FORM 10-Q/A
AMENDMENT #1
UNITED STATES
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
[ X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For Quarterly Period Ended June 30, 2006
or
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act For the
Transition period from _______________ to ______________
Commission file number: 000-29621
XSUNX, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1384159
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
65 Enterprise, Aliso Viejo, CA 92656
------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 330-8060
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 [_]
Indicate by check my whether the registrant is a large accelerated filer, 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 [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ _ ] Yes [ X ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of August 3, 2006 the number
of shares outstanding of the registrant's only class of common stock was
153,898,896.
Table of Contents
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements.................................................................... 2
Independent Auditor's Report............................................................ F-1
Balance Sheets June 30, 2006 (unaudited) and September 30, 2005......................... F-2
Statements of Operations for the Three Months and Nine Months ended June 30,
2006 and 2005 (unaudited) and the period February 25, 1997 (inception)
to June 30, 2006........................................................................ F-3
Statements of Stockholders Equity for the period February 25, 1997
(inception) to June 30, 2006 unaudited)................................................. F-5
Statements of Cash Flows for the Nine Months ended June 30, 2006 and
2005 (unaudited) and the period February 27, 1997 (inception) to June 30, 2006.......... F-9
Notes to Financial Statements
(Unaudited)............................................................................. F-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 8
Item 4. Controls and Procedures................................................................. 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 8
Item 1A. Risk Factors............................................................................ 9
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 15
Item 3. Defaults upon Senior Securities......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders..................................... 17
Item 5. Other Information ...................................................................... 17
Item 6. Exhibits................................................................................ 17
Signatures....................................................................................... 18
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
XSUNX, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
NINE-MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
2
JASPERS + HALL, PC CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
9175 E. Kenyon Avenue, Suite 100
Denver, CO 80237
303-796-0099
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
XSUNX, INC.
Aliso Viejo, CA
We have reviewed the accompanying balance sheet of XSUNX, INC. (a development
stage company) as of June 30 2006, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the three-month period then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). The review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with standards of the Public Company Accounting Oversight Board (United States),
the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, conditions
exist which raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Jaspers + Hall, PC
----------------------
Jaspers + Hall, PC
Denver, CO
August 3, 2006
F-1
XSUNX, INC.
(Formerly Sun River Mining, Inc.)
(A Development Stage Company)
Balance Sheets
Unaudited Audited
June 30, September 30,
2006 2005
----------------- ------------------
ASSETS:
Current assets:
Cash $5,176,028 $ 175,869
Prepaid Expenses 333,429 79,984
----------------- ------------------
Total current assets 5,509,457 255,853
----------------- ------------------
Fixed assets:
R&D Equipment (Net) 417,769 165,831
----------------- ------------------
Total fixed assets 417,769 165,831
----------------- ------------------
Other assets:
Patents 30,000 20,000
Security Deposit 2,615
Deferred Financing Costs 183,334 -
Prototype Production System 1,765,000 -
----------------- ------------------
Total other assets 1,980,949 20,000
----------------- ------------------
TOTAL ASSETS $7,908,175 $ 441,684
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current Liabilities:
Accounts Payable $ 906,963 $ 78,377
Accrued Expenses 43,656 45,856
Accrued Interest 210,000 -
Notes Payable 2,000,000 850,000
----------------- ------------------
Total current liabilities 3,160,619 974,233
----------------- ------------------
Stockholders' Equity (Deficit):
Preferred Stock, par value $0.01 per share; 50,000,000
shares authorized; no shares issued and outstanding - -
Common Stock, no par value; 500,000,000 shares authorized;
151,267,417 shares issued and outstanding at June 30,
2006 and 123,876,739 outstanding at September 30, 2005 11,036,035 3,996,735
Common stock warrants 2,151,250 1,200,000
Deficit accumulated during the development stage (8,439,729) (5,729,284)
----------------- ------------------
Total stockholders' equity (deficit) 4,747,556 (532,549)
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIT $7,908,175 $ 441,684
================= ==================
See Accountants' Review Report
F-2
XSUNX, INC.
(Formerly Sun River Mining, Inc.)
