channels. Prior to joining Lynch Entertainment, Mr.
Altounian held key management positions at numerous entertainment companies
including Director of Finance and Administration at Time Warner Interactive;
Finance Manager for National Geographic Television; and Manager of Business
Services for WQED, the nation's first community-owned public television station.
He also founded his own consulting company, BKA Enterprises, a firm that
supported and advised entertainment and multimedia companies in the areas of
financial and business management. Mr. Altounian holds an undergraduate degree
from UCLA and an MBA from Pepperdine University.
TOM DJOKOVICH, age 48, President and Chief Executive Officer as of September 30,
2003, and Director;
Mr. Djokovich was the founder and served from 1995 to 2002 as the Chief
Executive Officer of Accesspoint Corporation, a vertically integrated provider
of electronic transaction processing and e-business solutions for merchants.
Under Mr. Djokovich's guidance, Accesspoint became a member of the
Visa/MasterCard association, the national check processing association NACHA,
and developed one of the payment industry's most diverse set of network based
transaction processing, business management and CRM systems for both Internet
and conventional points of sale. Prior to Accesspoint, Mr. Djokovich founded TMD
Construction and Development in 1979. TMD provided management for
multimillion-dollar projects incorporating at times hundreds of employees,
subcontractors and international material acquisitions for commercial,
industrial and custom residential construction services as a licensed building
firm in California. In 1995 Mr. Djokovich developed an early Internet based
business-to-business ordering system for the construction industry. Mr.
Djokovich also currently serves as a Director and Chairman of the Audit
Committee for Roaming Messenger, Inc., a publicly reporting company that
provides a breakthrough software solution for delivering real-time actionable
information for Homeland Security, emergency response, military and enterprise
applications.
THOMAS ANDERSON, age 40, became a director of the Company in August 2001;
Mr. Anderson presently works as a Senior Environmental Scientist for the Energy
and Environmental Engineering Division of Apogen Technologies in Los Alamos, New
Mexico. He earned his B.S. in Geology from Denison University and his M.S. in
Environmental Science and Engineering from Colorado School of Mines. Mr.
Anderson has worked for past 16 years in the environmental consulting field,
providing environmental compliance, characterization and remediation services to
Department of Energy, Department of Defense, and industrial clients. He formerly
worked as a Senior Environmental Scientist at Concurrent Technologies Corp. from
November 2000 to December 2004. From March 2000 to November 2000 he was employed
as a hydrologist at Stone & Webster Engineering, Inc. From July 1998 to March
2000 he was employed by advanced Integrated Management Services as an
Environmental Scientist/Engineer. From 1997 to 1998 he was a graduate research
assistant at Colorado School of Mines in the Environmental Science and
Engineering Program.
31
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT
No disclosure contained herein.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors received no cash compensation for their service to the Company as
directors, but can be reimbursed for expenses actually incurred in connection
with attending meetings of the Board of Directors.
SUMMARY COMPENSATION TABLE OF DIRECTORS
(excludes compensation for executives)
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Name Annual Meeting Fees Consulting Number of Number of
Retainer ($) Fees/Other Fees Shares (#) Securities
Fees ($) ($) Underlying
Options SARS (#)
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Director, Tom Djokovich $0 $0 $0 0 0
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Director, Brian Altounian $0 $0 $0 0 0
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Director, Thomas Anderson $0 $0 $0 0 0
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
EXCUTIVE OFFICER COMPENSATION
The annual compensation for the executive officers of the Company for the post
reorganization operations has not yet been determined, but is expected to be
established by a resolution of the Company's Board of Directors in the future.
The Company has not entered into any employment agreements with its executive
officers to date. The Company may enter into employment agreements with them in
the future.
The following table and notes set forth the annual cash compensation paid to
officers of the Company.
SUMMARY COMPENSATION TABLE OF EXECUTIVES
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Name & Principal Position Fiscal Annual Annual Bonus Awards Other Restricted Securities
Year Salary ($) ($) Annual Stock Award(s) Underlying
Compensation ($) ($) Options/ SARS
(#)
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Tom Djokovich, President 2005 $150,000 0 0 0 0
2004 $130,000 0 0 0 0
2003 $0 0 0 0 0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Brian Altounian, Secretary 2005 $0 0 0 0 0
2004 $0 0 0 0 0
2003 $0 0 0 0 0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Thomas Anderson, Director 2005 $0 0 0 0 0
2004 $0 0 0 0 0
2003 $0 0 0 0 0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
32
(1) The Company has agreed to pay Mr. Djokovich $2,884 per week for services
provided as Chief Executive Officer up to and until the Company determines
executive compensation pursuant to an employment agreement as determined by the
Board. When necessitated by the Company's adverse financial condition Mr.
Djokovich has agreed to the deferment of his monthly salary up to and until such
time that the Company can repay any such deferred amounts. In the period ended
September 30, 2004 Mr. Djokovich agreed to the deferment of $65,000 dollars of
his salary until such time that the Company could begin to repay him. As of the
period ended September 30, 2005 the remaining balance of Mr. Djokovich's
deferred salary was $29,423.
Option/SAR Grants Table (None)
Aggregated Option/SAR Exercises in Last Fiscal Year an FY-End Option/SAR value
(None)
Long Term Incentive Plans - Awards in Last Fiscal Year
(None)
WARRANTS
The following table sets forth information with respect to warrants to purchase
common stock of the Company granted during fiscal year ended September 30, 2005.
Non-Qualified Options
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Name Date Issued Number Issued Exercise Expiration Date Consideration
Price
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Dr.Richard Rocheleau(1) February 1, 2005 250,000 $0.20 February 1, 2008 Advisory Board service
2 year
agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Dr. Arokia Nathan(2) February 1, 2005 250,000 $0.20 February 1, 2008 Advisory Board service
2 year agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Dr. John Moore (3) March 8, 2005 250,000 $0.20 March 8, 2008 Advisory Board service
2 year agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Cornell Capital, LP(4) July 14, 2005 4,250,000 $0.15 July 14, 2010 As part of a financing
agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Cornell Capital, LP(5) July 14, 2005 2,125,000 $0.20 July 14, 2010 As part of a financing
agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
33
(1) The Warrant granted to Dr. Richard Rocheleau will vest in the amount of
50,000 shares upon the effective date of the Consultancy and Advisory Agreement
which was February 1, 2005. Thereafter, the Warrant will vest at the rate of
25,000 Shares per calendar quarter, or any apportioned amount thereof, during
the term of two (2) year engagement by XsunX, Inc. of Dr. Richard Rocheleau.
(2) The Warrant granted to Dr. Arokia Nathan will vest in the amount of 50,000
shares upon the effective date of the Consultancy and Advisory Agreement which
was February 1, 2005. Thereafter, the Warrant will vest at the rate of 25,000
Shares per calendar quarter, or any apportioned amount thereof, during the term
of two (2) year engagement by XsunX, Inc. of Dr. Arokia Nathan.
