FORM 10-K
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2006
Commission file number: 000-29621
XSUNX, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1384159
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(State of incorporation) (I.R.S. Employer Identification No.)
65 Enterprise, Aliso Viejo, CA 92656
(Address of principal executive offices) (Zip Code)
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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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [_] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [_] Yes [X] No
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. [_]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, or a non-accelerated filer. see definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
[_] Large accelerated filer [X] Accelerated filer [_] Non-accelerated filer
State issuer's revenues for its most recent fiscal year. $8,0000
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, 2006: $75,156,137 based on the last sale
price at year end of $.54 as reported by OTCBB.
Number of authorized outstanding shares of the registrant's no par value common
stock, as of December 14, 2006: 157,137,931
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TABLE OF CONTENTS
PART I PAGE
Item 1. Business 5
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 13
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
and Issuer Purchases of Equity Shares 16
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosres About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 27
PART III
Item 10. Directors, Executive Officers, Promoters and Corporate Governance 27
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 33
Item 13. Certain Relationships and Related Transactions, and Director
Independence 33
Item 14. Principal Accounting Fees and Services 34
PART IV
Item 15. Exhibits, Financial Schedules 35
SIGNATURES
CERTIFICATES
3
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
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-K 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-K 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 7 "Management's Discussion and Analysis or
Plan of Operation - Cautionary and Forward Looking Statements."
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PART I
ITEM 1. 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").
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 develops and markets proprietary solar cell designs and core solar cell
manufacturing systems, enabling licensees to manufacture advanced thin film
solar devices on various substrates. We function as a strategic solar technology
partner, supplying the advanced thin film solar cell manufacturing know-how and
capabilities that will enable our original equipment manufacturers ("OEM")
customers to address the expanding market for thin film solar products.
The process for producing electricity from sunlight is known as Photovoltaics.
Thin film photovoltaics (TFPV) are comprised of thin film of PV material
deposited on various rigid or flexible substrate. Photovoltaic ("PV") is the
science of capturing and converting sun light 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 in the growing field of Building Integrated
Photovoltaics.
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BUSINESS STRATEGY
XsunX, as a technology partner to our customers, develops and delivers thin film
solar cell designs and core manufacturing systems, customized to the needs of
our customers. Licensees of our technology can manufacture thin film solar cells
that are lightweight, flexible, and provide OEM's the opportunity for rapid
returns on investment (ROI). The key aspects to XsunX's business strategy are:
XsunX is positioning itself as a leading provider of TFPV device designs and
core manufacturing products to an expanding global group of existing and new
entrant solar product manufacturers. The company is working to establish an
environment in which XsunX products and technologies are viewed as advanced core
support infrastructure to manufacturers increasing their opportunities for
economic success in servicing their regional solar markets. XsunX does not sell
thin film solar materials directly to the consumer market.
Preliminary marketing based on an analysis of 3,120 direct product inquires for
the last 12 months illustrates a wide breadth of interest and diversity ranging
from local home owners enquiring about solar glazing for their home to
international automakers enquiring about solar glazing for their automobiles.
The preliminary results of the marketing queries provide insights into end-user
support and interest from potential customers. The percentage breakdown of the
queries is as follows:
o 70% End-users: such as Architects, Building Managers, and Residential
o 16% Distributors, Integrators, and Fabricators
o 12% New Entrant OEMs and Manufacturers
o 2% Existing Solar or Building Material Manufacturers
o And of the queries, 23% were international in nature and were comprised
of India, China, Japan, Mexico, Australia, France, Italy, Germany,
Spain, Portugal, Belgium, Eastern Europe, Costa Rica, and Chile.
Based upon these initial results and the high degree of new entrant interest,
XsunX believes that there is a market for fully integrated turnkey manufacturing
lines and their end product TFPV panels. Therefore, the targeted manufacturing
partners will include (but not be limited to):
o Existing and new entrant Photovoltaic materials manufacturers
o Construction materials manufacturers (BIPV)
o Solar energy systems integrators
o Global Joint Ventures
PRODUCTS
The XsunX approach integrates technologies for the production of thin film
variants of silicon (Si) solar cells using various processes to form the
necessary top and bottom transparent conducting oxides (TCO) as contacts, Plasma
Enhanced Chemical Vapor Deposition (PECVD) to form the photovoltaic cores,
patterning techniques to generate either serially connected or discrete solar
cells, and a cassette based patented reel-to-reel material handling system that
allows for the use of metallic or plastic based flexible substrates.
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XsunX systems offer the efficiency attributes of in-line roll-to-roll thin film
processing techniques, process automation, reliability and low maintenance while
improving cell efficiencies due to reductions in cross chamber contamination.
Modular in design the systems offer upgradeability for production capacities,
process technology, and can be designed for delivery in either cluster or
in-line system architectures. Production capacities for multi-chamber cluster
tool production configurations are offered in capacities ranging from 1MW/y to
5MW/y, and in-line multi-chamber production configurations can be offered in
capacities ranging from 5MW/y to in excess of 50MW/y.
Systems can be designed for integration into existing or new front and back end
production lines and configured for annual production capacities to meet the
needs of customers. Innovative production technologies include:
o Multi-Chamber vacuum deposition
o Advanced Sputtering Techniques
o RF &VHF Plasma Enhanced Chemical Vapor Deposition (PECVD)
o Cassette based reel-to-reel material handling
o The use of flexible and/or rigid substrates
o Automated robotic control systems
o Web widths starting at 30 cm
The Company's solar cell designs, development efforts, and marketing objectives
are focused on the commercialization of the following two primary solar cell
device types for production:
Power Glass(R) for semi-transparent and opaque applications on both
flexible and rigid substrates - a patented Amorphous Silicon cell
structure offering the advantages of cost effective monolithically
integrated solutions for use in architectural glass, building
materials, and consumer products. These cells are single-junction
amorphous silicon based (a-Si) solar cells that depending on the
degree of light transmission, or transmisivity, can operate at up to
4% efficiencies. That is approximately 40 watts of direct current can
be produced per square meter of Power Glass film. A projected cost on
the order of $2.16/W is expected for relatively conservative
deposition rates and a 3.8MW/y factory. Costs are comprised by
materials, equipment (cluster tool and non-cluster tool), personnel
(fringes included) and a U.S. based G and A rate of 40%. Throughputs
and production costs were calculated assuming 4% efficiency for
different deposition rates for a-Si and ITO.
Hybrid 4-Terminal for high performance and high stability opaque
applications rivaling silicon wafer efficiencies - a patent-pending
cell structure combining nano crystalline (nc-Si) and amorphous
silicon (a-Si) layers exceeding the performance characteristics of
tandem and multi-junction Si solar cell designs without the limiting
aspects of current matching, stability, and performance degradation.
The initial operating efficiencies for this cell type are anticipated
to produce 10% conversion efficiencies and through continued
refinement of the device properties the Company anticipates
improvements to produce conversion efficiencies of 12% to 14%. A
projected cost on the order of $1.65/W is expected for relatively
conservative deposition rates and a 4MW/y factory. Costs are comprised
by materials, equipment (cluster tool and non-cluster tool), personnel
(fringes included) and a U.S. based G and A rate of 40%. Throughputs
and production costs were calculated assuming 10% efficiency for
different deposition rates for a-Si, nc-Si and ZnO.
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COMPANY SPONSORED RESEARCH AND DEVELOPMENT
Management has established a plan under which the Company has and continues to
work to commercializing its technologies and develop new technologies through
the contracting for research, development and commercialization processes with
certain qualified facilities that specialize in the Company's target market
segments. Management believes this product development process has provided the
Company with the fastest path to marketable products, the maximization of
corporate resources, and, the broadest access to cutting edge device and
material engineering facilities, and technical expertise.
In June 2004 XsunX established, and continues to maintain, a 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 received warrants for the purchase
of common stock in XsunX.
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 thereby also expanding the Company's
intended product base to include both semi-transparent and opaque thin film
solar cell designs, and manufacturing methods, (see Item 8B "Subsequent Events -
Expanded License and Warrants"). The Company believes that the licensed
technologies provide enhanced commercial viability for its products, and
improved market opportunities.
For the year ended September 30, 2006, the Company committed 39% or $949,472 of
its cash operational expenditures towards product development, another $220,000
was committed for use in the addition of development equipment, and $1,765,000
was committed for the production of a marketable production system prototype
that is currently in the final stages of assembly. The Company intends to
continue to focus on the development and refinement of commercially appealing
solar cell designs, proprietary manufacturing processes, and facilities design
that could be provided to our 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
development efforts.
At present the Company continues to develop and optimize its solar cell designs
and manufacturing process for commercial applications. Areas of on going process
development include:
(a) Device development on thin-film sheet and rolled polymers,
plastics, and metals (b) Deposition processes to enhance device
properties and reduce manufacturing costs (c) Enhanced reel-to-reel
processing designs; and (d) Development of new cell segmentation
process for integration into manufacturing process
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, 2007 the Company has developed a plan of operations requiring
$5,750,000 that commits 21% of its budget or $1,200,000 to the completion of
development of a patent-pending 4-Terminal solar cell device, another 26% of its
budget or $1,500,000 to the development of new technologies licensed and/or
acquired during the 2007 period, and another 16% of its budget or $900,000 to
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the completion of its first production line system for eventual re-sale to
future licensee's and for engineering and adaptation of new manufacturing
devices and techniques. The purpose of these on going investments is to develop
and market patented and proprietary solar electric thin film designs and
manufacturing processes for sale and licensure to our target markets. No
research was done by the Company prior to September 30, 2003.
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 pursuit
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 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 "Subsequent Events - 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 XsunX
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)
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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 films 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 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.
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 TFPV manufacturing systems will be licensed to manufacturers as modular
systems and licensed for use in the manufacture the Company's thin film designs.