(A Development Stage Company)
Statements of Operations
(Unaudited)
Feb. 25, 1997
Three-Months Ended Nine-Months Ended (Inception) to
June 30, June 30, June 30,
----------------------------- -----------------------------
2006 2005 2006 2005 2006
------------- ------------ ------------- ------------ ----------------
Revenue $ - $ - $ 8,000 $ - $ 8,000
------------- ------------ ------------- ------------ ----------------
Expenses:
Abandoned Equipment - - - - 808
Advertising 1,982 1,344 2,421 3,754 6,400
Bank Charges 78 71 244 372 2,870
Conferences and Seminars 7,040 8,540 - 8,540
Consulting 19,382 10,000 19,382 10,000 1,217,337
Depreciation 27,647 - 55,294 - 104,554
Directors' Fees - - - - 11,983
Due Diligence - - 13,000 - 45,832
Dues and Subscriptions - - - 1,054
Equipment Rental - - - - 1,733
Filing Fees - - 4,625 - 6,425
Impairment loss - - - - 923,834
Insurance - - - - 758
Legal and Accounting 21,244 31,150 89,853 49,783 385,612
Licenses & Fees - - - 25 6,435
Meals & Entertainment - 551 - 551 4,119
Office Expenses 2,633 587 2,891 3,135 24,725
Other Operating Expenses 832 2,098 1,632 2,098 3,307
Patent Fees 625 - 625 - 1,288
Salaries 87,152 41,032 172,050 120,144 827,373
Postage & Shipping 33 377 768 849 6,147
Printing 944 1,219 7,684 1,721 17,564
Public Relations 76,742 42,645 129,263 81,871 362,641
Rent 1,950 3,290 6,450 7,040 32,413
Research and Development 368,608 144,310 679,884 357,646 1,640,536
Subscription Reports 2,594 104 2,787 104 2,787
Taxes - - - - 4,657
Telephone 1,961 1,342 5,292 3,675 45,764
Transfer Agent Expense 91 319 321 3,413 20,125
Travel 13,142 1,904 25,165 6,584 99,331
Warrant Option Expense - - 951,250 - 2,151,250
------------- ------------ ------------- ------------ ----------------
Total Operating Expenses 634,680 282,343 2,179,421 652,765 7,960,994
------------- ------------ ------------- ------------ ----------------
Other Income (Expense)
Interest Expense 515,555 - 567,999 - 567,999
Returned Merchandise - (98) - (516) (516)
Interest Income (28,811) - (28,975) - (28,975)
Forgiveness of Debt - - - - (59,773)
------------- ------------ ------------- ------------ ----------------
Net (Loss) $ (1,121,424) $ (282,245) $ (2,710,445) $ (652,249) $ (8,439,729)
------------- ------------ ------------- ------------ ----------------
Per Share Information:
Weighted average number of
common shares outstanding 147,013,051 120,544,239 127,245,894 114,036,102
------------- ------------ ------------- ------------
Net Loss per Common Share $ (0.007) $ (0.002) $(0.021) $ (0.006)
------------- ------------ ------------- ------------
See Accountants' Review Report
F-3
z
XSUN, INC.
(Formerly Sun River Mining, Inc.)
(A Development Stage Companay)
Statements of Cash Flows
(Unaudited)
Feb. 25, 1997
Nine-Months Ended (Inception) to
June 30, June 30,
-------------------------------
2006 2005 2006
-------------- ------------ ---------------
Cash Flows from Operating Activities:
Net Loss $(2,710,445) $(652,249) $ (8,439,729)
Issuance of Common Stock for Services 7,500 34,000 1,303,384
Issuance of Common Stock for Loan Inducement - - 310,117
Warrant expense 951,250 - 2,151,250
Amortization of loan fees 316,666 - 316,666
Issuance of Common Stock for Interest 10,550 - 10,550
Depreciation 55,294 - 76,907
Adjustments to reconcile net loss to cash used in
operating activities:
(Increase) Decrease in Deposits (2,615) 2,500 (2,615)
(Increase) in Prepaid Expenses (253,445) (23,500) (333,429)
Increase in Accrued Expenses & Taxes 207,800 1,576 253,656
Increase in Accounts Payable 828,586 256,779 906,963
-------------- ------------ ---------------
Net Cash Flows Used for Operating Activities (588,859) (380,894) (3,446,280)
-------------- ------------ ---------------
Cash Flows from Investing Activities:
Purchase of Fixed Assets (307,232) (173,000) (473,063)
Purchase of Prototype and Patent (1,775,000) (10,000) (1,795,000)
-------------- ------------ ---------------
Net Cash Flows Used for Investing Activities (2,082,232) (183,000) (2,268,063)
-------------- ------------ ---------------
Cash Flows from Financing Activities:
Payment of Note Payable - (1,225) -
Proceeds from Notes Payable - Net 4,500,000 - 4,500,000
Issuance of Common Stock 3,171,250 531,395 6,390,371
-------------- ------------ ---------------
Net Cash Flows Provided by Financing Activities 7,671,250 530,170 10,890,371
-------------- ------------ ---------------
Net Increase (Decrease) in Cash 5,000,159 (33,724) 5,176,028
-------------- ------------ ---------------
Cash and cash equivalents - Beginning of period 175,869 37,344 -
-------------- ------------ ---------------
Cash and cash equivalents - End of period $ 5,176,028 $ 3,620 $5,176,028
============== ============ ===============
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Year for:
Interest $ - $ - $ 71,346
============== ============ ===============
Income Taxes $ - $ - $ -
============== ============ ===============
NON-CASH TRANSACTIONS
Common stock issued in exchange for services $ 7,500 $ 34,000 $1,303,384
============== ============ ===============
Conversion of debt for stock $ 3,850,000 $ - $3,850,000
============== ============ ===============
See Accountants' Review Report
F-4
XSUNX, INC.
(Formerly Sun River Mining, Inc.)