(3) The Warrant will vest in the amount of 50,000 shares upon the effective date
of the Consultancy and Advisory Agreement which was March 8, 2005. Thereafter,
the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any
apportioned amount thereof, during the term of two (2) year engagement by XsunX,
Inc. of Dr. John Moore.
(4), (5) Warrant to Purchase Common Stock Cornell - On July 14, 2005, the
Company consummated a Securities Purchase Agreement with Cornell providing for
the sale by the Company to Cornell of its 12% secured convertible debentures in
the aggregate principal amount of $850,000. Under the Purchase Agreement, the
Company also issued to Cornell five-year warrants to purchase 4,250,000 and
2,125,000 shares of Common Stock at $0.15 and $0.20, respectively (collectively,
the "Warrants").
During the years ended September 30, 2004, and September 30, 20005, no warrant
holders exercised warrants to purchase the Company's common stock.
A summary of warrant activity for the year ended September 30, 2004 and 2005 is
as follows:
Weighted- Weighted-
Number of Average Average
Warrants Exercise Warrants Exercise
Price Exercisable Price
-------------- ------------- --------------- --------------
Outstanding, September 30, 2003 0 $0.0 0 $0.0
Granted 2004 8,000,000 $.15 6,700,000 $.15
Exercised 2004 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2004 8,000,000 $.15 6,700,000 $.15
Granted 2005 7,125,000 $.17 6,725,000 $.17
Exercised 2005 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2005 15,125,000 $.1595 14,450,000 $.1595
==============
34
At September 30, 2005, the range of warrant prices for shares under warrants and
the weighted-average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable
-------------------------------------------------- ---------------------------------
Weighted-
Weighted- Average Weighted-
Range of Number of Average Remaining Number Average
Warrant Warrants Exercise Contractual Of Exercise
Exercise Price Price Life Warrants Price
-------------------- ------------ -------------- ---------------- ---------------- -------------
$.15 8,000,000 $ .15 2 6,700,000 $ .15
.17 7,125,000 .17 2.8 6,725,000 .17
------------ ----------------
15,125.000 14,450,000
============ ================
No other compensation not described above was paid or distributed during the
last fiscal year to the executive officers of the Company. There are no
compensatory plans or arrangements, with respect to any executive office of the
Company, which result or will result from the resignation, retirement or any
other termination of such individual's employment with the Company or from a
change in control of the Company or a change in the individual's
responsibilities following a change in control.
35
INCENTIVE STOCK OPTIONS
On July 15, 2004, the Board of Directors of XsunX resolved to establish the 2004
Stock Option Plan. The plan was adopted to provide equity incentives to
employees, consultants and suppliers of the Company. The adoption of the Plan
was subject to ratification by a majority of the Company's stockholders, which
approval was to be obtained within 12 months from the date the Plan was adopted
by the Board. The Plan was cancelled by the Board, due to non-approval by the
shareholders, in August 2005. No stocks or options were issued at September 30,
2005
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Report, the number of
shares of common stock owned of record and beneficially by executive officers,
directors and persons who hold 5.0% or more of the outstanding common stock of
the Company as of December 31, 2005. Also included are the shares held by all
executive officers and directors as a group.
SHAREHOLDERS/ NUMBER OF SHARES OWNERSHIP
BENEFICIAL OWNERS PERCENTAGE(1)
---------------------------------------------------------------------------
Tom Djokovich 17,903,000(2) 14.45%
President & Director
65 Enterprise
Aliso Viejo, CA 92656
Brian Altounian 3,650,000 2.95%
Secretary
65 Enterprise
Aliso Viejo, CA 92656
Thomas Anderson 56,900 >.01%
65 Enterprise
Aliso Viejo, CA 92656
All directors and executive officers as a group (3 persons) 21,609,900 17.44%.
Each principal shareholder has sole investment power and sole voting power over
the shares.
(1) Applicable percentage ownership is based on 123,917,080 shares of common
stock outstanding as of January 9, 2006. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
January 9, 2006 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes 16,978,000 shares owned by the Djokovich Limited Partnership. Mr.
Djokovich shares voting and dispositive power with respect to these shares with
Mrs. Djokovich.
36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
No officer or director of the Company has or proposes to have any direct or
indirect material interest in any asset proposed to be acquired by the Company
through security holdings, contracts, options, or otherwise.
ADDITION OF MEMBERS TO SCIENTIFIC ADVISORY BOARD
Grant of Options/Warrants
During the quarter period ending September 30, 2005 the Company issued
consultancy and advisory Warrants to 3 individuals, Dr. Richard Rocheleau on
February 1, 2005, Dr. Arokia Nathan on February 1, 2005, and Dr. John Moore on
March 8, 2005 as compensation for 2 years service each as members of the
Company's Scientific Advisory Board. Each individual was granted Warrants
totaling 250,000 shares with an exercise price of $0.20 per share. The Warrants
were issued as part of Consultancy and Advisory Agreements and each carry a 3
year exercise term and the following vesting provisions:
(i) 50,000 shares upon the effective date of Warrant. Thereafter, the
Warrant shall become exercisable at the rate of 25,000 Shares per
calendar quarter, or any apportioned amount thereof, during the term of
engagement between the consultant and the Company.
Expanded License and Warrants
Expanded Use License stock warrant MVSystems, Inc. - As consideration for the
grant of an Expanded Use License on October 12, 2005, granting XsunX additional
benefits for use of licensed technologies and patents, XsunX granted MVS a
warrant (the "Expanded Use License Stock Warrant") for the purchase of up to
Seven Million (7,000,000) shares of common stock of XsunX, the warrant will
expire five (5) years after the date of the grant and is subject to the
following vesting provisions:
(4) The Expanded Use License Stock Warrant allowed for the vesting of
one million (1,000,000) warrants on the effective date of the
agreements.
(5) Another one million (1,000,000) warrants will vest upon the
satisfactory completion of a Phase 4 development program for the
development of technologies licensed under the Expanded Use
License.
(6) The balance of five million (5,000,000) warrants will vest upon
the date the technologies licensed within the Expanded Use
License are licensed to a third party in a bona fide arms-length
commercial setting.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. Reports on Form 8-K:
8-K filed 7-18-05
8-K filed 8-10-05
8-K filed 8-11-05
8-K filed 9-7-05
8-K/A filed 10-11-05
8-K filed 10-17-05
8-K filed 10-28-05
8-K 12-12-05
37
2. Exhibits:
10.1 EXPANDED USE LICENSE AGREEMENT*
10.2 EXPANDED USE LICENSE STOCK WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC.*
10.3 SUBSCRIPTION FORM AND NOTICE OF EXERCISE*
10.4 CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC.*
10.5 CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC.*
10.6 CONSULTING AND ADVISORY AGREEMENT*
10.7 CONSULTING AND ADVISORY AGREEMENT*
10.8 CONSULTING AND ADVISORY AGREEMENT*
31 Sarbanes-Oxley Certification
32 Sarbanes-Oxley Certification
* Previously filed
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company's Board acts as the audit committee and had no "pre-approval
policies and procedures" in effect for the auditors' engagement for the audit
year 2004 and 2005.