The 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. Although the Company is currently
providing proposals to interested OEM's no licenses or contracts now exist with
any manufacturer.
We intend to target customers who are developing their own technology platforms
in which the manufacture of or the integration of our 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 OEM's, 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.
BACKLOG OF ORDERS
There are currently no orders for sales.
GOVERNMENT CONTRACTS
There are no government contracts at this time.
COMPETITIVE CONDITIONS
Currently, management is aware of other technologies similar to those of the
company on the market. These include vacuum chamber manufacturing technologies,
plasma enhanced vapor deposition technologies, and variants of available solar
cells that capture and convert solar energy into usable power. Although similar
in respect to the operation and use of these technologies the Company believes
that its patented solar cell designs and manufacturing methods provide
marketable improvements over current other technologies. However, a number of
new solar cell technologies have and are being developed by other companies.
Such technologies include amorphous silicon, cadmium telluride,
copper-indium-gallium-selenide (CIGS), and copper indium diselenide as well as
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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 our thin film solar cells.
In accessing the principal competitive factors in the market for solar electric
power products we use 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 we do not compete successfully with respect to these or other
factors, it could materially and adversely affect our 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 we do.
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. We expect our 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 AND MARKETING OFFICES
As of September 30, 2006 the Company leased administrative office facilities
located at 65 Enterprise, Aliso Viejo CA 92656 for approximately $2,000 per
month pursuant to a six month lease agreement renewable in 6 month or greater
increments thereafter. Management anticipates that there may be a need to
increase administrative office facilities in the 2007 period. There can be no
assurances that the Company will be able to find the necessary additional
facilities on terms similar or more advantages to the current facility terms.
In April 2006 the Company entered into a three year lease for technical and
marketing operations facilities in Golden, CO. The Company provided a $2,615
security deposit and expensed $79,867 in costs associated with tenant
improvements to the facilities in preparation for occupancy. The following is a
schedule, by years, of the minimum base payments required under this operating
lease for facilities. An additional $825 monthly is also due as a pro rata share
equaling 4.12% of the operating costs for real estate taxes, assessments, and
the expenses of operating and maintaining common areas within the commercial
grounds surrounding the leased facilities.
Annual Annualized Monthly
Rent Schedule Rate/sf Rent Rent
------------- ------- ---- ----
7/1/06-6/30/07 $6.75 $20,250.00 $1,687.50
7/1/07-6/30/08 $6.95 $20,850.00 $1,737.50
7/1/08-6/30/09 $7.16 $21,480.00 $1,790.00
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EMPLOYEES AND CONSULTANTS
The Company is a development stage company and as of September 30, 2006 had 5
salaried employees. This represents an increase of 4 employees over the same
period ended 2005. Through various other consultancy agreements and a strategic
technology sharing and facilities use relationship with MVSystems, Inc. we use
the services of approximately 15 additional technologists and support staff to
assist in the development of our products. The Company projects that during the
next 12 months the Company's workforce is likely to increase to 13, with 2 of
the new employees being in Administrative, 2 in Marketing and Sales positions, 3
Scientific and Technical positions, and 1 in Administrative Support. In addition
to the anticipated addition of new employees the Company expects to expand its
use of strategic relationships to leverage industry expertise in areas of
design, systems automation, manufacturing and assembly to augment product
commercialization time lines and the delivery of technologies. The Company 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 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 our thin films
development efforts. 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.
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.
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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.
ITEM 1A. RISK FACTORS
Need For Additional Financing. The Company has 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
13
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 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.
14
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 two (2) 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
15
ITEM 2. PROPERTIES
As of September 30, 2006 the Company leased administrative office facilities
located at 65 Enterprise, Aliso Viejo CA 92656 for approximately $2,000 per
month pursuant to a three month lease agreement.
In April 2006 the Company entered into a three year lease for technical and
marketing operations facilities in Golden, CO. The Company provided a $2,615
security deposit and expensed $79,867 in costs associated with tenant
improvements to the facilities in preparation for occupancy. The following is a
schedule, by years, of the minimum base payments required under this operating
lease for facilities. An additional $825 monthly is also due as a pro rata share
equaling 4.12% of the operating costs for real estate taxes, assessments, and
the expenses of operating and maintaining common areas within the commercial
grounds surrounding the leased facilities.
Annual Annualized Monthly
Rent Schedule Rate/sf Rent Rent
------------- ------- ---- ----
7/1/06-6/30/07 $6.75 $20,250.00 $1,687.50
7/1/07-6/30/08 $6.95 $20,850.00 $1,737.50
7/1/08-6/30/09 $7.16 $21,480.00 $1,790.00
The Company owns no real property.
ITEM 3. LEGAL PROCEEDINGS
On March 6, 2006 Ron Sentchuck filed an action against the Company in the
Superior Court of California for the County of Los Angeles. The Company was
dismissed from this action on August 3, 2006. No contingency expenses were
accrued by the Company for this complaint.
On April 19th 2006, a service provider Office Radio Network filed a lawsuit in
the District Court in Colorado alleging that it has been damaged due to refusal
to allow it to sell its shares under Rule 144. The parties entered into a
settlement in December 2006 providing for the return of 150,000 shares of the
300,000 shares issued to Office Radio Network, and the provisioning by Office
Radio Network of an additional six months of service to the Company.
The Company is not currently a party to any pending legal proceedings, nor is
its property subject to such proceedings, at December 13, 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the period ended September 30, 2006.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 three fiscal years, as reported
by the National Quotation Bureau Incorporated, was as follows:
Year Ended September 30, 2006 HIGH LOW CLOSE
-----------------------------
First Quarter ended December 31, 2005 $ .59 $0.53 $ .58
Second Quarter ended March 31, 2006 $2.24 $2.08 $2.13
Third Quarter ended June 30, 2006 $1.06 $1.04 $1.05
Fourth Quarter ended September 30, 2006 $ .55 $ .52 $ .54
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
16
Year Ended September 30, 2005 HIGH LOW CLOSE
-----------------------------
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, 2006, there were approximately 304 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, 2006, there were approximately
157,137,931 shares of common stock outstanding on record with the Company's
stock transfer agent, Mountain Share Transfer. On September 30, 2006 the last
reported sales price of its common stock on the OTCBB was $.54 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.
SALE OF UNREGISTERED SECURITIES
Warrant Grants
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.
(2) One million (1,000,000) warrants will vest upon the satisfactory
completion of a Phase 4 development program for the development of
certain opaque solar technologies.
(3) The balance of the remaining 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.
Debenture Warrants - In connection with the issuance of a debenture in the
principal amount of $5,000,000 in December, 2005 3,125,000 warrants were granted
to Cornell Capital Partners, LP at $.45 and 1,250,000 warrants were granted at
$.55. During the 2006 fiscal year Cornell exercised all of the available
warrants granted. As of the date of this filing there were no remaining warrants
available for conversion by Cornell.
Employment Incentive Warrants - In connection with the issuance of an employment
agreement to Joseph Grimes in April 2006, the Company granted 500,000 warrants
at the then market price of $1.69. On July 20, 2006 the Company and Mr. Grimes
mutually agreed to the cancellation of the remaining 388,000 unvested balance of
this warrant and to the grant of a new warrant agreement in the amount of
500,000 warrants at the then market price of $.51. The warrant will expire five
(5) years after the date of the grant and is subject to the following vesting
provisions:
(1) The Warrant shall become exercisable at the rate of 28,000 shares per
month up to and through the first nine months of employment of
Optionee by Company.
17
(2) One Hundred Thousand (100,000) shares shall become exercisable upon
the completion and delivery of a marketing plan by Optionee to the
Board of Directors.
(3) One Hundred Forty Eight Thousand (148,000) shares shall become
exercisable upon the first sale or licensure of an XSUNX, Inc.
technology under the marketing plan.
The total charged in expense for the 2006 fiscal year has been $951,250 for the
issuance of the above described Expanded Use License, Debenture Warrants, and
Employment Incentive Warrants.
During the years ended September 30, 2005 and September 30, 2006 the board of
directors approved the issuance of warrants to purchase an aggregate of
19,112,000 shares of the Company's common stock. Such warrants are exercisable
at prices ranging from $.15 to $1.69 per share, vest over periods from between
36 to 60 months, and expire at various times through July 2011.
During the years ended September 30, 2005 no warrant holder's exercised warrants
to purchase the Company's common stock. During the year ended September 30, 2006
warrant holders exercised a total of 10,850,000 warrants in cash to purchase the
Company's common stock.
A summary of warrant activity for the year ended September 30, 2005 and 2006 is
as follows:
Weighted- Weighted-
Number of Average Average
Warrants Exercise Accrued Exercise
--------------
Price Warrants Price
--------
Exercisable
-------------- ------------- --------------- --------------
Outstanding, September 30, 2004 8,000,000 $0.15 5,525,000 $0.15
Granted 2005 7,125,000 $0.1649 7,884,167 $0.1659
Exercised 2005 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2005 15,125,000 $0.1595 13,409,167 $0.1593
Granted 2006 11,987,000 $0.3419 6,143,000 $0.4340
Exercised 2006 (10,850,000) $0.2923 (10,850,000)
-------------- ------------- --------------- --------------
Outstanding, September 30, 2006 16,262,000 $0.2170 8,702,167 $0.1873
==============
18
At September 30, 2006, the range of warrant prices for shares under warrants not
exercised 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(yr) Warrants Price
--------------- ------------ -------------- ---------------- ---------------- -------------
$.15 7,900,000 $ .15 2.7 6,900,000 $ .15
------------ ----------------
.20 750,000 .20 1.5 634,167 .20
------------ ----------------
.25 7,000,000 .25 4.0 1,000,000 .25
------------ ----------------
.51 500,000 .51 4.8 56,000 .51
------------ ----------------
1.69 112,000 1.69 4.5 112,000 1.69
============ ================
SALES OF SHARES AND DEBENTURE
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, as part of the
reorganization, were for accrued director fees and salaries and to pay off past
debt to investors. Included in the reorganization were 70,000,000 shares of
stock issued to obtain certain patent rights from Xoptix, Inc. Also shares of
stock were issued in 2003 for consulting fees in arranging the formation of the
reorganized Corporation. In 2004 2,737,954 shares of stock were issued for cash
and consulting fees to fund operations. 9,840,537 shares of common stock were
issued in 2005 for cash and consulting fees to fund operations. 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. On August 18,
2006 the note underlying the collateral shares was paid and requirement of
collateral was discharged. In 2006 33,188,926 shares of common stock were issued
for cash and 72,366 were issued for services to fund operations.