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
(Unaudited)
Deficit
Accumulated
Common During the
Treasury Stock Common Stock Stock Exploration
------------------------ --------------------------
# of Shares ount # of Shares Amount Warrants Stage Totals
----------- ----------- ----------
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 Accruals - - 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)
----------- ------ ------------ ------------ ----------- ----------- ----------
Balance - September 30, 2003 - - 111,298,148 2,821,726 - (2,819,377) 2,349
----------- ------ ------------ ------------ ----------- ----------- ----------
Issuance of stock for cash - - 181,750 21,071 - - 21,071
Issuance of stock for cash - - 217,450 22,598 - - 22,598
Issuance of stock for cash - - 254,956 34,669 - - 34,669
Issuance of stock for cash - - 694,649 96,306 - - 96,306
Issuance of stock for cash - - 157,649 21,421 - - 21,421
Issuance of stock for cash - - 57,000 5,133 - - 5,133
Issuance of stock for cash - - 1,174,500 81,472 - 81,472
Issuance of common stock warrants - - - - 1,200,000 - 1,200,000
Net Loss for period - - - - - (1,509,068) (1,509,068)
----------- ------ ------------ ------------ ----------- ----------- ----------
Balance - September 30, 2004 - - 114,036,102 3,104,396 1,200,000 (4,328,445) (24,049)
----------- ------ ------------ ------------ ----------- ----------- ----------
Issuance of stock for cash - - 5,919,537 471,068 - - 471,068
Issuance of stock for cash - - 300,600 20,067 - - 20,067
Issuance of stock for services - - 310,000 27,000 - - 27,000
Issuance of stock for cash - - 527,000 40,260 - - 40,260
Issuance of stock for services - - 125,000 10,000 - - 10,000
Issuance of stock for services - - 114,469 13,827 - - 13,827
Issuance of stock for collateral 26,798,418 - - - - - -
Issuance of stock for loan inducement - - 2,544,031 310,117 - - 310,117
Net Loss for Period - - - - - (1,400,839) (1,400,839)
----------- ------ ------------ ------------ ----------- ----------- ----------
Balance - September 30, 2005 26,798,418 - 123,876,739 3,996,735 1,200,000 (5,729,284) (532,549)
----------- ------ ------------ ------------ ----------- ----------- ----------
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 - - 4,475,000 2,108,750 - - 2,108,750
Issuance of stock for warrant conversion - - 6,375,000 1,062,500 - - 1,062,500
Issuance of stock for debenture conversion - - 7,894,737 3,000,000 - - 3,000,000
Net Loss for Period - - - - - (2,710,445) (2,710,445)
----------- ------ ------------ ------------ ----------- ----------- ----------
Balance - June 30, 2006 26,798,418 $ - 151,267,417 $11,036,035 $2,151,250 $(8,439,729) $4,747,556
=========== ====== ============ ============ =========== =========== ==========
See Accountants' Review Report
F-5
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2006
(Unaudited)
Note 1 - Presentation of Interim Information:
In the opinion of the management of XSUNX, Inc., the accompanying unaudited
financial statements include all normal adjustments considered necessary to
present fairly the financial position as of June 30, 2006 and the results of
operations for the three and nine-months ended June 30, 2006 and 2005 and for
the period February 25, 1997 (inception) to June 30, 2006, and cash flows for
the nine-months ended June 30, 2006 and 2005 and the for the period February 25,
1997 (inception) to June 30, 2006. Interim results are not necessarily
indicative of results for a full year.
The financial statements and notes are presented as permitted by Form 10-Q, and
do not contain certain information included in the Company's audited financial
statements and notes for the fiscal year ended September 30, 2005.
Note 2 - Going Concern:
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
The Company is in the development stage and has not earned any significant
revenue from operations. The Company's ability to continue as a going concern is
dependent upon its ability to develop additional sources of capital and
ultimately, achieve profitable operations. The accompanying financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
Note 3 - Convertible Debentures:
On July 14, 2005, XSUNX, Inc., entered into a Convertible Debenture agreement
with Cornell Capital Partners, LP in the amount of $400,000. On August 16, 2005,
XSUNX, Inc, received an additional $450,000 from Cornell Capital Partners, LP
bring the total principal value of the Debenture to $850,000. Interest accrued
on the outstanding principal balance at an annual rate equal to twelve percent
(12%). This Debenture was convertible into shares of Common Stock at the option
of the Holder, with a conversion price in effect on any Conversion Date equal to
ten cents ($.10). On January 12, 2006 XSUNX paid $47,216.67 of the then accrued
interest to Cornell. On February 8, 2006 Cornell converted $350,000 of the
principal balance of this debenture and on March 1, 2006 Cornell converted the
remaining principal and accrued interest balance totaling $510,550. Upon
conversion of these notes XsunX issued 8,605,500 shares of common stock to
Cornell. The remaining balance of the Debenture is Zero.