All audit work was performed by the auditors' full time employees.
Michael Johnson & Co., LLC, formerly auditors for the Company, was dismissed as
auditor on July 18, 2005. Jaspers + Hall, PC were engaged as auditors for
Company on July 18, 2005.
Jaspers + Hall, PC, is now the Company's principal auditing accountant firm. The
Company's Board of Directors has considered whether the provision of the audit
services is compatible with maintaining Jaspers + Hall, PC independence.
AUDIT FEES 2005:
As of the period ended September 30, 2005 Jaspers + Hall had billed the Company
$1,500 for the following professional services: review of the interim financial
statements included in quarterly reports on Form 10-QSB for the periods ended
June 30, 2005. No other fees the Company billed by Jaspers + Hall in the period
ended September 30, 2005.
The Company's previous auditor, Michael Johnson & Co, LLC, billed the Company
$7,500 for the following professional services: audit of the annual financial
statement of the Company for the fiscal year ended September 30, 2004, review of
the interim financial statements included in quarterly reports on Form 10-QSB
for the periods ended December 31, 2004, March 31, 2005.
AUDIT FEES 2004:
The Company's previous auditor, Michael Johnson & Co, LLC, billed the Company
$5,900 for the following professional services: audit of the annual financial
statement of the Company for the fiscal year ended September 30, 2003, and
review of the interim financial statements included in quarterly reports on Form
10-QSB for the periods ended December 31, 2003, March 31, 2004, and June 30,
2004. Michael Johnson & Co, LLC, billed the Company $4,250 for the 2002 audit.
The Company's Board acts as the audit committee and had no "pre-approval
policies and procedures" in effect for the auditors' engagement for the audit
year 2004 and 2005.
38
INDEX
Form 10-KSB
Regulation Consecutive
S-K Number Exhibit Page Number
3.1 Articles of Incorporation Incorporated by reference
to Registration Statement
Form 10SB12G #000-29621
3.2 Bylaws Incorporated by Reference
to Registration Statement
Form 10SB12G #000-29621
39
INDEPENDENT AUDITOR'S REPORT
Board of Directors
XSUNX, INC.
Aliso Viejo, CA
We have audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun
River Mining, Inc). (A Development Stage Company) as of September 30, 2004 and
2003, and the related statements of operations, cash flows, and stockholders'
equity for the years ended September 30, 2004 and 2003 and for the period from
February 25, 1997 (inception) to September 30, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits "in accordance with the standards of the Public Company
Accounting Oversight Board (United States)" as outlined in PCAOB Auditing
Standard No. 1. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XSUNX, INC., (formerly Sun
River Mining, Inc.) at September 30, 2004 and 2003 and the results of their
operations and their cash flows for the years ended September 30, 2004 and 2003
and for the period from February 25, 1997 (inception) to September 30, 2004 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, conditions exist which raise substantial doubt about the
Company's ability to continue as a going concern unless it is able to generate
sufficient cash flows to meet its obligations and sustain its operations.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Michael Johnson & Co., LLC
Michael Johnson & Co., LLC
Denver, Colorado
February 24, 2005
May 5, 2005
F-1
JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
9175 E. Kenyon Avenue, Suite 100
Denver, CO 80237
303-796-0099
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
Board of Directors
XSUNX, INC.
Aliso Viejo, CA
We have audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun
River Mining, Inc). (A Development Stage Company) as of September 30, 2005, and
the related statements of operations, cash flows, and stockholders' equity for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XSUNX, INC., (formerly Sun
River Mining, Inc.) at September 30, 2005 and the results of their operations
and their cash flows for the year ended September 30, 2005 in conformity with
accounting principles generally accepted in the United States.
The financial statements for the years ended September 30, 2004 and 2003 and
from the period February 25, 1997 (inception) to September 30, 2004, were
audited by other accountants, whose report dated May 5, 2005 expressed an
unqualified opinion on those statements. They have not performed any auditing
procedures since that date.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, conditions exist which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 4. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ JASPERS + HALL, PC
Denver, CO
December 28, 2005
F-2
XSUNX, INC.
(A Development Stage Company)
Balance Sheets
September 30,
2005 2004
---------------- ----------------
ASSETS:
Current assets:
Cash $ 175,869 $ 37,344
Prepaid Expense 79,984 20,000
---------------- ----------------
Total current assets 255,853 57,344
---------------- ----------------
Fixed Assets:
Office Equipment (Net) 165,831 2,270
---------------- ----------------
Total Fixed Assets 165,831 2,270
---------------- ----------------
Other Assets:
Patents 20,000 10,000
Deposits - 2,500
---------------- ----------------
Total other assets 20,000 12,500
---------------- ----------------
TOTAL ASSETS $ 441,684 $ 72,114
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts Payable $ 78,377 $ 89,030
Accrued Interest 45,856 5,908
Note Payable 850,000 -
Note Payable - Stockholder - 1,225
---------------- ----------------
Total current liabilities 974,233 96,163
---------------- ----------------
Stockholders' equity (deficit):
Preferred Stock, par value $0.01 per share; 50,000,000
shares authorized; no shares issued and outstanding - -
Treasury Stock, no par value; 26,798,418 issued and outstanding - -
Common Stock, no par value; 500,000,000 shares authorized;
123,876,633 shares issued and outstanding in 2005, and 114,036,102 3,996,735 3,104,396
shares issued and outstanding in 2004.
Common Stock Warrants 1,200,000 1,200,000
Deficit accumulated during the development stage (5,729,284) (4,328,445)
---------------- ----------------
Total stockholders' deficit (532,549) (24,049)
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 441,684 $ 72,114
================ ================
The accompanying notes are an integral part of these financial statements.
F-3
XSUNX, INC.