The following represents a detailed analysis of the 2006 capital stock
transactions.
Debenture Conversion - On February 8, 2006 Cornell Capital Partners, LLP
converted $350,000 of the principal balance of $850,000 debenture issued to
Cornell in July 2005. On March 1, 2006 Cornell converted the remaining principal
and accrued interest the debenture balance totaling $510,550. Upon conversion of
the notes XsunX issued 8,605,500 shares of common stock to Cornell. The
conversion price for all of the above issued shares was $.10. The remaining
value of the debenture is $0.
Warrant Conversion - In February 2006, a consultant exercised 100,000 of the
1,000,000 available $.15 cent warrants. The amount of $15,000 dollars was paid
to XsunX by the consultant and 100,000 shares were issued.
Warrant Conversion - In March 2006 Cornell Capital Partners, LLP exercised
3,125,000 of the available 3,125,000 $.45 warrants and 1,250,000 of the
available 1,250,000 $.55 cent warrants. The aggregate amount of $2,093,750
dollars was paid to XsunX by Cornell. The Company issued 4,375,000 shares of
common stock in association with the exercise of these warrants.
Warrant Conversion - In April 2006 Cornell Capital Partners, LLP exercised
4,250,000 of the available 4,250,000 $.15 warrants and 2,125,000 of the
available 2,125,000 $.20 cent warrants. The aggregate amount of $1,062,500
dollars was paid to XsunX by Cornell. The Company issued 6,375,000 shares of
common stock in association with the exercise of these warrants.
19
Debenture Conversions - On May 10, 2006 Cornell Capital Partners, LLP converted
$2,000,000 of the principal balance of a $5,000,000 debenture issued to Cornell
in December 2005 and the Company issued 5,263,158 shares of common stock to
Cornell for the conversion. On June 12 Cornell converted another $1,000,000 of
the principal balance of the debenture and the Company issued 2,631,579 shares
of common stock to Cornell. On July 17, 2006 another $1,000,000 of the principal
balance was converted by Cornell for which the Company issued 2,631,579 shares
of common stock to Cornell. On August 23, 2006 Cornell converted the remaining
$1,000,000 principal balance and $230,833 of the total accrued interest charges
of the debenture for which the Company issued 3,239,035 shares of common stock
to Cornell. The conversion price for all of the above issued shares was $.38
each. The remaining balance of the Debenture as of the date of this filing is
$0.0.
Issuance of Shares for Service - In December 2005 the Company issued 40,441
unregistered common shares to a service provider for accrued service fees
totaling $7,500 dollars for services provided over the fourth quarter period
ended September 30, 2005. In September 2006 XsunX issued an additional 31,925
unregistered common shares to the same service provider for accrued service fees
totaling $24,000 dollars for the one year period ended September 30, 2006. The
shares were earned on a quarterly basis by the service provider and the
conversion price for the stock issued was calculated using the average daily
closing price of the Company's common stock over each quarter period of service.
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 development efforts and day-to-day operations of the
Company and to pay the accrued liabilities associated with these operations.
REGISTRATION OF MARKETABLE SECURITIES
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 was advanced
prior to the filing by the Company with the Securities and Exchange Commission
of a Registration Statement in January 2006. The last installment of $1,000,000
was advanced in February 2006 upon the Registration Statement being declared
effective by the Commission. Between May 2006 and August 2006 the Debentures
principal balance of $5,000,000 dollars and accrued interest charges were
converted into 13,765351 shares of Common Stock at the option of Cornell at a
conversion price per share equal to $0.38. The remaining balance of the
debenture is $0.0.
In connection with the above Cornell L.P. Securities 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 the
exercise of Warrants issued to Cornell in association with Debenture. Prior to
executing the Securities Purchase Agreement, the Company had withdrawn a
previously filed 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 were
included in the Registration Statement. The Company and Cornell also agreed to
terminate the July 14, 2005 Distribution Agreement. On January 11, 2006 the
Company filed to register up to 72,879,263 shares in association with the above
securities registration requirements. The Registration statement was made
effective on or about February 9, 2006. Upon the final conversion by Cornell of
the Initial Securities, the Securities Purchase Agreement, the underlying
Warrants therein, and accrued interest associated with the Debentures XsunX
issued the aggregate amount of 35,245,851 registered shares of common stock in
the 2006 period.
20
The Company's obligations under the Prior Agreement and the Securities Purchase
Agreement were secured by substantially all of the Company's assets. As further
security for its obligations thereunder, the Company had deposited into escrow
26,798,418 shares of Common Stock. In addition, Tom Djokovich, the Company's
Chief Executive Officer, had 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. As of the date of this filing XsunX had received notice from
Cornell of the release of the security interest in above listed security shares
and assets.
ITEM 6. SELECTED FINANCIAL DATA
Table of Selected Financial Data
2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------------------------------------------------
Net Sales 8,000 - - - -
Income(Loss) from Continuing Operations (3,441,940) (1,400,839) (1,509,068) (145,868) (47,297)
Income(Loss) from Continuing Operations
per Common Share $ (0.02) $ (0.02) $ (0.01) $ (0.02) *
Cash 4,305,105 175,869 37,344 2,346 -
Total Assets 6,859,463 441,684 72,114 2,349 -
Long Term Obligations - - - - -
Cash Dividends Declared per Common Share $ - $ - $ - $ - $ -
* Less than $0.01
In 2003, the Company completed a Plan of Reorganization and Asset Purchase
Agreement and changed the name of the Company from Sun River Mining, Inc. to
XsunX, Inc. Due to the Company's change in primary focus in October of 2003 and
the developing nature of the 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. The historical trends reflect this change of primary focus and
the associated research and development period of the development stage company.
This change in primary focus is the largest factor in the comparability of this
information over time.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Form 10-K 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:
21
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-K
filed by the Company in 2006 and Form 10KSB in 2005 and any Current Reports on
Form 8-K filed by the Company.
For the year ended September 30, 2006, 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 OEM licensees as turn-key solutions for the mass production of thin films. A
large part of the Company's capital was used for product development. However,
marketing and business development efforts were launched in the later part of
2006 requiring an increase to budget requirements to fund these efforts.
GROWTH, REVENUE AND DISTRIBUTION PLAN
The Company is marketing its integrated manufacturing systems as turnkey
solutions for the manufacture it's current and future PV thin films designs. The
manufacturing systems will be licensed to manufacturers as modular systems and
licensed for use in the manufacture the Company's thin film designs. The
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. Although the Company is currently providing
proposals to interested OEM's no licenses or contracts now exist with any
manufacturer.
We intend to target customers who are developing their own technology platforms
in which the manufacture of or the integration of our 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 OEM's, the Company
reduces operating expenses and saves capital in plant, property and equipment.
22
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.
PLAN OF OPERATIONS
XsunX anticipates the 12-month capital operational requirements of the company
to be $5,750,000 dollars. Capital will be applied to operations as follows: (i)
approximately $1,200,000 will be used to pay costs associated with the
completion of development of a 4-Terminal nano-crystalline solar cell patent for
commercialization purposes, (ii) approximately$1,500,000 will be used for the
development of new technologies licensed and/or acquired during the 2007 period,
(iii) approximately $400,000 will be used to complete the manufacture of a
marketable prototype manufacturing system that began in January 2006, (iv)
approximately $500,000 will be used for the engineering and adaptation of
certain manufacturing devices and techniques to provide product manufacturing
demonstration and development capabilities, (v) approximately $160,000 will be
used to pay for third party engineering, testing, and consulting services, (vi)
approximately $835,000 will be used to pay salaries and general administrative
costs, and for intellectual property protection, (vii) approximately $625,000
will be used to pay for sales and market development, general competitive
research and publicity costs, and (viii) approximately $500,000 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 additional capital to support its budget. The Company has
insignificant revenues to date. 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 may need to seek additional financing for this budget. (See "Risk
Factors" at p. 13).
Management believes the summary data and audit presented herein is a fair
presentation of the Company's results of operations for the periods presented.
Due to the Company's change in primary business focus and new 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.
RESULTS OF OPERATIONS FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 30, 2006,
COMPARED TO FISCAL YEARS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
The Company generated insignificant revenues in the period ended September 30,
2006 of $8,000. The Company generated no revenues for the same period in 2005 as
well as for the same period in 2004.
The Company incurred expenses totaling $3,380,087 in 2006 compared to $1,383,406
in 2005 and $1,528,193 in 2004. The increase of $1,996,681 included a onetime
non-cash warrant issuance expense of $951,250 for Warrants issued in association
the licensure of technologies and the sale by the Company of convertible
debentures, and a net increase of $511,834 in loan fee expenses associated with
the sale by the Company of convertible dentures. Excluding this non-cash warrant
expense and the cash based debenture expenses in the comparative analysis
between the period's results in an increase of $508,596 in normal and customary
operational expenses for the period ending September 30, 2006 as compared to the
same period 2005.