On December 2, 2005, XsunX, Inc. consummated a second Securities Purchase
Agreement with Cornell Capital Partners, LP, providing for the sale by the
Company to Cornell of 10% secured convertible debentures in the aggregate
principal amount of $5,000,000 ("The Debenture") of the total amount of
$5,000,000 has been advance and the remaining $1,000,000 un-paid principal
balance of this Debenture is include in Notes Payable at June 30, 2006. The
Debenture is convertible into shares of Common Stock at the option of the Holder
at a conversion price per share equal to the lesser of $.38 or 95% of the lowest
daily volume weighted average price of the Common Stock, as quoted by Bloomberg,
LP, for the 30 trading days immediately preceding the date of conversion (the
"Variable Market Price"). Unless waived by the Company, the Holders may not,
together with their affiliates, convert more than an aggregate of $350,000 in
any 30-day period of principal amount of the Debentures in the Variable Market
Price. Cornell has agreed not to short any of the shares of Common Stock. As of
the date of this filing there have been three conversions of this Debenture by
Cornell totaling $4,000,000 resulting in a remaining principal balance of
$1,000,000. Interest in the amount of approximately $210,000 has accrued and is
included in accrued interest as of June 30, 2006.
F-6
Note 4 - Equity Transactions:
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) Another 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.
The total charged in expense for the 2006 fiscal year has been $951,250 for the
issuance of the above described Expanded Use License and Debenture warrants.
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.
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 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
available 1,000,000 available $.15 cent warrants the amount of $15,000 dollars
was paid to XSUNX by the consultant.
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 $.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.
F-7
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 the $5,000,000 debenture issued to
Cornell in December 2005 and the Company issued 5,263,158 shares of common stock
to Cornell. Subsequently, on June 12 Cornell converted another $1,000,000 and
the Company issued 2,631,579 shares of common stock to Cornell, and on July 17,
2006 another $1,000,000 was converted by Cornell for which the Company issued
2,631,579 shares of common stock to Cornell. The conversion price for all of the
above issued shares was $.38 each. The remaining un-paid principal balance of
the Debenture as of August 3, 2006 is $1,000,000.
Issuance of Shares for Service
------------------------------
XSUNX has accounted for $18,000 dollars in services rendered in accounts payable
to the Company in the nine-months ended June 30, 2006, and for which XSUNX is
required to issue non-registered shares in the aggregate value of $18,000. The
shares may be issued based on the then current market price for the Company's
common stock at the end of each month of services. Upon issuance approximately
23,058 shares may be issued to this service provider.
Note 5 - Property Acquisition:
Subject to the terms of the Expanded Use License Agreement between XsunX and
MVSystems, Inc. the parties have planned to build a first run production Machine
for the purpose of proofing and demonstrating technology. XsunX may attempt to
market this Machine. In the event that XsunX sells this first Machine the
parties 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 6 - Deferred Financing Costs:
Costs related to obtaining the capital funding by Cornell Capital Partners, LLP
are capitalized and amortized over the term of the related debt using the
straight-line method.
Note 7 - Commitments and Contingencies
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
F-8
Item 2. MANAGEMENT'S DISCUSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Form 10-Q/A 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:
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; and
(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-Q and Annual Reports on Form 10-KSB
filed by the Company and any Current Reports on Form 8-K filed by the Company.
3
CURRENT OVERVIEW
XsunX, Inc. is developing and commercializing innovative new thin film
photovoltaic (TFPV) solar cell technologies and manufacturing processes to
service expanding global energy demands. The Company has focused its efforts on
lowering the cost per watt of solar power and making solar cell technology
easier to use in a wide variety of applications. XsunX calls this dual
improvement to cost and efficiency the XFactor(TM). The process for producing
electricity is known as Photovoltaics. Photovoltaics ("PV") is the science of
capturing and converting solar energy into electricity.
The Company is focusing its research and product development efforts on thin
film PV devices and their manufacturing methods in an effort to capitalize on
what it perceives as cost and application diversity advantages to current rigid
multi-crystalline silicon wafer technologies. The Company's thin film cell
designs employ between .2 microns to 1.5 microns of material thickness as
opposed to an approximate 400 microns of material thickness for
multi-crystalline cell designs. This significant reduction in cell thickness and
flexibility of the completed cell structure leads to the use of "thin film"
terminology in describing the solar cell design.
The 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.
Building Integrated Photovoltaics or ("BIPV") allows photovoltaic material, in
the form of photoelectric panels, to be incorporated into the design of building
materials; thus, providing a new and smart way to integrate additional sources
of power production into the operation of buildings. As the BIPV category of the
photovoltaic industry is beginning its growth into the US, and worldwide
markets, XsunX intends to positioned itself as one of the first companies
dedicated to the large scale commercialization of BIPV through a combination of
innovation and patented thin film designs and manufacturing techniques.
Through the successful commercial development of its Power Glass(R) film, a
semi-transparent solar electric glazing process, patent pending multi-terminal
solar cell designs, patented and innovative new manufacturing methods the
Company anticipates being able to take advantage of opportunities to provide
manufacturers of solar products exciting new application opportunities and
reductions to the cost per watt of solar power. The Company anticipates the
majority of revenues to be derived from the sale of its proprietary
manufacturing systems and the licensing of its technologies.