(A Development Stage Company)
Statements of Operations
February 25, 1997
Year Ended (Inception) to
September 30, September 30,
-----------------------------------
2005 2004 2005
-------------- -------------- ------------------
Revenue $ - $ - $ -
Expenses:
Abandoned Equipment - - 808
Advertising 3,979 - 3,979
Bank Charges 500 401 2,613
Consulting 320,944 19,900 1,344,983
Depreciation 18,435 - 21,613
Directors' Fees - - 11,983
Due Dilgence - - 45,832
Equipment Rental - - 1,733
Filing Fees 1,800 - 1,800
Impairment loss - - 923,834
Insurance 758 - 758
Legal and Accounting 107,249 27,203 295,609
Licenses & Fees 25 190 6,435
Loan Fees 115,000 - 115,000
Meals & Entertainment - - 4,119
Miscellaneous Expenses 1,675 - 1,675
Office Expenses 2,634 5,218 21,833
Patent Fees 663 - 663
Salaries 155,236 119,336 655,322
Postage 2,161 - 5,378
Printing 4,300 - 9,880
Public Relations 116,413 6,640 227,379
Rent 9,000 8,905 25,963
Research & Development 501,423 129,493 630,916
Subscription Reports 860 - 860
Taxes - - 4,657
Telephone 5,489 4,270 40,304
Transfer Agent Expense 3,628 2,997 19,954
Travel 11,234 3,640 74,167
Warrant Option Expense - 1,200,000 1,675,000
-------------- -------------- ------------------
Total Expenses 1,383,406 1,528,193 6,175,050
-------------- -------------- ------------------
Other Income and Expense
Interest Expense 17,433 251 89,030
Interest Income - - (23)
Forgiveness of Debt - (19,376) (59,773)
-------------- -------------- ------------------
Net Loss $ (1,400,839) $ (1,509,068) $ (6,204,284)
============== ============== ==================
Per Share Information:
Weighted average number of
common shares outstanding 123,854,733 114,036,102
-------------- --------------
Net Loss per Common Share $ (0.02) $(0.01)
======== =======
* Less than $.01
The accompanying notes are an integral part of these financial statements.
F-4
XSUNX
(A Development Stage Company)
Statements of Cash Flows
(Indirect Method)
February 25, 1997
Year Ended (Inception) to
September 30, September 30,
------------------------------------
2005 2004 2005
-------------- --------------- -------------------
Cash Flows from Operating Activities:
Net Loss $ (1,400,839) $(1,509,068) $ (6,204,284)
Issuance of Common Stock for Services 50,827 - 1,288,384
Issuance of Common Stock for Loan Inducement 310,117 310,117
Depreciation Expense 18,435 18,435
Adjustments to reconcile net loss to net cash used in operations.
(Increase) Decrease in Deposits 2,500 (22,500) -
(Increase) in Prepaid Expenses (59,985) (79,985)
Increase (Decrease) in Accounts Payable (10,653) 89,030 78,377
Increase (Decrease) in Accrued Liabilities 39,948 5,908 45,856
-------------- --------------- -------------------
Net Cash Flows Used by Operations (1,049,650) (1,436,630) (4,543,100)
-------------- --------------- -------------------
Cash Flows from Investing Activities:
Purchase of Equipment (181,995) (2,270) (184,265)
Purchase of Intangible Assets (10,000) (9,997) (20,000)
-------------- --------------- -------------------
Net cash used by investing activities (191,995) (12,267) (204,265)
-------------- --------------- -------------------
Cash Flows from Financing Activities:
Proceeds from Notes payable - Stockholder 3,775 1,225 -
Payment for Notes payable - Stockholder (5,000) - -
Proceeds from Convertible Debt 850,000 - 850,000
Issuance of Common Stock Warrants - 1,200,000 1,675,000
Issuance of Common Stock for cash 531,395 282,670 2,398,234
-------------- --------------- -------------------
Net Cash Flows Provided by Financing Activities 1,380,170 1,483,895 4,923,234
-------------- --------------- -------------------
Increase in Cash 138,525 34,998 175,869
-------------- --------------- -------------------
Cash at Beginning of Period 37,344 2,346 -
-------------- --------------- -------------------
Cash at End of Period $ 175,869 $ 37,344 $ 175,869
============== =============== ===================
Supplemental Disclosure of Cash Flow Information
Cash paid for Interest $ - $ - $ 71,346
============== =============== ===================
Cash paid for income taxes $ - $ - $ -
============== =============== ===================
NON-CASH TRANSACTIONS
Stock issued for services $ 50,827 $ - $ 1,288,384
============== =============== ===================
Stock issued for Loan Inducement $ 310,117 $ - 310,117
============== =============== ===================
The accompanying notes are an integral part of these financial statements.
F-4
XSUNX, INC.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
September 30, 2005
Deficit
Accumulated
Common During
Treasury Stock Common Stock Stock Development
---------------------- --------------------
# of Shares Amount # of Shares Amount Warrants Stage Totals
------------------------ ---------
Inception February 25, 1997 $ - $ - - $ - $ - $ - -
Issuance of stock for cash 3/97 - - 10,590 111,900 - - 111,900
Issuance of stock to Founders 3/97 - - 14,110 - - - -
Issuance of stock for consolidation 4/97 - - 445,000 312,106 - - 312,106
Issuance of stock for cash 8/97 - - 2,900 58,000 - - 58,000
Issuance of stock for cash 9/97 - - 2,390 47,800 - - 47,800
Net Loss for Year - - - - - (193,973) (193,973)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 1997 - - 474,990 529,806 - (193,973) 335,833
---------- ---------- --------- -------- ---------- ----------- ---------
Issuance of stock for services 11/97 - - 1,500 30,000 - - 30,000
Issuance of stock for cash 9/98 - - 50,200 204,000 - - 204,000
Consolidation stock cancelled 9/98 - - (60,000) (50,000) - - (50,000)
Net Loss for Year - - - - - (799,451) (799,451)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 1998 - - 466,690 713,806 - (993,424) (279,618)
---------- ---------- --------- -------- ---------- ----------- ---------
Issuance of stock for cash 10/98 - - 21,233 159,367 - - 159,367
Issuance of stock for services 1/99 - - 65,000 316,500 - - 316,500
Issuance of stock for cash 1/99 - - 37,500 296,125 - - 296,125
Issuance of stock for cash 2/99 - - 7,500 70,313 - - 70,313
Issuance of stock for cash 4/99 - - 45,225 122,108 - - 122,108
Issuance of stock for services 6/99 - - 70,000 147,000 - - 147,000
Issuance of stock for cash 9/99 - - 40,000 69,200 - - 69,200
Net Loss for Year - - - - - (1,482,017) (1,482,017)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 1999 - - 753,148 1,894,419 - (2,475,441) (581,022)
---------- ---------- --------- -------- ---------- ----------- ---------
Issuance of stock for cash 9/00 - - 15,000 27,000 - - 27,000
Net Loss for year - - - - - (118,369) (118,369)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 2000 - - 768,148 1,921,419 - (2,593,810) (672,391)
---------- ---------- --------- -------- ---------- ----------- ---------
Extinquishment of debt - - - 337,887 - - 337,887
Net Loss for year - - - - - (32,402) (32,402)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 2001 - - 768,148 2,259,306 - (2,626,212) (366,906)
---------- ---------- --------- -------- ---------- ----------- ---------
Net Loss for year - - - - - (47,297) (47,297)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 2002 - - 768,148 2,259,306 - (2,673,509) (414,203)
---------- ---------- --------- -------- ---------- ----------- ---------
Issuance of stock for Assets 7/03 - - 70,000,000 3 - - 3
Issuance of stock for Cash 8/03 - - 9,000,000 225,450 - - 225,450
Issuance of stock for Debt 9/03 - - 115,000 121,828 - - 121,828
Issuance of stock for Expenses 9/03 - - 115,000 89,939 - - 89,939
Issuance of stock for Services 9/03 - - 31,300,000 125,200 - - 125,200
Net Loss for year - - - - - (145,868) (145,868)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 2003 - - 111,298,148 2,821,726 - (2,819,377) 2,349
---------- ---------- --------- -------- ---------- ----------- ---------
F-5
...Continued