Primary sources for the increase to operating expense of $533,597 include: an
increase of $448,049 in Research and Development activities totaling $949,472 as
compared to $501,423 incurred for the same period in 2005 and $129,493 in 2004,
an increase of $65,738 in Public Relations activity totaling $182,151 as
compared to activity totaling $116,413 for the same period in 2005 and $6,640 in
2004, an increase of $119,853 in Salaries totaling $275,089 as compared to
Salaries totaling $155,236 for the same period in 2005 and $119,336 for the same
period 2004, an increase of $33,044 in Legal and Accounting expenses totaling
$140,293 as compared to Legal and Accounting totaling $107,249 for the same
period in 2005 and $27,203 for the same period 2004, an increase of $123,707 in
23
General and Administrative expenses related to an increase in travel,
advertising, depreciation, business development and other General and
Administrative expenses. These increases were partially offset by a decrease in
Consulting expenses of $(273,094) totaling 47,850 as compared to activity
totaling $320,944 for the same period in 2005 and $19,900 for the same period in
2004. The $3,355,086 in operating expenses includes non-cash charges of $24,000
for the issuance of common shares in lieu of cash payment for services.
For the twelve months ended September 30, 2006, the Company's consolidated net
loss was $(3,441,940) as compared to a consolidated net loss of $(1,400,839) for
the same period ended September 30, 2005 and $(1,509,068) for the same period
ended September 30, 2004. The increase of $2,041,101 resulted from a one time
non-cash warrant issuance expense of $951,250 for Warrant Expenses accounted for
in the period ended September 30, 2006, and a net increase of $511,834 in loan
fee expenses associated with the sale by the Company of convertible dentures..
Excluding the one time non-cash warrant expense and net loan fee expenses, in
the comparative analysis between the period's, results in an increase of
$578,017 in net loss for the period ended September 30, 2006 as compared to the
same period 2005. The net loss per share was less than $(0.02) for the twelve
month period ended September 30, 2006.
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 an accumulated deficit totaling
($9,171,354) to September 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 2006 was $4,065,523 as compared to a working
capital (deficit) of $(718,380) at September 30, 2005 and ($38,819) at September
2004. There were insignificant cash flows totaling $8,000 provided by operations
during the twelve months ended September 30, 2006.
Cash and cash equivalents at September 30, 2006 were $4,654,222, an increase of
$4,398,369 from September 30, 2005. During the year ended, September 30, 2006,
the Company used $1,942,278 net cash in operating activities as compared to
using $1,049,650 net cash for the year ended, September 30, 2005 and $236,630
for the year ended September 30, 2004. The increase of $892,628 between the 2006
and 2005 periods resulted from onetime non-cash expenses for a warrant issuance
expense of $951,250, an expense of $31,500 for the issuance of stock in lieu of
cash for services, and $241,383 in expenses for the issuance of stock in lieu of
cash for the payment of accrued interest associated with the sale of debentures
by the Company accounted for in the period ended September 30, 2006. Excluding
these one time non-cash expenses, in the comparative analysis between the
period's, results in a decrease of $331,505 in net cash used in operations for
the period ended September 30, 2006 compared to the same period 2005.This
decrease of net cash used in operations was primarily due to a decrease in
consulting expenses of $273,094 in the 2006 period.
For the twelve months ended, September 30, 2006, the Company's capital needs
have primarily been met from the proceeds of (i) the issuance of Common Stock
for Debenture conversion and; (ii) the issuance of Common Stock for warrant
conversion. Total cash provided by financing activities for the period ended
September 30, 2006 increased to $8,171,250 from $1,380,170 for the same period
ended September 30, 2005 and $283,895 for the period ended September 30, 2004.
The increase of $6,791,080 between the 2006 and 2005 periods was mainly
attributable to an increase of $5,000,000 from the conversion of a debenture
into common stock and $3,171,250 in the conversion of warrants for common stock.
24
Contractual Obligations are shown in the following table -
------------------------ ------------------------------------------------------------
Contractual Obligations Payments Due by Period
------------------------ ------------------------------------------------------------
More
Less than than 5
Total 1 Year 1-3 Years 3-5 Years Years
------------------------ ------------ ------------ ----------- ----------- ----------
Long Term Obligations - - - - -
------------------------ ------------ ------------ ----------- ----------- ----------
Capital Lease - - - - -
------------------------ ------------ ------------ ----------- ----------- ----------
Operating Lease 57,518 20,550 36,968 - -
------------------------ ------------ ------------ ----------- ----------- ----------
Purchase Obligations 1,183,680 1,183,680 - - -
------------------------ ------------ ------------ ----------- ----------- ----------
Other Long Term
Liabilities Reflected
on the Registrant's
Balance Sheet Under
GAAP - - - - -
------------------------ ------------ ------------ ----------- ----------- ----------
Total 1,241,198 1,204,230 36,968 - -
------------------------ ------------ ------------ ----------- ----------- ----------
(1) Operating Lease Obligations consist of the lease on the Company's
Administrative and Sales facility in Golden, CO
(2) Remaining accounts payable associated with the production prototype machine
of $353,000
(3) Remaining amount due to MVSystems from the Phase IV, 4T research and
development contract signed in the period ending September 30, 2006 of $830,680
The estimated contract cost in item (2) and (3) above may be higher or lower
based on final costs. The compnay has not booked any contingency for cost
overruns
During the year ended, September 30, 2006, we used $2,099,736 for investing
activities as compared to $191,995, for the year ended, September 30, 2005 and
$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 a marketable prototype manufacturing tool and additional equipment.
We had, at September 30, 2006, working capital of $4,065,523. We have begun
marketing efforts and anticipate the sale of licenses in the 2007 period however
the cash flow requirements associated with the transition to revenue recognition
may exceed cash generated from operations in the current and future periods. We
may seek to obtain additional financing from equity and/or debt placements. We
have been able to raise capital in a series of equity and debt offerings in the
past. While there can be no assurances that we will be able to obtain such
additional financing, on terms acceptable to us and at the times required, or at
all, we believe that sufficient capital can be raised in the foreseeable future
if necessary.
NET OPERATING LOSS
For federal income tax purposes, we have net operating loss carry forwards of
approximately $9,646,224 as of September 30, 2006. 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.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains interest bearing deposits in the form of U.S. Treasury
Notes in various amounts and maturity periods that allow us to maintain access
to necessary capital to fund operations. These investments in Treasury Notes
earn varied interest rates and upon maturity are subject to market risks
associated with the increase or decrease for the then available rates
comparative to the expiring rates. These investments in U.S Treasury Notes are
underwritten by the United States Government and are brokered through our
association with a U.S. based and Federally insured bank. We do not believe that
these investments are subject to foreign currency risks.
Our products are quoted for sale and licensure in United States dollars and as
our business development efforts progress we anticipate the sale and/or
licensure of our products to foreign entities. To the extent that we may be
exposed to foreign currency risks related to the rise and/or fall of foreign
currencies against the U.S. dollar we will report in United States dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please refer to pages F-1 through F-19.
ITEM 9. 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 period ended September
30, 2004 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 did not contain an adverse opinion or disclaimer of opinion,
nor was qualified or modified as to uncertainty, audit scope, or accounting
principles.
ITEM 9A. CONTROLS AND PROCEEDURES
Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. The evaluation included certain control areas in which we have made, and
are continuing to make, changes to improve and enhance controls. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures were effective, and we have discovered no material weakness.
A material weakness is a condition in which the design or operation of one or
more of the internal control components does not reduce to a relatively low
level the risk that misstatements caused by error or fraud in amounts that would
be material in relation to the financial statements being audited may occur and
not be detected within a timely period by employees in the normal course of
performing their assigned functions.
26
Internal Control Over Financial Reporting
The Securities and Exchange Commission rule making for the Sarbanes-Oxley Act of
2002 Section 404 requires that a company's internal controls over financial
reporting be based upon a recognized internal control framework. While the
Company has an internal control and procedures manual in place and management
believes the controls and procedures are effective the manual is not based upon
a recognized internal control framework, because we have not found one that fits
the limited scope of operations of our Company.
During the first half of the Company's fiscal year ending September 30, 2007
management will be revising the Company's internal and controls procedure
document basing this revision upon a model framework created by the Committee of
Sponsoring Organizations of the Treadway Commission (or "COSO") as is
appropriate to our operations. This framework is entitled Internal
Control-Integrated Framework. The COSO Framework, which is the common shortened
title, was published in 1992 and has been updated, and we believe will satisfy
the Securities and Exchange Commission requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Management is committed to re-writing its internal controls and procedures
manual based upon the Treadway Commission report as is appropriate to our
operations during the first half of fiscal year ending September 30, 2007.
Except as noted above, there have not been any changes in our internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during our fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
On April 19th 2006, a service provider Office Radio Network filed a lawsuit in
the District Court in Colorado alleging that it has been damaged due to refusal
to allow it to sell its shares under Rule 144. The parties entered into a
settlement in December 2006 providing for the return of 150,000 shares of the
300,000 shares issued to Office Radio Network, and the provisioning by Office
Radio Network of an additional six months of service to the Company.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following table lists the executive offices and directors of the Company as
of September 30, 2006:
NAME Age POSITION HELD TENURE
Brian Altounian 43 Secretary, Director Since September 2003
(resigned 6/30)
Tom Djokovich 49 President, CEO, CFO, Director Since September 2003
Thomas Anderson 41 Director Since August 2001
Joseph Grimes 49 COO Since April 2006
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.
27
BIOGRAPHICAL INFORMATION
TOM DJOKOVICH, age 49, 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.
JOSEPH GRIMES, age 49, Chief Operating Officer as of April 2006;
Mr. Grimes brings to XsunX more than eight years direct experience in thin-film
technology and manufacturing. He was most recently Vice President, Defense
Solutions, for Envisage Technology Company, where he directed and managed the
defense group business development process, acquisition strategies and vision
for next generation applications. Previously he was Co-Founder, President and
CEO of ISERA Group, where he established the company infrastructure and guided
five development teams, finally selling the company to Envisage. His direct
experience in thin-film technology came with Applied Magnetics Corporation as
manager for thin-film prototype assembly. Mr. Grimes holds a Bachelor's degree
in business economics and environmental studies, and a Master's in computer
modeling and operation research applications, both from the University of
California at Santa Barbara.