Management believes the summary data 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 in October 2003 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.
4
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO
THE SAME PERIOD IN 2005
The Company had no revenues in the quarter ended June 30, 2006 nor in the same
period in 2005.
The Company incurred operating expenses totaling $634,680 for the three months
ending June 30, 2006 compared to $282,343 for the same period in 2005, a 225%
increase. Primary sources for the increase to operating expense of $352,337
include: Research and Development expenses increased by $224,298 to $368,608 as
compared to $144,310 for the same period in 2005, Depreciation expenses
increased by $27,647 as compared to $0 for the same period in 2005, Public
Relations expenses increased by $34,097 to $76,742 from $42,645 in 2005 and,
General and Administrative expenses increased by $66,295 to $161,683 from
$95,388 in 2005 representing the continued increase in costs associated with
expansion of the Company's business plan. These expenses in the third quarter of
the current fiscal year were all incurred in preparing to commercialize
innovative new thin film photovoltaic (TFPV) solar cell technologies and
manufacturing processes in an attempt to address expanding global energy
demands.
The net loss for the three months ending June 30, 2006 was ($1,121,424) as
compared to a net loss of ($282,245) for the same period 2005. The increase of
$839,179 in the third quarter of this fiscal year includes (i) an increase in
research and development expenditures of $224,298 over the same period in the
previous fiscal year which is anticipated to continue to increase for the
foreseeable future as the Company continues the development of the Company's
business plan as the developer and provider of proprietary thin film
photovoltaic devices and manufacturing technologies, (ii) an increase to
Depreciation expenses of $27,647 over the same period in 2005 representing costs
associated with the depreciation of fixed assets purchased for use in the
research and development of Company products, (iii) an increase to Public
Relations expenses of $34,097 over the same period in 2005 associated with an
increase to marketing efforts, (iv) an increase to General and Administrative
expenses totaling $66,295 representing the continued increase in costs
associated with expansion of the Company's business plan, (v) $198,889 for
interest expenses associated with the issuance of convertible debentures by the
Company, and (vi) $316,666 for loan origination costs associated with the
issuance of a debenture in December 2005. These expenses in the third quarter of
the current fiscal year include credits for interest income totaling $28,811 and
were all incurred in preparing to commercialize innovative new thin film
photovoltaic (TFPV) solar cell technologies and manufacturing processes in an
attempt to address expanding global energy demands.
The Company incurred net loses of ($1,121,424) and ($282,245) in the three-month
period ended June 30, 2006 and 2005 respectively. The associated net loss per
share was $.007 in the three-month period ended June 30, 2006 and nominal in the
period in 2005. The Company the trend of losses to continue in the future until
the Company achieves commercialization of its technology and significant
revenues commence, of which there is no assurance.
5
RESULTS OF OPERATION FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO
THE SAME PERIOD IN 2005
The Company generated $8,000 in revenues in the nine month period ended June 30,
2006 as compared to $0.0 for the same period in 2005.
The Company incurred operating expenses totaling $2,179,421 for the nine months
ending June 30, 2006 compared to $652,765 for the same period in 2005, a 334%
increase. The major components for the increase to operating expense of
$1,526,656 include: an increase of $322,238 in research and development
activities, an increase of $47,392 in public relations, an increase of $40,070
in legal & accounting expenses, an increase Depreciation expenses of $55,294
representing costs associated with the depreciation of fixed assets purchased
for use in the research and development of Company products, an increase to
General and Administrative expenses totaling $110,412 representing the continued
increase in costs associated with expansion of the Company's business plan. The
increase in overall expenses included a one-time expense of $420,000 associated
with the grant of in-the-money warrants as consideration for the expansion of
licensing and manufacturing rights associated with a technology sharing and
license agreement granted to the Company. And, there was an additional one-time
expense of $531,250 from the grant of in-the-money warrants associated with the
sale by the Company of 10% secured convertible debenture in the aggregate
principal amount of $5,000,000. The $2,179,421 operating expenses includes
non-cash charges of $18,000 for the issuance of unregistered stock for business
development and advisory services in lieu of cash payment for services.
These expenses may continue to increase as the Company continues to expand the
development of it's business plan as the developer and provider of proprietary
thin film photovoltaic devices and manufacturing technologies.
The net loss for the nine months ending June 30, 2006 was ($2,710,445) as
compared to a net loss of ($652,249) for the same period 2005. The loss per
share was $.021 for the period in 2006 and nominal for 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at June 30, 2006 of $5,176,028 and prepaid expenses in the
amount of $333,429 as compared to cash of $175,869 and prepaid expenses in the
amount of $79,984 as of September 30, 2005. The Company had a net working
capital of $2,348,838 as compared to a working capital (deficit) of ($718,380)
at September 30, 2005.