XSUNX, INC. ...Continued
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
September 30, 2005
Deficit
Accumulated
Common During
Treasury Stock Common Stock Stock Development
---------------------- --------------------
# of Shares Amount # of Shares Amount Warrants Stage Totals
------------------------ ---------
Issuance of stock for Cash - - 181,750 21,071 - - 21,071
Issuance of stock for Cash - - 217,450 22,598 - - 22,598
Issuance of stock for Cash - - 254,956 34,669 - - 34,669
Issuance of stock for Cash - - 694,649 96,306 - - 96,306
Issuance of stock for Cash - - 157,649 21,421 - - 21,421
Issuance of stock for Cash - - 57,000 5,133 - - 5,133
Issuance of stock for Cash - - 1,174,500 81,472 - - 81,472
Issuance of Common Stock Warrants - - - - 1,200,000 - 1,200,000
Net Loss for year - - - - - (1,509,068) (1,509,068)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 2004 - - 114,036,102 3,104,396 1,200,000 (4,328,445) (24,049)
---------- ---------- --------- -------- ---------- ----------- ---------
Issuance of stock for cash - - 5,919,537 471,068 - - 471,068
Issuance of stock for cash - - 300,500 20,067 - - 20,067
Issuance of stock for services - - 10,000 3,000 - - 3,000
Issuance of stock for services - - 300,000 24,000 - - 24,000
Issuance of stock for cash - - 527,000 40,260 - - 40,260
Issuance of stock for services - - 125,000 10,000 - - 10,000
Issuance of stock for services - - 114,469 13,827 - - 13,827
Issuance of stock for Collateral 26,798,418 - - - - - -
Issuance of stock for loan inducement - - 2,544,031 310,117 - - 310,117
Net Loss for year - - - - - (1,400,839) (1,400,839)
---------- ---------- --------- -------- ---------- ----------- ---------
Balance - September 30, 2005 26,798,418 $ - 123,876,639 $3,996,735 $1,200,000 $ (5,729,284) $(532,549)
========== ========== ========= ======== ========== =========== =========
The accompanying notes are an integral part of these financial statements.
F-6
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
Note 1 - Organization:
XsunX, Inc. ("XsunX," the "Company" or the "issuer") is a Colorado corporation
formerly known as Sun River Mining Inc. "Sun River"). The Company was originally
incorporated in Colorado on February 25, 1997. In May 1999 management decided to
write-off the Sun River Bolivian subsidiaries and to take the subsequent loss,
of all investments associated with the subsidiaries. Effective September 24,
2003, The Company completed a Plan of Reorganization and Asset Purchase
Agreement with Xoptix, Inc., a California corporation.
Pursuant to the Plan the Company acquire the following three patents for Seventy
Million (70,000,000) shares (post reverse split one for twenty): No. 6,180,871
for Transparent Solar Cell and Method of Fabrication (Device), granted on
January 30, 2001; No. 6,320,117 for Transparent Solar Cell and Method of
Fabrication (Method of Fabrication), granted on November 20, 2001; and No.
6,509,204 for Transparent Solar Cell and Method of Fabrication (formed with a
Schottky barrier diode and method of its manufacture), granted on January 21,
2003.
Pursuant to the Plan, the Company authorized the issuance of 110,530,000 (post
reverse split) common shares. Prior to the Plan the Company had no tangible
assets and insignificant liabilities. Subsequent to the Plan the Company
completed its name change from Sun River Mining, Inc. to XsunX, Inc. The
transaction was completed on September 30, 2003.
XsunX, Inc. is developing solar cell designs and manufacturing process with the
intent to provide commercially viable solar cell design applications that
convert sun light into electrical energy. The process for producing electricity
from sun light is known as Photovoltaics. Photovoltaic ("PV") is the science of
capturing and converting solar energy into electricity.
The product of the Company's development efforts is intended to deliver two
aspects of deliverable technologies in the form of an integrated solution
providing, a) commercially scalable manufactured processes and equipment
designed for the specific manufacture of the Company's thin film solar
technologies, and b) proprietary thin film solar cell designs that address new
application opportunities.
Note 2 - Going Concern
Going Concern:
The financial statements of the Company have been presented on the basis that
they are a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
not generated any revenue and has an accumulated deficit at September 30, 2005
of $6,201,284.
The future success of the Company is likely dependent on its ability to attain
additional capital, or to find an acquisition to add value to its present
shareholders and ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be successful in
obtaining such financing, or that it will attain positive cash flow from
operations. Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for the
Company to continue as a going concern.
The Company has made substantial investments this last year in the development
of intellectual property assets as part of a business-restructuring plan. The
purpose of these investments was to acquire patented solar electric glass
technology. The Company believes that its patented solar electric glass
technology has a number of market opportunities in the multi-billion dollar
worldwide architectural glass markets.
Note 3 - Summary of Significant Accounting Policies:
Basis of Presentation - Development Stage Company:
The Company has not earned significant revenues from operations. Accordingly,
the Company's activities have been accounted for as those of a "Development
Stage Enterprise" as set forth in Financial Accounting Standards Board Statement
No. 7 ("SFAS 7"). Among the disclosures required by SFAS 7 are that the
Company's financial statements be identified as those of a development stage
company, and that the statements of operations, stockholders' equity (deficit)
and cash flows disclose activity since the date of the Company's inception.
F-7
Basis of Accounting:
The accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, cash and cash equivalents include
cash in banks and money markets with an original maturity of three months or
less.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. Significant
estimates made in preparing these financial statements include the estimate for
the useful life of property and equipment, and the fair value of stock warrants.
Actual results could differ from those estimates
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
accounts payable and accrued liabilities are carried at cost, which approximates
their fair value, due to the relatively short maturity of these instruments. As
of September 30, 2005 and 2004, the Company's notes payable have stated
borrowing rates that are consistent with those currently available to the
Company and, accordingly, the Company believes the carrying value of these debt
instruments approximates their fair value.
Property and Equipment
Property and equipment are stated at cost, and are depreciated or amortized
using the straight-line method over the following estimated useful lives:
Furniture, fixtures & equipment 7 Years
Computer equipment 5 Years
Commerce server 5 Years
Computer software 3-5 Years
Leasehold improvements Length of the lease
Net earning (loss) per share:
Basic loss per share is computed on the basis of the weighted average number of
common shares outstanding. For all periods, all of the Company's common stock
equivalents were excluded from the calculation of diluted loss per common share
because they were anti-dilutive, due to the Company's net losses.
Advertising:
Advertising costs are expensed as incurred. Total advertising costs were $3,975
and $0.0 for the years ended September 30, 2005 and 2004, respectively.