THOMAS ANDERSON, age 41, 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.
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and certain persons who own more than 10% of a registered class of the Company's
equity securities (collectively, "Reporting Persons"), to file reports of
ownership and changes in ownership ("Section 16 Reports") with the Securities
and Exchange Commission (the "SEC"). Reporting Persons are required by the SEC
to furnish the Company with copies of all Section 16 Reports they file.
Based solely on its review of the copies of such Section 16 Reports received by
it, or written representations received from certain Reporting Persons, the
following persons were required to file forms pursuant to Section 16(a):
28
Name Form Filed
----------------------------------------------------------------------------
Tom Djokovich Form 3 October 24, 2003
Brian Altounian Form 4 June 22, 2006
Xoptix, Inc. Form 3* Did not file
* NOTE: Xoptix, Inc. was being liquidated pursuant to a Plan of Liquidation, and
the shares were distributed in December, 2003 pro rata to shareholders of
Xoptix, Inc. in a liquidating distribution of assets in kind. Xoptix has
represented that no shareholder of Xoptix, Inc. receiving shares holds more than
10% of the issued and outstanding shares of Registrant.
ITEM 11. 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
(resigned June 30, 2006)
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Director, Thomas Anderson $0 $0 $0 0 0
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
EXCUTIVE OFFICER COMPENSATION
The annual compensation for the executive officers of the Company for the post
reorganization operations has not yet been determined, but is expected to be
established by a resolution of the Company's Board of Directors in the future.
The following table and notes set forth the annual cash compensation paid to
officers of the Company.
SUMMARY COMPENSATION TABLE OF EXECUTIVES
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Name & Principal Position Fiscal Annual Annual Bonus Awards Other Restricted Securities
Year Salary ($) ($) Annual Stock Award(s) Underlying
Compensation ($) ($) Options/ SARS
(#)
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Tom Djokovich, President(1) 2006 $150,000 0 0 0 0
2005 $150,000 0 0 0 0
2004 $130,000 0 0 0 0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Joseph Grimes, COO (2) 2006 $0 0 0 0 612,000
2005 $0 0 0 0 0
2004 $0 0 0 0 0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Brian Altounian, Secretary(3) 2006 $0 0 0 0 0
2005 $0 0 0 0 0
2004 $0 0 0 0 0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Thomas Anderson, Director 2006 $0 0 0 0 0
2005 $0 0 0 0 0
2004 $0 0 0 0 0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
29
(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, 2006 the remaining balance of Mr. Djokovich's
deferred salary was $6,538.
(2) The Company has agreed to pay Mr. Grimes $2,884 per week for services
provided as Chief Operating Officer under the terms of an employment agreement
effective April 5, 2006. In addition to Mr. Grimes base compensation the Company
also provides Mr. Grimes with a $400 monthly health insurance allowance. In
connection with the issuance of an employment agreement to Mr. Grimes the
Company granted 500,000 warrants at the then market price of $1.69. On July 20,
2006 the Company and Mr. Grimes mutually agreed to the cancellation of the
remaining 388,000 unvested balance of this warrant and then granted 500,000 new
warrants on July 20, 2006 at the then market price of $0.51. The new warrant
will vest at the rate of 28,000 shares per month up to and through the first
nine months of employment, 100,000 shares will become exercisable upon delivery
of a marketing plan by Mr. Grimes to the Board of Directors, 148,000 shares will
become exercisable upon the first sale or licensure of an XsunX technology under
the marketing plan.
(3) Resigned as Chairman and Secretary effective June 30, 2006
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
Long Term Incentive Plan Options/Warrants
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Name Date Issued Number Issued Exercise Expiration Date Consideration
Price
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Joseph Grimes(1) April 5, 2006 112,000 $1.69 April 5, 2011 As part of an employment
incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Joseph Grimes(2) July 20, 2006 500,000 $0.51 July 20, 2011 As part of an employment
incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
(1) Employment Incentive Warrants - In connection with the issuance of an
employment agreement to Joseph Grimes in April 2006, the Company granted 500,000
warrants at the then market price of $1.69. On July 20, 2006 the Company and Mr.
Grimes mutually agreed to the cancellation of the remaining 388,000 unvested
balance of this warrant.
(2) Employment Incentive Warrants - In connection with the issuance of an
employment agreement to Joseph Grimes in April 2006, the Company granted 500,000
warrants on July 20, 2006 at the then market price of $0.51. The warrant will
vest at the rate of 28,000 shares per month up to and through the first nine
months of employment, 100,000 shares will become exercisable upon delivery of a
marketing plan by Mr. Grimes to the Board of Directors, 148,000 shares will
become exercisable upon the first sale or licensure of an XsunX technology under
the marketing plan.
30
2006 WARRANT ISSUANCE AND SUMMARYS
The following table sets forth information with respect to warrants to purchase
common stock of the Company granted during fiscal year ended September 30, 2006.
Options/Warrants
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Name Date Issued Number Issued Exercise Expiration Date Consideration
Price
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
MVSystems, Inc.(1) October 12, 2005 7,000,000 $0.25 October 12, 2010 Expanded Use
License Agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Cornell Capital, LP(2) December 12, 2005 3,125,000 $0.45 December 12, 2010 As part of a
financing agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Cornell Capital, LP (3) December 12, 2005 1,250,000 $0.55 December 12, 2010 As part of a financing
agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Joseph Grimes(4) April 5, 2006 112,000 $1.69 April 5, 2011 As part of an employment
incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Joseph Grimes(5) July 20, 2006 500,000 $0.51 July 20, 2011 As part of an employment
incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
(1) The Warrant granted to MVSystems, Inc. will vest in the amount of 1,000,000
shares upon the effective date of the Expanded Use License Agreement which was
October 12, 2005. Thereafter, the Warrant will vest at the rate of 1,000,000
shares upon the satisfactory completion of a Phase 4 development program for the
development of certain opaque solar technologies that began in January 2006, and
the balance of 5,000,000 shares will vest upon the date the technologies
licensed under the Expanded Use License are licensed to a third party in a bona
fide arms-length commercial setting.
(2), (3) Warrant to Purchase Common Stock Cornell - On December 12, 2005, the
Company consummated a Securities Purchase Agreement with 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. 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"). As of the date of this filing all of the Cornell warrants had
been exercised.
(4) Employment Incentive Warrants - In connection with the issuance of an
employment agreement to Joseph Grimes in April 2006, the Company granted 500,000
warrants at the then market price of $1.69. On July 20, 2006 the Company and Mr.
Grimes mutually agreed to the cancellation of the remaining 388,000 unvested
balance of this warrant.
(5) Employment Incentive Warrants - In connection with the issuance of an
employment agreement to Joseph Grimes in April 2006, the Company granted 500,000
warrants on July 20, 2006 at the then market price of $0.51. The warrant will
vest at the rate of 28,000 shares per month up to and through the first nine
months of employment, 100,000 shares will become exercisable upon delivery of a
marketing plan by Mr. Grimes to the Board of Directors, 148,000 shares will
31
become exercisable upon the first sale or licensure of an XsunX technology under
the marketing plan.
During the years ended September 30, 2005 no warrant holders exercised warrants
to purchase the Company's common stock. During the year ended September 30, 2006
warrant holders exercised a total of 10,850,000 warrants in cash to purchase the
Company's common stock.
A summary of warrant activity for the year ended September 30, 2005 and 2006 is
as follows:
Weighted- Weighted-
Number of Average Average
Warrants Exercise Accrued Exercise
--------------
Price Warrants Price
--------
Exercisable
-------------- ------------- --------------- --------------
Outstanding, September 30, 2004 8,000,000 $0.15 5,525,000 $0.15
Granted 2005 7,125,000 $0.1649 7,884,167 $0.1659
Exercised 2005 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2005 15,125,000 $0.1595 13,409,167 $0.1593
Granted 2006 11,987,000 $0.3419 6,143,000 $0.4340
Exercised 2006 (10,850,000) $0.2923 (10,850,000)
-------------- ------------- --------------- --------------
Outstanding, September 30, 2006 16,262,000 $0.2170 8,702,167 $0.1873
==============
At September 30, 2006, the range of warrant prices for shares under warrants not
exercised 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(yr) Warrants Price
--------------- ------------ -------------- ---------------- ---------------- -------------
$.15 7,900,000 $ .15 2.7 6,900,000 $ .15
------------ ----------------
.20 750,000 .20 1.5 634,167 .20
------------ ----------------
.25 7,000,000 .25 4.0 1,000,000 .25
------------ ----------------
.51 500,000 .51 4.8 56,000 .51
------------ ----------------
1.69 112,000 1.69 4.5 112,000 1.69
============ ================
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.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELEATED STOCKHOLDER MATTERS
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 7, 2006. 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 (2) 17,903,000 11.39%
President & Director
65 Enterprise
Aliso Viejo, CA 92656
Thomas Anderson 56,900 >.01%
65 Enterprise
Aliso Viejo, CA 92656
Joseph Grimes (3) 224,000 >.01%
Chief Operating Officer
65 Enterprise
Aliso Viejo, CA 92656
(1) Applicable percentage ownership is based on 157,137,931 shares of common
stock outstanding as of December 13, 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
December 13, 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. Tamara Djokovich.
(3) Includes vested warrants that may be exercised within 60 days of the date of
this filing.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED PARTY TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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.
The Company has adopted a policy under which any consulting or finder's fee that
may be paid to a third party for consulting services to assist management in
evaluating a prospective business opportunity would be paid in stock, stock
purchase options or in cash. Any such issuance of stock or stock purchase
options would be made on an ad hoc basis. Accordingly, the Company is unable to
predict whether or in what amount such a stock issuance might be made.