Cash flows used in operating activities during the nine-month period ended, June
30, 2006, was ($588,859) as compared to using ($380,894) for the same period
2005. Cash flow used in investing activities was ($2,082,232) for the nine
months ended June 30, 2006 as compared to cash used in investing activities of
($183,000) during the nine months ended June 30, 2005. Cash flow provided by
financing activities was $7,671,250 for the nine months ended June 30, 2006 as
compared to cash provided by financing activities of $530,170 during the nine
months ended June 30, 2005.
6
For the nine-months ended June 30, 2006, the Company's primary capital needs
have been met from the proceeds of the sale of a secured convertible debenture
made by the Company, and the exercise of warrants associated with the
convertible debenture and a previous convertible debenture. In December the
Company sold a 10% secured convertible debenture in the aggregate principal
amount of $5,000,000 of which the Company had received, less loan fees, the net
amount of $4,500,000 as of February 2006. The holder of the debenture has
exercised 10,750,000 of the available 10,750,000 warrants associated with this
debenture and a previous debenture issued to the same holder. As of June 30,
2006 XsunX had received the aggregate amount of $3,156,250 for the exercise of
all available warrants under both debentures.
The proceeds from the above sale of debentures and the exercise of warrants were
used to fund research and developments efforts, pay financing fees associated
with issuance of debentures, and to pay liabilities associated with the
development of the Company's business plan as the developer and provider of
proprietary thin film photovoltaic devices and manufacturing technologies.
We had, at June 30, 2006, cash and cash equivalents of $5,176,028 and net
working capital of $2,348,838. Although the Company has not generated any
significant revenues to date, and may continue to be highly dependant upon
financing to fund future operations, the Company's 2006 plan of operations
requiring $4,500,000 dollars has been adequately funded. The Company may engage
in efforts to obtain additional financing from equity and debt placements to
fund future operations as necessary.
ADDITIONAL FINANCING
The Company has not generated significant revenues to date and may continue to
be highly dependant on financing to fund continued operations. The Company's
2006 plan of operations requiring $4,500,000 dollars has been adequately funded.
The Company may engage in efforts to obtain additional financing from equity and
debt placements to fund future operations as necessary.
The Company has incurred operating deficits since its reorganization in October
2003, which are expected to continue until its new business model is fully
developed. Accordingly, the Company may continue to be dependent on raising
additional capital necessary to meet the Company's future cash needs for
Research, Development, General and Administrative expenses including the costs
of compliance with the continuing reporting requirements of the Securities
Exchange Act of 1934.
The Company has been able to raise capital in a series of equity and debt
offerings in the past and may actively pursue additional financing in the form
of loans or equity placements to cover future cash needs. There can be no
assurances that the Company will be able to obtain such additional financing, on
terms acceptable to it and at the times required, or at all. Lack of capital may
be a sufficient impediment to prevent it from accomplishing the goal of
commercializing its technologies.
Irrespective of whether the Company's cash assets prove to be inadequate to meet
the Company's operational needs, the Company might seek to compensate providers
of services by issuances of stock in lieu of cash.
7
GOING CONCERN
The Company is in the development stage and as of the period ending June 30,
2006, and had not generated significant revenue from sales or other operating
activities. To date the Company's principal source of liquidity has been the
private placement of equity securities and the issuance of notes payable. As
such, the Company's ability to secure additional financing on a timely basis is
critical to its ability to stay in business and to pursue planned operational
activities.
Based on the foregoing and the Company's history of losses, the Company's
financial statements for the nine-month period ended June 30, 2006 include a
going concern opinion from its outside auditors, which stated there "is
substantial doubt" about our ability to continue operating as a "going concern."
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any market risk sensitive instruments. Since all operations are
in U.S. dollar denominated accounts, we do not have foreign currency risk. Our
operating costs are reported in U.S. dollars.
The Company does not invest in term financial products or instruments or
derivatives involving risk other than money market accounts, which fluctuate
with interest rates at market.
Item 4. CONTROLS AND PROCEDURES
The management of the Company has evaluated the effectiveness of the issuer's
disclosure controls and procedures as of the end of the period of the report
(evaluation date) and have concluded that the disclosure controls internal
controls and procedures are adequate and effective based upon their evaluation
as of the evaluation date.
There were no changes in the small business issuer's internal controls over
financial reporting identified in connection with the Company evaluation
required by paragraph (3) of Rule 13a-15 or Rule 15d-15 under the Exchange Act
that occurred during the small business issuer's fourth fiscal quarter that has
materially affected or is reasonably likely to materially affect the small
business issuer's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. 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.
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 Company contends that it has no liability under
the complaint and intends to vigorously defend the action.
8
Item 1A. RISK FACTORS
An investment in our shares involves a high degree of risk. Before making an
investment decision, you should carefully consider all of the risks described on
this Form 10-Q/A and Annual Reports on Form 10-KSB filed by the Company and any
Current Reports on Form 8-K filed by the Company. If any of the risks discussed
in these reports actually occur, our business, financial condition and results
of operations could be materially and adversely affected. If this were to
happen, the price of our shares could decline significantly and you may lose all
or a part of your investment. The risk factors described below are not the only
ones that may affect us. Our forward-looking statements in this prospectus are
subject to the following risks and uncertainties. Our actual results could
differ materially from those anticipated by our forward-looking statements as a
result of the risk factors below. See "Cautionary and Forward-Looking
Statements."