Research and Development:
Research and development costs are expensed as incurred. Total research and
development costs were $ 501,423 and $129,493 for the years ended September 30,
2005 and 2004, respectively.
Other Comprehensive Income:
The Company has no components of other comprehensive income (loss) and
accordingly, net loss is equal to comprehensive loss in all periods.
F-8
Note 4 - Federal Income Tax:
The Company accounts for income taxes under SFAS No. 109, which requires the
asset and liability approach to accounting for income taxes. Under this
approach, deferred income taxes are determined based upon differences between
the financial statement and tax bases of the Company's assets and liabilities
and operating loss carry forwards using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets are
recognized if it is more likely than not that the future tax benefit will be
realized.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
2005 2004
----------- -----------
Deferred Tax Liability $ 6,204,284 $ 4,328,445
Deferred Tax Assets
Net Operating Loss Carry forwards
Book/Tax Differences in Bases of Assets 0 0
-------------- ---------------
Valuation allowance $ 6,204,284 $ 4,328,445
-------------- ---------------
Net Deferred tax assets $ 0 $ 0
============== ===============
At September 30, 2005, the Company had net operating loss carry forwards of
approximately, $6,204,284 for federal income tax purposes. These carry forwards
if not utilized to offset taxable income will begin to expire in 2010.
Note 5 - Capital Stock Transactions:
The authorized capital stock of the Company was established at 500,000,000 with
no par value. On September 29, 2003 the Board of Directors authorized a reverse
split of 1 for 20 shares of stock. The stocks issued in 2003 were for accrued
directors fees and salaries and to pay off past debt to investors. 70,000,000
shares of stock were issued to obtain the patent rights from Xoptix, Inc. Also
shares of stock were issued in 2003 for consulting fees in arranging the
formation of the new Corporation. In 2004 2,737,954 shares of stock were issued
for cash and consulting fees. 9,840,537 shares of common stock were issued in
2005 for cash and consulting fees. In July 2005, 26,798,418 shares of common
stock were placed in XSUNX, Inc. Treasury Stocks as collateral for the long-term
note with Cornell Capital Partners.
In 2005, the Company issued 6,747,037 shares of common stock for $531,395 in
cash, 549,419 shares of common stock for consulting fees with estimated value of
$50,827, and 2,544,031 shares for a loan inducement with estimated value of
$310,117.
Note 6 - Stock Options and Warrants:
Stock Option Plan:
On July 15, 2004, the Board of Directors of XsunX resolved to establish the 2004
Stock Option Plan. The plan was adopted to provide equity incentives to
employees, consultants and suppliers of the Company. The adoption of the Plan
was subject to ratification by a majority of the Company's stockholders, which
approval was to be obtained within 12 months from the date the Plan was adopted
by the Board. The Plan was cancelled by the Board, due to non-approval by the
shareholders, in August 2005. No stocks or options were issued at September 30,
2005
Warrant/Option Expense
Warrant/Option Expense for the Company was computed by multiplying the value of
the difference between the warrant exercise price, if less than the market
price, and the market price of the stock at date of grant. This method resulted
in a $0.0 charge to expenses for the warrants granted in the year ended
September 30, 2005, as follows:
F-9
2005 WARRANT/OPTION EXPENSE CHART
Underlying In the Money
# of Warrants Exercise Price Share Value at Spread at Date Warrant Expense
Holder Date of Grant of Grant
------------------------ -------------- --------------- ----------------- ----------------- -----------------
250,000 $.20 $.15 $.0 $.0
Richard Rocheleau
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Arokia Nathan 250,000 $.20 $.15 $.0 $.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
John Moore 250,000 $.20 $.12 $.0 $.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Cornell Capital, LP 4,250,000 $.15 $.15 $.0 $.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Cornell Capital, LP 2,125,000 $.20 $.15 $.0 $.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Totals $0.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Warrant Grants
License Stock Warrant MVSystems, Inc.- In September 2004 as consideration for
the grant of the License, XsunX granted MVS a warrant (the "License Stock
Warrant") for the purchase of up to Five Million (5,000,000) shares of common
stock of XsunX (the "License Stock Warrant Shares"), the warrant will expire
five (5) years after the date of the grant.
Technology Sharing Warrant MVSystems, Inc.- In September 2004 as consideration
for access to MVS know how and Service at Cost pursuant to the technology
sharing agreement between the parties, XsunX granted to MVS a warrant to
purchase up to One Million shares (1,000,000) of common stock of XsunX (the
"Technology Sharing Warrant Shares"). The Technology Sharing Warrant carries a
five (5) year exercise term and is subject to conditional vesting in accordance
with the following provisions:
(1) The Technology Sharing Warrant shall become exercisable in the
amount of 250,000 shares upon the satisfactory completion of
Phase 2 under the MVS Phase 2 Development Agreement.
(2) The Technology Sharing Warrant shall become exercisable in the
amount of 250,000 shares upon the satisfactory completion, as
reasonably determined by the XsunX Board of Directors, of any
subsequent phase of development as may be defined under the MVS
future development proposal.
(3) The Technology Sharing Warrant shall become exercisable in the
amount of 500,000 shares upon the Commercialization of an XsunX
process.
Consultancy Warrant Bentley - In September 2004 the Company granted James
Bentley a consultancy and advisory warrant in the amount of 1,000,000 shares
with an exercise price of $.15 per share. Mr. Bentley has worked with the
Company in its initial stage helping to establish a plan for the development of
working samples and the review and selection process for engaging qualified
research and development firms to initiate development efforts. Mr. Bentley had
also assisted the Company in continued efforts to expand research efforts and
business development opportunities. The warrant was issued for the conversion of
$15,000 in accrued consultancy fees, and as part of a Consultancy and Advisory
Agreement and carries a 3 year exercise term and is subject to the following
vesting provisions:
(1) 500,000 shares upon the effective date of the warrant.
Thereafter, the warrant shall become exercisable at the rate of
125,000 shares per calendar quarter up to the full amount of the
warrant.
Consultancy and Advisory Warrant Dr. Madan - In September 2004 as compensation
for Dr. Madan's advice and consultation efforts in the furtherance of XsunX
business initiatives as Chairman of the XsunX Scientific Advisory Board , XsunX
granted Dr. Madan the a warrant (the "Consultancy and Advisory Warrant") to
purchase up to One Million (1,000,000) shares of common stock of XsunX (the
"Consultancy and Advisory Stock Warrant Shares") The Warrant carries a five (5)
year exercise term and is subject to conditional vesting in accordance with the
following provisions:
(1) The Consultancy and Advisory Warrant shall become exercisable at
the rate of 25,000 Shares per month during and up to the first
twenty-four (24) months of engagement by XsunX of Dr. Madan.
(2) The Consultancy and Advisory Warrant shall become exercisable in
the amount of 150,000 shares upon the satisfactory completion of
Phase 2 under the MVS Phase 2 Development Agreement.
(3) The Consultancy and Advisory Warrant shall become exercisable in
the amount of 250,000 shares upon the Commercialization of an
XsunX process.