33
Grant of Options/Warrants to Executive Officer
Employment Incentive Warrants - In connection with the issuance of an employment
agreement to Joseph Grimes in April 2006, the Company granted 500,000 warrants
at the then market price of $1.69. On July 20, 2006 the Company and Mr. Grimes
mutually agreed to the cancellation of the remaining 388,000 unvested balance of
this warrant and to the grant of a new warrant agreement in the amount of
500,000 warrants at the then market price of $.51. The warrant will expire five
(5) years after the date of the grant and is subject to the following vesting
provisions:
(1) The Warrant shall become exercisable at the rate of 28,000 shares per
month up to and through the first nine months of employment of
Optionee by Company.
(2) One Hundred Thousand (100,000) shares shall become exercisable upon
the completion and delivery of a marketing plan by Optionee to the
Board of Directors.
(3) One Hundred Forty Eight Thousand (148,000) shares shall become
exercisable upon the first sale or licensure of an XSUNX, Inc.
technology under the marketing plan.
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.
(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.
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.
ITEM 14. PRINCIPAL ACCOUNTING 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 2005 and 2006.
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 2006:
As of the period ended September 30, 2006 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
December 31, April 30, and June 30, 2006. No other fees we billed by Jaspers +
Hall in the period ended September 30, 2006.
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 and annual financial statements included in annual reports on Form
10-KSB for the period ended September 30, 2005. No other fees we billed by
Jaspers + Hall in the period ended September 30, 2006.
34
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.
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 2005 and 2006.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Reports on Form 8-K:
8-K filed 1-11-06
8-K/A filed 1-11-06
8-K filed 1-12-06
8-K filed 7-6-06
8-K filed 7-27-06
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
35
INDEX
Form 10-K
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
36
XSUNX, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
September 30, 2006 and 2005
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, 2006, 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, 2006 and the results of their operations
and their cash flows for the year ended September 30, 2006 and for the period
February 25, 1997 to September 30, 2006, 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.
Denver, CO
December 14, 2006
/s/ Jaspers + Hall, PC
Jaspers + Hall, PC
Denver, Colorado
December 14, 2006
F-1
XSUNX, INC.
(A Development Stage Company)
Balance Sheets
Audited
September 30,
----------------------------------------
2006 2005
---------------- ----------------
ASSETS:
Current assets:
Cash $4,305,105 $ 175,869
Prepaid Research and Development Expense 3,200 -
Prepaid Professional Expense 330,917 79,984
Prepaid Legal Expenses 15,000 -
---------------- ----------------
Total current assets 4,654,222 255,853
---------------- ----------------
Fixed Assets:
Office Equipment 9,774 2,270
Research and Development Equipment 392,301 181,995
Leasehold Improvement 80,492 -
---------------- ----------------
Total Fixed Assets 482,567 184,265
Less Depreciation and Amortization (84,941) (18,434)
---------------- ----------------
Net Fixed Assets 397,626 165,831
---------------- ----------------
Other Assets:
Patents 40,000 20,000
Security Deposit 2,615 -
Deferred Financing Costs 25,001 -
Marketable Prototype 1,765,000 -
---------------- ----------------
Total other assets 1,832,616 20,000
---------------- ----------------
TOTAL ASSETS $6,884,464 $ 441,684
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts Payable $ 582,161 $ 78,377
Accrued Expenses 6,538 45,856
Note Payable - 850,000
---------------- ----------------
Total current liabilities 588,699 974,233
---------------- ----------------
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;
157,169,856 shares issued and outstanding September 30, 2006 13,290,868 3,996,735
123,876,633 shares issued and outstanding September 30, 2005.
Common Stock Warrants 2,151,250 1,200,000
Deficit accumulated during the development stage (9,146,353) (5,729,284)
---------------- ----------------
Total stockholders' deficit 6,295,765 (532,549)
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $6,884,464 $ 441,684
================ ================
The accompanying notes are an integral part of these financial statements.
F-2
XSUNX, INC.
(A Development Stage Company)
Statements of Operations
February 25, 1997
Years Ended (Inception) to
September 30, September 30,
-------------
2006 2005 2004 2006
-------------- ------------- ------------- ------------------
Revenue $ 8,000 $ - $ - $ 8,000
-------------- ------------- ------------- ------------------
Expenses:
Abandoned Equipment - - - 808
Advertising 9,050 3,979 - 13,029
Bank Charges 294 500 401 2,907
Conferences and Seminars 11,267 - - 11,267
Consulting 47,850 320,944 19,900 1,392,833
Depreciation and Amortization 82,941 18,435 - 104,554
Directors' Fees - - 11,983
Due Dilgence - - 45,832
Equipment Rental - - 1,733
Filing Fees 4,625 1,800 - 6,425
Impairment loss - - 923,834
Insurance 2,705 758 - 3,463
Legal and Accounting 140,293 107,249 27,203 435,902
Licenses and Fees 20 25 190 6,455
Loan Fees 628,834 115,000 - 741,834
Meals and Entertainment - - - 4,119
Miscellaneous Expenses 3,882 1,675 - 5,687
Office Expenses 4,581 2,634 5,218 26,414
Patent Fees 625 663 - 1,288
Salaries 275,089 155,236 119,336 930,411
Postage 1,123 2,161 - 6,501
Printing 8,730 4,300 - 18,610
Public Relations 182,151 116,413 6,640 409,530
Rent 19,858 9,000 8,905 45,821
Research & Development 949,472 501,423 129,493 1,580,388
Subscription Reports 2,895 860 - 3,755
Taxes - - - 4,657
Telephone 12,318 5,489 4,270 52,622
Transfer Agent Expense 411 3,628 2,997 20,365
Travel 41,823 11,234 3,640 115,990
Warrant Option Expense 951,250 - 1,200,000 2,151,250
-------------- ------------- ------------- ------------------
Total Expenses 3,380,087 1,383,406 1,528,193 9,080,267
-------------- ------------- ------------- ------------------
Other Income and Expense
Interest Expense 158,333 17,433 251 247,363
Interest Income (88,480) - - (88,503)
Forgiveness of Debt - - (19,376) (59,773)
-------------- ------------- ------------- ------------------
Net Loss $ (3,441,940) $ (1,400,839) $ (1,509,068) $ (9,171,354)
============== ============= ============= ==================
Per Share Information:
Weighted average number of
common shares outstanding 138,005,964 123,854,733 114,036,102
-------------- ------------- -------------
Net Loss per Common Share $ (0.02) $ (0.02) $ (0.01)
=========== ======== ========
* Less than $.01
The accompanying notes are an integral part of these financial statements.
F-3
XSUNX, INC. Continued...
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
September 30, 2006
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 - - 10,590 111,900 - - 111,900
Issuance of stock to Founders - - 14,110 - - - -
Issuance of stock for consolidation - - 445,000 312,106 - - 312,106
Issuance of stock for cash - - 5,290 105,800 - - 105,800
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 - - 1,500 30,000 - - 30,000
Issuance of stock for cash - - 50,200 204,000 - - 204,000
Consolidation stock cancelled - - (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 - - 21,233 159,367 - - 159,367
Issuance of stock for services - - 65,000 316,500 - - 316,500
Issuance of stock for cash - - 90,225 488,546 - - 488,546
Issuance of stock for services - - 70,000 147,000 - - 147,000
Issuance of stock for cash - - 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 - - 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 - - 70,000,000 3 - - 3
Issuance of stock for Cash - - 9,000,000 225,450 - - 225,450
Issuance of stock for Debt - - 115,000 121,828 - - 121,828
Issuance of stock for Expenses - - 115,000 89,939 - - 89,939
Issuance of stock for Services - - 31,300,000 125,200 - - 125,200
Net Loss for year - - - - - (145,868) (145,868)
---------- --------- ---------- ---------- ---------- ---------- ---------
F-4
XSUNX, INC. ...Continued
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
September 30, 2006
Deficit
Accumulated
Common During
Treasury Stock Common Stock Stock Development
---------------------- ----------------------
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- --------- ------------ --------- ---------- ---------- ---------
Balance - September 30, 2003 - - 111,298,148 2,821,726 - (2,819,377) 2,349
---------- --------- ---------- ---------- ---------- ---------- ---------
Issuance of stock for Cash - - 2,737,954 282,670 - - 282,670
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 - - 6,220,037 491,135 - - 491,135
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 - - 239,469 23,827 - - 23,827
Issuance of stock for Collateral 26,798,418 - - - - - -
Issuance of stock for services - - 2,544,031 310,117 - - 310,117
Net Loss for year - - - - - (1,400,969) (1,400,969)
---------- --------- ---------- ---------- ---------- ---------- ---------
Balance - September 30, 2005 26,798,418 - 123,876,639 3,996,735 1,200,000 (5,729,414) (532,679)
---------- --------- ---------- ---------- ---------- ---------- ---------
Issuance of stock for services - - 40,441 7,500 - - 7,500
Issuance of common stock warrants - - - - 951,250 - 951,250
Issuance of stock for debenture conversion - - 8,500,000 850,000 - - 850,000
Issuance of stock for interest on debenture - - 105,500 10,550 - - 10,550
Issuance of stock for warrant conversion - - 10,850,000 3,171,250 - 3,171,250
Issuance of stock for debenture conversion - - 7,894,737 3,000,000 - - 3,000,000
Issuance of stock for debenture conversion - - 5,263,158 2,000,000 - - 2,000,000
Issuance of stock for interest on debenture - - 607,456 230,833 - - 230,833
Issuance of stock for services - - 31,925 24,000 - - 24,000
Net Loss for year - - - - - (3,441,940) (3,416,939)
---------- --------- ---------- ---------- ---------- ---------- ---------
Balance - September 30, 2006 26,798,418 $ - 157,169,856 $13,290,868 $ 2,151,250 $(8,171,354) $6,295,765
========== ========= ========== ========== ========== ========== =========
The accompanying notes are an integral part of these financial statements.