RISKS RELATED TO OUR BUSINESS
-----------------------------
WE HAVE NOT GENERATED ANY SIGNIFICANT REVENUES AND MAY NEVER ACHIEVE
PROFITABILITY
We are a development stage company and, to date, have not generated any
significant revenues. From inception through September 30, 2005, we had an
accumulated deficit of $6,204,284. For the years ended September 30, 2005 and
2004, we incurred net losses of $1,400,839 and $1,509,068, respectively. We
cannot assure you that we can achieve or sustain profitability in the future.
Our operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether our product development can be completed, and
if it will achieve market acceptance. We may not achieve our business objectives
and the failure to achieve such goals would have an adverse impact on us. These
matters raise substantial doubt about our ability to continue as a going
concern.
OUR AUDITORS HAVE INCLUDED A GOING CONCERN QUALIFICATION IN THEIR OPINION WHICH
MAY MAKE IT MORE DIFFICULT FOR US TO RAISE CAPITAL
Our auditors have qualified their opinion on our financial statements because of
concerns about our ability to continue as a going concern. These concerns arise
from the fact that we have not generated sufficient cash flows to meet our
obligations and sustain our operations. If we are unable to continue as a going
concern, you could lose your entire investment in us.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE
TERMS OR AT ALL
Since July 2005, we have received $5,850,000 in debt financing of which
$1,000,000 remains as principal balance as of August 3, 2006. We have also
received an additional $3,156,250 from the cash exercise of warrants from
Cornell Capital Partners LP. In the future, we may be required to raise
9
additional funds, particularly if we exhaust the funds advanced under that
agreement, are unable to generate positive cash flow as a result of our
operations and are required to repay the outstanding convertible debenture as a
result of Cornell Capital's failure to convert the debenture into common stock.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
may reduce our ability to continue to conduct business operations. If we are
unable to obtain additional financing, we will likely be required to curtail our
research and development plans. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES
WHICH WOULD RESULT IN CONTINUED LOSSES AND MAY REQUIRE US TO CURTAIL OR CEASE
OPERATIONS
While we have made progress in the development of our products, it has not
generated any significant revenues and we are unable to project when we will
achieve profitability, if at all. As is the case with any new technology, we
expect the development process to continue. We cannot assure that our
engineering resources will be able to modify the product fast enough to meet
market requirements. We can also not assure that our product will gain market
acceptance and that we will be able to successfully commercialize the
technologies. The failure to successfully develop and commercialize the
technologies would result in continued losses and may require us to curtail or
cease operations
OUR REVENUES ARE DEPENDENT UPON ACCEPTANCE OF OUR PRODUCTS BY LICENSEES; THE
FAILURE OF WHICH WOULD CAUSE TO CURTAIL OR CEASE OPERATIONS
We believe that virtually all of our revenues will come from the licensing of
our proprietary technologies to major manufacturers. We intend to offer
non-exclusive licensing rights. As a result, we will continue to incur
substantial operating losses until such time as we are able to generate revenues
from licensing and service fees for our products through our distribution
partners. There can be no assurance that businesses and customers will adopt our
technology and products, or that businesses and prospective customers will agree
to pay the licensing and service fees for our products. In the event that we are
not able to significantly increase the number of customers that license our
products, or if we are unable to charge the necessary license fees, our
financial condition and results of operations will be materially and adversely
affected.
WE DO NOT MAINTAIN THEFT OR CASUALTY INSURANCE, AND ONLY MAINTAIN MODEST
LIABILITY AND PROPERTY INSURANCE COVERAGE AND THEREFORE WE COULD INCUR LOSSES AS
A RESULT OF AN UNINSURED LOSS.
We do not maintain theft or casualty insurance and we have modest liability and
property insurance coverage. We cannot assure that we will not incur uninsured
liabilities and losses as a result of the conduct of our business. Any such
uninsured or insured loss or liability could have a material adverse affect on
our results of operations.
10
IF WE LOSE KEY EMPLOYEES AND CONSULTANTS OR ARE UNABLE TO ATTRACT OR RETAIN
QUALIFIED PERSONNEL, OUR BUSINESS COULD SUFFER.
Our success is highly dependent on our ability to attract and retain qualified
scientific and management personnel. We are highly dependent on our management,
including Mr. Tom Djokovich who has been critical to the development of our
technologies and business. The loss of the services of Mr. Djokovich could have
a material adverse effect on our operations. We do not have an employment
agreement with Mr. Djokovich. Accordingly, there can be no assurance that he
will remain associated with us. His efforts will be critical to us as we
continue to develop our technology and as we transition from a development stage
company to a company with commercialized products and services. If we were to
lose Mr. Djokovich, or any other key employees or consultants, we may experience
difficulties in competing effectively, developing our technology and
implementing our business strategies.