Consultancy and Advisory Warrant Nathan - A Consultancy and Advisory agreement
with Dr. Arokia Nathan for services to the Company as a member of the Scientific
F-10
Advisory Board was approved by the Board on February 1, 2005. The Board issued a
warrant agreement for the purchase of common stock to Dr. Arokia Nathan in
accordance with the provisions of the Consulting and Advisory Agreement totaling
two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The
Warrant carries a three (3) year exercise term and is subject to conditional
vesting in accordance with the following provisions:
(2) The Warrant will vest in the amount of 50,000 shares upon the
effective date of the Consultancy and Advisory Agreement which
was February 1, 2005. Thereafter, the Warrant will vest at the
rate of 25,000 Shares per calendar quarter, or any apportioned
amount thereof, during the term of two (2) year engagement by
XsunX, Inc. of Dr. Arokia Nathan.
Consultancy and Advisory Warrant Agreement Rocheleau- A Consultancy and Advisory
agreement with Dr Richard E. Rocheleau for services to the Company as a member
of the Scientific Advisory Board was approved by the Board on February 1, 2005.
The Board issued a warrant agreement for the purchase of common stock to Dr.
Richard E. Rocheleau in accordance with the provisions of the Consulting and
Advisory Agreement totaling two hundred fifty thousand (250,000) warrants
exercisable at $.20 each. The Warrant carries a three (3) year exercise term and
is subject to conditional vesting in accordance with the following provisions:
(2) The Warrant will vest in the amount of 50,000 shares upon the
effective date of the Consultancy and Advisory Agreement which
was February 1, 2005. Thereafter, the Warrant will vest at the
rate of 25,000 Shares per calendar quarter, or any apportioned
amount thereof, during the term of two (2) year engagement by
XsunX, Inc. of Dr. Richard Rocheleau.
Consultancy and Advisory Warrant Agreement Moore - A Consultancy and Advisory
agreement with Dr John J. Moore for services to the Company as a member of the
Scientific Advisory Board was approved by the Board on March 8, 2005. The Board
issued a warrant agreement for the purchase of common stock to Dr. John J. Moore
in accordance with the provisions of the Consulting and Advisory Agreement
totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each.
The Warrant carries a three (3) year exercise term and is subject to conditional
vesting in accordance with the following provisions:
(2) The Warrant will vest in the amount of 50,000 shares upon the
effective date of the Consultancy and Advisory Agreement which
was March 8, 2005. Thereafter, the Warrant will vest at the rate
of 25,000 Shares per calendar quarter, or any apportioned amount
thereof, during the term of two (2) year engagement by XsunX,
Inc. of Dr. John Moore.
Warrant to Purchase Common Stock Cornell - On July 14, 2005, the Company
consummated a Securities Purchase Agreement (the "Purchase Agreement") with
Cornell providing for the sale by the Company to Cornell of its 12% secured
convertible debentures in the aggregate principal amount of $850,000. Under the
Purchase Agreement, the Company also issued to Cornell five-year warrants to
purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and $0.20,
respectively (collectively, the "Warrants").
During the years ended September 30, 2004, and September 30, 2005, the board of
directors approved the issuance of warrants to purchase an aggregate of
15,125,000 shares of the Company's common stock. Such warrants are exercisable
at prices ranging from $.15 to $.20 per share, vest over periods up to 60
months, and expire at various times through June 2010.
During the years ended September 30, 2004, and September 30, 20005, no warrant
holders exercised warrants to purchase the Company's common stock.
A summary of warrant activity for the year ended September 30, 2004 and 2005 is
as follows:
Weighted- Weighted-
Number of Average Average
Warrants Exercise Warrants Exercise
Price Exercisable Price
-------------- ------------- --------------- --------------
Outstanding, September 30, 2003 0 $0.0 0 $0.0
Granted 2004 8,000,000 $.15 6,700,000 $.15
Exercised 2004 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2004 8,000,000 $.15 6,700,000 $.15
Granted 2005 7,125,000 $.17 6,725,000 $.17
Exercised 2005 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2005 15,125,000 $.1595 14,450,000 $.1595
==============
At September 30, 2005, the range of warrant prices for shares under warrants and
the weighted-average remaining contractual life is as follows:
F-11
Warrants Outstanding Warrants Exercisable
-------------------------------------------------- ---------------------------------
Weighted-
Weighted- Average Weighted-
Range of Number of Average Remaining Number Average
Warrant Warrants Exercise Contractual Of Exercise
Exercise Price Price Life Warrants Price
-------------------- ------------ -------------- ---------------- ---------------- -------------
$.15 8,000,000 $ .15 2 6,700,000 $ .15
.17 7,125,000 .17 2.8 6,725,000 .17
------------ ----------------
15,125.000 14,450,000
============ ================
Note 7 - Notes, Commitments, and Contingencies
Note Payable
On July 14, 2005, XSUNX, Inc. entered into a Secured Convertible Debenture
agreement with Cornell Capital Partners, LP in the amount of $400,000. The
interest shall accrue on the outstanding principal balance hereof at an annual
rate equal to twelve percent (12%.) This Debenture shall be convertible into
shares of Common Stock at the option of the Holder, with a conversion price in
effect on any Conversion Date shall be equal to ten cents ($.10), which may be
adjusted pursuant to the other terms of this Debenture.
On August 16, 2005, XSUNX, Inc. received an additional $450,000 from Cornell
Capital Partners, LP with the same interest and conversion rights. The
Debentures are secured by the assets of the Company and mature on the first
anniversary of the date of issuance and bear interest at the annual rate of 12%
in cash.
Trademark Transfer Agreement:
On May 6, 2004 a Trademark transfer agreement was signed with Western Gas and
Electric Company of California. Western solely owns all rights and interest in
and to the registered trademark consisting of printed words styled as "POWER
GLASS' as more fully set forth herein ("Trademark") and desires to assign and
transfer, subject to the terms and conditions set forth herein, all rights and
interest in the Trademark to XsunX in exchange for the payment set forth in this
Agreement. The purchase price for the Trademark shall be: (1) the sum of $10,000
if paid within one (1) year from the effective date; (2) the sum of $20,000 if
paid after the conclusion of the first (1st) year but prior to the conclusion of
the second (2nd) year after the effective date of this Agreement; (3) the sum of
$35,000 if paid after the conclusion of the second (2nd) year but prior to the
conclusion of the third (3rd) year after the effective date of this Agreement;
or (4) the sum of $50,000 if paid after the conclusion of the third (3rd) year
but prior to the conclusion of three (3) years and six (6) months after the
effective date of this Agreement. If payment is not made prior to the conclusion
of three (3) years and six (6) months after the effective date of this
Agreement, XsunX shall re-assign the Trademark back to Western as set forth
herein. At September 2005 the balance of $20,000 is included in Accounts Payable
Funding Agreement
On July 14, 2005, the Company entered into a Standby Equity Distribution
Agreement (the "Distribution Agreement") with Cornell Capital Partners LP
("Cornell") providing for the sale and issuance to Cornell of up to $10,000,000
of Common Stock over a period of up to 24 months after the signing of the
Distribution Agreement. Under the Distribution Agreement, the Company may sell
to Cornell up to $250,000 in shares of its common stock (the "Common Stock")
once every five trading days at a price of 96% of the lowest closing bid price
(as reported by Bloomberg L.P.), of the Common Stock on the principal market
where the Common Stock is traded for the five consecutive trading days following
a notice by the Company to Cornell of its intention to sell shares. The Company
will also pay a 5% commitment fee upon each sale of shares under the
Distribution Agreement. Cornell has agreed not to short any of the shares of
Common Stock
In connection with the Distribution Agreement, the Company has issued to Cornell
2,544,031 shares of Common Stock as a commitment fee. It also issued to
Newbridge Securities Corporation, a registered broker dealer, 65,232 shares of
Common Stock as compensation for its services as the exclusive placement agent
for the sale of the Common Stock under the Distribution Agreement.