F-5
XSUNX, INC.
(A Development Stage Company)
Statements of Cash Flows
(Indirect Method)
February 25, 1997
Years Ended (Inception) to
September 30, September 30,
-------------
2006 2005 2004 2006
-------------- -------------- ------------- ------------------
Cash Flows from Operating Activities:
Net Loss $ (3,441,940) $ (1,400,969) $ (1,509,068) $ (9,171,354)
Issuance of Common Stock for Services 31,500 50,827 - 1,348,997
Issuance of Common Stock for Loan Inducement - 310,117 - 310,117
Warrant Expense 951,250 - 1,200,000 2,151,250
Issuance of Common Stock for Interest 241,383 - - 241,383
Depreciation Expense 82,941 18,435 - 101,376
Adjustments to reconcile net loss to
net cash used in operations.
Decrease in Deposits (2,615) - (22,500) (2,615)
(Increase) in Deferred Financing Costs (25,001) - (25,001)
(Increase) in Prepaid Expenses (269,133) (59,985) - (349,117)
Increase (Decrease) in Accounts Payable 503,784 (10,653) 89,030 582,161
Increase (Decrease) in Accrued Liabilities (39,448) 42,578 5,908 6,538
-------------- -------------- ------------- ------------------
Net Cash Flows Used by Operations (1,942,278) (1,049,650) (236,630) (4,781,264)
-------------- -------------- ------------- ------------------
Cash Flows from Investing Activities:
Purchase of Fixed Assets (314,736) (181,995) (2,270) (499,002)
Purchase of Marketable Prototype and Patent (1,785,000) (10,000) (9,997) (1,805,000)
-------------- -------------- ------------- ------------------
Net cash used by investing activities (2,099,736) (191,995) (12,267) (2,304,002)
-------------- -------------- ------------- ------------------
Cash Flows from Financing Activities:
Proceeds from Notes payable - Stockholder - 3,775 1,225 -
Payment for Notes payable - Stockholder - (5,000) - -
Proceeds fom Warrant Conversion 3,171,250 - - 3,171,250
Proceeds from Debenture Conversion 5,000,000 - 5,000,000
Proceeds from Convertible Debt - 850,000 - -
Issuance of Common Stock for cash - 531,395 282,670 3,219,121
-------------- -------------- ------------- ------------------
Net Cash Flows Provided by Financing Activities 8,171,250 1,380,170 283,895 11,390,371
-------------- -------------- ------------- ------------------
Increase in Cash 4,129,236 138,525 34,998 4,305,105
-------------- -------------- ------------- ------------------
Cash at Beginning of Period 175,869 37,344 2,346 -
Cash at End of Period $4,305,105 $ 175,869 $ 37,344 $ 4,305,105
============== ============== ============= ==================
Supplemental Disclosure of Cash Flow Information
Cash paid for Interest $ - $ - $ - $ 71,346
============== ============== ============= ==================
Cash paid for income taxes $ - $ - $ - $ -
============== ============== ============= ==================
NON-CASH TRANSACTIONS
Stock issued for services $ 31,500 $ 50,827 $ - $ 1,288,384
============== ============== ============= ==================
Stock issued for Loan Inducement $ - $ 310,117 $ - 310,117
============== ============== ============= ==================
Stock Issued for Interest $ 241,383 $ - $ - $ 241,383
============== ============== ============= ==================
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, 2006
F-7
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
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. Effective September 24, 2003, the
Company completed a Plan of Reorganization and Asset Purchase Agreement (the
"Plan").
Pursuant to the Plan the Company acquire the following three patents from
Xoptix, Inc., a California corporation 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 - Summary of Significant Accounting Policies:
Basis of Presentation - Development Stage Company:
-------------------------------------------------
The Company has not earned any 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.
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.
F-8
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
Note 2 - Summary of Significant Accounting Policies (Cont.):
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, 2006 and 2005, 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 none dilutive, due to the Company's net losses.
Advertising:
-----------
Advertising costs are expensed as incurred. Total advertising costs were $9,050
and $3,979 for the years ended September 30, 2006 and 2005, respectively.
Research and Development:
------------------------
Research and development costs are expensed as incurred. Total research and
development costs were $ 949,472 and $501,423 for the years ended September 30,
2006 and 2005, respectively.
F-9
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
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.
Note 3 - 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:
2006 2005
-------- ------------
Deferred Tax Liability $ 9,646,224 $ 5,729,284
Deferred Tax Assets
Net Operating Loss Carry forwards
Book/Tax Differences in Bases of Assets 0 0
------------- -------------
Valuation allowance $ 9,646,224 $ 5,729,284
------------- -------------
Net Deferred tax assets $ 0 $ 0
============= =============
Note 3 - Federal Income Tax (Cont.):
At September 30, 2006, the Company had net operating loss carry forwards of
approximately, $9,146,353 for federal income tax purposes. These carry forwards
if not utilized to offset taxable income will begin to expire in 2010.
Note 4 - 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, as part of a
reorganization, were for accrued director fees and salaries and to pay off past
debt to investors. Included in the reorganization were 70,000,000 shares of
stock issued to obtain certain patent rights from Xoptix, Inc. Also shares of
stock were issued in 2003 for consulting fees in arranging the formation of the
reorganized Corporation. In 2004 2,737,954 shares of stock were issued for cash
and consulting fees to fund operations. 9,840,537 shares of common stock were
issued in 2005 for cash and consulting fees to fund operations. 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. On August 18,
2006 the note underlying the collateral shares was paid and requirement of
collateral was discharged. In 2006 33,188,926 shares of common stock were issued
for cash and 72,366 were issued for services to fund operations.
The following represents a detailed analysis of the 2006 capital stock
transactions.
F-10
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
Issuance of Shares
------------------
Debenture Conversion - On February 8, 2006 Cornell Capital Partners, LLP
converted $350,000 of the principal balance of $850,000 debenture issued to
Cornell in July 2005. On March 1, 2006 Cornell converted the remaining principal
and accrued interest the debenture balance totaling $510,550. Upon conversion of
the notes XsunX issued 8,605,500 shares of common stock to Cornell. The
conversion price for all of the above issued shares was $.10. The remaining
value of the debenture is $0.
Warrant Conversion - In February 2006, a consultant exercised 100,000 of the
1,000,000 available $.15 cent warrants. The amount of $15,000 dollars was paid
to XsunX by the consultant and 100,000 shares were issued.
Warrant Conversion - In March 2006 Cornell Capital Partners, LLP exercised
3,125,000 of the available 3,125,000 $.45 warrants and 1,250,000 of the
available 1,250,000 $.55 cent warrants. The aggregate amount of $2,093,750
dollars was paid to XsunX by Cornell. The Company issued 4,375,000 shares of
common stock in association with the exercise of these warrants.
Warrant Conversion - In April 2006 Cornell Capital Partners, LLP exercised
4,250,000 of the available 4,250,000 $.15 warrants and 2,125,000 of the
available 2,125,000 $.20 cent warrants. The aggregate amount of $1,062,500
dollars was paid to XsunX by Cornell. The Company issued 6,375,000 shares of
common stock in association with the exercise of these warrants.
Debenture Conversions - On May 10, 2006 Cornell Capital Partners, LLP converted
$2,000,000 of the principal balance of a $5,000,000 debenture issued to Cornell
in December 2005 and the Company issued 5,263,158 shares of common stock to
Cornell for the conversion. On June 12 Cornell converted another $1,000,000 of
the principal balance of the debenture and the Company issued 2,631,579 shares
of common stock to Cornell. On July 17, 2006 another $1,000,000 of the principal
balance was converted by Cornell for which the Company issued 2,631,579 shares
of common stock to Cornell. On August 23, 2006 Cornell converted the remaining
$1,000,000 principal balance and $230,833 of the total accrued interest charges
of the debenture for which the Company issued 3,239,035 shares of common stock
to Cornell. The conversion price for all of the above issued shares was $.38
each. The remaining balance of the Debenture as of the date of this filing is
$0.0.
Issuance of Shares for Service
------------------------------
In December 2005 the Company issued 40,441 unregistered common shares to a
service provider for accrued service fees totaling $7,500 dollars for services
provided over the fourth quarter period ended September 30, 2005. In September
2006 XsunX issued an additional 31,925 unregistered common shares to the same
service provider for accrued service fees totaling $24,000 dollars for the one
year period ended September 30, 2006. The shares were earned on a quarterly
basis by the service provider and the conversion price for the stock issued was
calculated using the average daily closing price of the Company's common stock
over each quarter period of service.
Note 5 - 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
F-11
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
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 in August
2005. No stocks were issued at September 30, 2006.
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 $951,250 charge to expenses for the warrants granted in the year ended
September 30, 2006, as follows:
2006 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
------------------------ -------------- --------------- ----------------- ----------------- -----------------
MVSystems, Inc. 7,000,000 $.25 $.31 $.06 $420,000
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Cornell Capital, LP 3,125,000 $.45 $.60 $.15 $468,750
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Cornell Capital, LP 1,250,000 $.55 $.60 $.05 $62,500
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Joseph Grimes 112,000 $1.69 $1.69 $0.0 $0.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Joseph Grimes 500,000 $.51 $.51 $.0 $.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Totals $951,250
------------------------ -------------- --------------- ----------------- ----------------- -----------------
F-12
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
Note 5 - Stock Options and Warrants (cont.):
Warrant Grants
--------------
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.
(2) One million (1,000,000) warrants will vest upon the satisfactory
completion of a Phase 4 development program for the development of
certain opaque solar technologies.
(3) The balance of the remaining 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.
Debenture Warrants - In connection with the issuance of a debenture in the
principal amount of $5,000,000 in December, 2005 3,125,000 warrants were granted
to Cornell Capital Partners, LP at $.45 and 1,250,000 warrants were granted at
$.55. During the 2006 fiscal year Cornell exercised all of the available
warrants granted. As of the date of this filing there were no remaining warrants
available for conversion by Cornell.
Employment Incentive Warrants - In connection with the issuance of an employment
agreement to Joseph Grimes in April 2006, the Company granted 500,000 warrants
at the then market price of $1.69. On July 20, 2006 the Company and Mr. Grimes
mutually agreed to the cancellation of the remaining 388,000 unvested balance of
this warrant and to the grant of a new warrant agreement in the amount of
500,000 warrants at the then market price of $.51. The warrant will expire five
(5) years after the date of the grant and is subject to the following vesting
provisions:
(1) The Warrant shall become exercisable at the rate of 28,000 shares per
month up to and through the first nine months of employment of
Optionee by Company.
(2) One Hundred Thousand (100,000) shares shall become exercisable upon
the completion and delivery of a marketing plan by Optionee to the
Board of Directors.
(3) One Hundred Forty Eight Thousand (148,000) shares shall become
exercisable upon the first sale or licensure of an XSUNX, Inc.
technology under the marketing plan.
The total charged in expense for the 2006 fiscal year has been $951,250 for the
issuance of the above described Expanded Use License, Debenture warrants, and
employment incentive warrants.
During the years ended September 30, 2005 and September 30, 2006 the board of
directors approved the issuance of warrants to purchase an aggregate of
19,112,000 shares of the Company's common stock. Such warrants are exercisable
at prices ranging from $.15 to $1.69 per share, vest over periods from between
36 to 60 months, and expire at various times through July 2011.
During the years ended September 30, 2005 no warrant holders exercised warrants
to purchase the Company's common stock. During the year ended September 30, 2006
warrant holders exercised a total of 10,850,000 warrants in cash to purchase the
Company's common stock.
F-13
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
Note 5 - Stock Options and Warrants (cont.):
A summary of warrant activity for the year ended September 30, 2005 and 2006 is
as follows:
Weighted- Weighted-
Number of Average Average
Warrants Exercise Accrued Exercise
--------------
Price Warrants Price
--------
Exercisable
-------------- ------------- --------------- --------------
Outstanding, September 30, 2004 8,000,000 $0.15 5,525,000 $0.15
Granted 2005 7,125,000 $0.1649 7,884,167 $0.1659
Exercised 2005 0 $0.0
-------------- ------------- --------------- --------------
Outstanding, September 30, 2005 15,125,000 $0.1595 13,409,167 $0.1593
Granted 2006 11,987,000 $0.3419 6,143,000 $0.4340
Exercised 2006 (10,850,000) $0.2923 (10,850,000)
-------------- ------------- --------------- --------------
Outstanding, September 30, 2006 16,262,000 $0.2170 8,702,167 $0.1873
==============
At September 30, 2006, the range of warrant prices for shares under warrants not
exercised 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(yr) Warrants Price
--------------- ------------ -------------- ---------------- ---------------- -------------
$.15 7,900,000 $ .15 2.7 6,900,000 $ .15
------------ ----------------
.20 750,000 .20 1.5 634,167 .20
------------ ----------------
.25 7,000,000 .25 4.0 1,000,000 .25
------------ ----------------
.51 500,000 .51 4.8 56,000 .51
------------ ----------------
1.69 112,000 1.69 4.5 112,000 1.69
============ ================
Note 6 - Marketable Prototype Acquisition:
Subject to the terms of the Expanded Use License Agreement dated October 12,
2005 between XsunX and MVSystems, Inc. the parties are building a first run
production Machine for the purpose of proofing and demonstrating thin film solar
cell manufacturing technology. The parties intend to sell this first Machine and
have agreed to a 50/50 split of the net proceeds of the sale of this Machine
excluding production Costs and reasonable marketing expenses.
Note 7 - Notes, Commitments, and Contingencies
Note Payable (Paid)
-------------------
On July 14, 2005, XSUNX, Inc. entered into a Secured Convertible Debenture
agreement with Cornell Capital Partners, LP in the amount of $400,000. The
interest accrued on the outstanding principal balance thereof at an annual rate
equal to twelve percent (12%). The Debenture was convertible into shares of
Common Stock at the option of the Holder, with a conversion price in effect on
any Conversion Date was be equal to ten cents ($.10). On August 16, 2005, XSUNX,
F-14
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
Inc. received an additional $450,000 from Cornell Capital Partners, LP with the
same interest and conversion rights. During the period ended March 31, 2006
Cornell converted the entire $850,000 principal balance and $10,550 of the
remaining accrued interest charges into 8,605,500 shares of common shares. The
shares were issued subject to a registration statement effective as of February
2006. The remaining balance of the debenture is $0.0.
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 was advanced
prior to the filing by the Company with the Securities and Exchange Commission
of a Registration Statement in January 2006. The last installment of $1,000,000
was advanced in February 2006 upon the Registration Statement being declared
effective by the Commission. Between May 2006 and August 2006 the Debentures
principal balance of $5,000,000 dollars and accrued interest charges were
converted into 13,765351 shares of Common Stock at the option of Cornell at a
conversion price per share equal to $0.38. The remaining balance of the
debenture is $0.0.
In connection with the above Cornell L.P. Securities 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 the
exercise of Warrants issued to Cornell in association with Debenture. Prior to
executing the Securities Purchase Agreement, the Company had withdrawn a
previously filed 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 were
included in the Registration Statement. The Company and Cornell also agreed to
terminate the July 14, 2005 Distribution Agreement. On January 11, 2006 the
Company filed to register up to 72,879,263 shares in association with the above
securities registration requirements. The Registration statement was made
effective on or about February 9, 2006. Upon the final conversion by Cornell of
the Initial Securities, the Securities Purchase Agreement, the underlying
Warrants therein, and accrued interest associated with the Debentures XsunX
issued the aggregate amount of 35,245,851 registered shares of common stock in
the 2006 period.
The Company's obligations under the Prior Agreement and the Securities Purchase
Agreement were secured by substantially all of the Company's assets. As further
security for its obligations thereunder, the Company had deposited into escrow
26,798,418 shares of Common Stock. In addition, Tom Djokovich, the Company's
Chief Executive Officer, had 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. As of the date of this filing XsunX had received notice from
Cornell of the release of the security interest in above listed security shares
and assets.
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;
F-15
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
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 2006 the accrued balance of $35,000 is included in Accounts
Payable.
Operating Leases
In April 2006 the Company entered into a three year lease for operations
facilities in Golden, CO. The Company provided a $2,615 security deposit and
expensed $79,867 in costs associated with tenant improvements to the facilities
in preparation for occupancy. The following is a schedule, by years, of the
minimum base payments required under this operating lease for facilities. An
additional $825 monthly is also due as a pro rata share equaling 4.12% of the
operating costs for real estate taxes, assessments, and the expenses of
operating and maintaining common areas within the commercial grounds surrounding
the leased facilities.
Annual Annualized Monthly
Rent Schedule Rate/sf Rent Rent
------------- ------- ---- ----
7/1/06-6/30/07 $6.75 $20,250.00 $1,687.50
7/1/07-6/30/08 $6.95 $20,850.00 $1,737.50
7/1/08-6/30/09 $7.16 $21,480.00 $1,790.00
Legal Proceedings
-----------------
On March 6, 2006 Ron Sentchuck filed an action against the Company in the
Superior Court of California for the County of Los Angeles. The Company was
dismissed from this action on August 3, 2006. No contingency expenses were
accrued by the Company for this complaint.
Note 8 - Subsequent Events
On April 19th 2006, Office Radio Network filed a lawsuit in the District Court
in Colorado alleging that it has been damaged due to refusal to allow it to sell
its shares under Rule 144. The parties entered into a settlement in December
2006 providing for the return of 150,000 shares of the 300,000 shares issued to
Office Radio network, and the provisioning by Office Radio Network of an
additional six months of service.
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
F-16
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
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.
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
F-17
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
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.
In February 2006 the amendment to FASB Statement No 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
was issued as SFAS 155, Accounting for Certain Hybrid Financial Instruments.
This Statement permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. Clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement 133, establishes a requirement to
evaluate interest in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation. Clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives and amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
This Statement is effective for all financial instruments acquired or issued
after the beginning of our first fiscal year that begins after September 15,
2006.
The fair value election provided for in paragraph 4(c) of this Statement may
also be applied upon adoption of this Statement for hybrid financial instruments
that had been bifurcated under paragraph 12 of Statement 133 prior to the
adoption of this Statement. Earlier adoption is permitted as of the beginning of
our fiscal year, provided we have not yet issued financial statements, including
financial statements for any interim period, for that fiscal year. Provisions of
this Statement may be applied to instruments that we hold at the date of
adoption on an instrument-by-instrument basis. The Company is currently
reviewing the effects of adoption of this Statement but it is not expected to
have a material impact on our financial statements.
In March 2006 the amendment to FASB Statement No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities, with
respect to the accounting for separately recognized servicing assets and
servicing liabilities was issued as SFAS 156, Accounting for Servicing of
Financial Assets.
This Statement requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by
entering into a servicing contract in certain situations, requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable and permits and entity to choose either
the amortization method or the fair value measurement method for each class of
separately recognized servicing assets and servicing liabilities. At its initial
adoption, permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
F-18
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2006
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value. Requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. Adoption of this Statement is
required as of the beginning of the first fiscal year that begins after
September 15, 2006. The adoption of this statement is not expected to have a
material impact on our financial statement.
F-19
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: December 14, 2006
XsunX, INC.
/s/ Tom Djokovich
---------------------------------
Tom Djokovich
President
DIRECTORS:
/s/ Tom Djokovich
--------------------------------
/s/ Thomas Anderson
--------------------------------