In August 2005 the Company filed a registration statement with the Securities
and Exchange Commission pertaining to the Common Stock issuable upon sales under
the Distribution Agreement. In December 2005 the Company withdrew the
registration statement and terminated the Distribution Agreement with Cornell in
lieu of obtaining alternate financing.
F-12
Note 8 - Subsequent Events
Expanded License and Warrants
Expanded Use License stock warrant MVSystems, Inc.- As consideration for the
grant of an Expanded Use License on October 12, 2005, granting XsunX additional
benefits for use of licensed technologies and patents, XsunX granted MVS a
warrant (the "Expanded Use License Stock Warrant") for the purchase of up to
Seven Million (7,000,000) shares of common stock of XsunX, the warrant will
expire five (5) years after the date of the grant and is subject to the
following vesting provisions:
(7) The Expanded Use License Stock Warrant allowed for the vesting of
one million (1,000,000) warrants on the effective date of the
agreements.
(8) Another one million (1,000,000) warrants will vest upon the
satisfactory completion of a Phase 4 development program for the
development of technologies licensed under the Expanded Use
License.
(9) The balance of five million (5,000,000) warrants will vest upon
the date the technologies licensed within the Expanded Use
License are licensed to a third party in a bona fide arms-length
commercial setting.
Funding Agreement
On December 12, 2005, XsunX, Inc. consummated a Securities Purchase Agreement
dated December 12, 2005 with Cornell Capital Partners L.P. providing for the
sale by the Company to Cornell of 10% secured convertible debentures in the
aggregate principal amount of $5,000,000 (the "Debentures") of which $2,000,000
was advanced immediately. The second installment of $2,000,000 will be advanced
immediately prior to the filing by the Company, with the Securities and Exchange
Commission, of a Registration Statement. The last installment of $1,000,000 will
be advanced three days prior to the date the Registration Statement is declared
effective by the Commission. The Debenture is convertible into shares of Common
Stock at the option of the Holder at a conversion price per share equal to the
lesser of $0.38 or 95% of the lowest daily volume weighted average price of the
Common Stock, as quoted by Bloomberg, LP, for the 30 trading days immediately
preceding the date of conversion (the "Variable Market Price"). Unless waived by
the Company, the Holders may not, together with their affiliates, convert more
than an aggregate of $350,000 in any 30-day period of principal amount of the
Debentures at the Variable Market Price. Cornell has agreed not to short any of
the shares of Common Stock
Note 9 - Financial Accounting Developments:
Recently issued Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity". The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
are effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatory redeemable financial instruments of nonpublic
entities. The Company has not issued any financial instruments with such
characteristics.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" (FIN No. 46R), which
addresses how a business enterprise should evaluate , whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities", which was
issued in January 2003. Companies are required to apply FIN 46R to variable
interests in variable interest entities ("VIE") created after December 31, 2003.
For variable interest in VIEs created before January 1, 2004 the interpretation
is applied beginning January 1, 2005. For any VIEs that must be consolidated
under FIN No. 46R that were created before January 1, 2004, the assets,
liabilities and non-controlling interests of the VIE initially are measured at
their carrying amounts with any difference between the net amount added to the
balance sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying value is
not practicable, fair value at the date FIN No. 46R first applies may be used
measure the assets, liabilities and non-controlling interest of the VIE. The
Company does not have any interest in VIEs.
F-13
In December 2004, the FASB issued SFAS No. 123R (revised 2004) "Share-Based
Payment" which amends FASB Statement No. 123 and will be effective for public
companies for interim or annual periods beginning June 15, 2005. The new
statement will require entities to expense employee stock options and other
share-based payments. The new standard may be adopted in one of three ways - the
modified prospective transition method, a variation of the modified transition
method or the modified retrospective transition method. The Company is to
evaluate how it will adopt the standard and the evaluation the effect that the
adoption of SFAS 123R will have on the financial position and results of
operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." The 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 No. 43, Chapter 4 previously stated that "under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight and rehandling costs may be so abnormal as to require treatment as
current period charges". SFAS No. 151 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 overhead to the costs of conversion be based on the prospectively and
are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005, with earlier application permitted for inventory costs incurred
during fiscal years beginning after the date this Statement is issued. The
adoption of SFAS No. 151 does not have an impact on the Company's financial
position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB opinion No. 29,
Accounting for Non-monetary Transactions, is based on the principle that
exchange of non-monetary assets should be measured on the fair value of the
assets exchanges. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for non-monetary exchanges of similar productive assets that do not
have commercial substance. A non-monetary has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for non-monetary exchanges occurring in
fiscal periods beginning June 15, 2005. The adoption of SFAS No. 153 is not
expected to have an impact on the Company's financial position and results of
operations.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liability's fair value can be reasonably estimated. FIN 47
also defines when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The provision is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006
and does not believe the adoption will have a material impact on its
consolidated financial position or results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and a correction of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by the Company in the
first quarter of 2006. The Company is currently evaluating the effect that the
adoption of SFAS 154 will have on its results of operations and financial
condition but does not expect it to have a material impact.
In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on
Issue 05-6, Determining the Amortization Period for Leasehold Improvements,
which requires that leasehold improvements acquired in a business combination
purchased subsequent to the inception of a lease be amortized over the lesser of
the useful life of the assets or a term that includes renewals that are
reasonably assured at the date of the business combination or purchase. EITF
05-6 is effective for periods beginning after July 1, 2005. We do not expect the
provisions of this consensus to have a material impact on the financial
position, results of operations or cash flows.
END OF NOTES
F-14
SIGNATURES
Pursuant to the requirements of Section 12 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.
Dated: January 18, 2006
XsunX, INC.
/s/ Tom Djokovich
---------------------------------
Tom Djokovich
President
DIRECTORS:
/s/ Tom Djokovich
--------------------------------
/s/ Brian Altounian
--------------------------------
/s/ Thomas Anderson
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