THE LOSS OF STRATEGIC RELATIONSHIPS USED IN THE DEVELOPMENT OF OUR PRODUCTS AND
TECHNOLOGY COULD IMPEDE OUR ABILITY TO COMPLETE OUR PRODUCT AND RESULT IN A
MATERIAL ADVERSE EFFECT CAUSING THE BUSINESS TO SUFFER.
We have established a plan of operations under which we rely on a strategic
relationship with MVSystems, Inc, to provide general facilities, personnel, and
expertise in the research and development of the technology and manufacturing
process underlying the development of two of our key technology product. A loss
of this relationship for any reason could cause us to experience difficulties in
completing the development of these products and further implementing our
business strategy. There can be no assurance that we could establish other
relationships of adequate expertise in a timely manner or at all.
WE CANNOT GUARANTEE YOU THAT OUR PATENTS ARE BROAD ENOUGH TO PROVIDE ANY
MEANINGFUL PROTECTION NOR CAN WE ASSURE YOU THAT ONE OF OUR COMPETITORS MAY NOT
DEVELOP MORE EFFECTIVE TECHNOLOGIES, DESIGNS OR METHODS WITHOUT INFRINGING OUR
INTELLECTUAL PROPERTY RIGHTS OR THAT ONE OF OUR COMPETITORS MIGHT NOT DESIGN
AROUND OUR PROPRIETARY TECHNOLOGIES.
We have been granted, and exclusively own, three patents from the United States
Patent and Trademark Office. We have also been granted a license to a patent and
technology portfolio relating to photovoltaic technology design, manufacturing
processes, and the development of technology. These patents and licenses may not
protect us against our competitors, and patent litigation is very expensive. We
may not have sufficient cash available to pursue any patent litigation to its
conclusion because currently we do not generate revenues.
11
We cannot rely solely on our current patents to be successful. The standards
that the U.S. Patent and Trademark Office and foreign patent offices use to
grant patents, and the standards that U.S. and foreign courts use to interpret
patents, are not the same and are not always applied predictably or uniformly
and can change, particularly as new technologies develop. As such, the degree of
patent protection obtained in the U.S. may differ substantially from that
obtained in various foreign countries. In some instances, patents have been
issued in the U.S. while substantially less or no protection has been obtained
in Europe or other countries.
We cannot be certain of the level of protection, if any, that will be provided
by our patents. If we attempt to enforce them and they are challenged in court
where our competitors may raise defenses such as invalidity, unenforceability or
possession of a valid license. In addition, the type and extent of any patent
claims that may be issued to us in the future are uncertain. Our patents may not
contain claims that will permit us to stop competitors from using similar
technology.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE NOTE THAT HAS BEEN
REGISTERED AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK.
As of June 30, 2006, we had 151,267,317 shares of common stock issued and
outstanding. In connection with the financing arrangement that we entered into
in June 2005 and December 2005, we also had outstanding secured convertible
debentures in the principal amount of $5,850,000 that may be converted into
shares of common stock. As of August 3, 2006 the Company had issued 19,026,316
shares for the conversion of $4,850,000 of the principal balance of these
debentures.
The debenture issued in June 2005 has been fully converted by the holder into
shares of the Company. There is no remaining principal or interest balance on
this debenture.
The debenture issued in December is convertible at $0.38 or if the current
market price for our shares is below $.38 then the holder may convert at a
floating conversion price of 95% of the lowest daily volume weighted average
price of our common stock for the 30 trading days immediately preceding the date
of conversion. The debentures issued in December 2005 limit the principal amount
to be converted at the floating conversion price during any 30 day period to
$350,000. Nevertheless, the number of shares of common stock issuable upon
conversion of the outstanding secured convertible debentures issued in December
2005 may increase if the market price of our stock declines below $.38. The sale
of these shares may adversely affect the market price of our common stock.
The variable price feature of our convertible debentures issued in December 2005
could require us to issue a substantially greater number of shares, which will
12
cause dilution to our existing stockholders. The number of shares we will be
required to issue upon conversion of the debentures will increase if the market
price of our stock decreases. This will cause dilution to our existing
stockholders.
THE LOWER THE STOCK PRICE, THE GREATER THE NUMBER OF SHARES ISSUABLE UNDER THE
CONVERTIBLE DEBENTURE
The number of shares issuable upon conversion of the debenture issued in
December 2005 is determined by the market price of our common stock prevailing
at the time of each conversion. The debentures issued in December 2005 limit the
principal amount to be converted at the floating conversion price during any
30-day period to $350,000. Nevertheless, the lower the market price the greater
the number of shares issuable under the debenture. Upon issuance of the shares,
to the extent that holders of those shares will attempt to sell the shares into
the market, these sales may further reduce the market price of our common stock.
This in turn will increase the number of shares issuable under the debenture.
This may lead to an escalation of lower market prices and an increasing number
of shares to be issued. A larger number of shares issuable at a discount to a
continuously declining stock price will expose our shareholders to greater
dilution and a reduction of the value of their investment.
A LOWER STOCK PRICE WILL PROVIDE AN INCENTIVE TO CORNELL TO SELL ADDITIONAL
SHARES INTO THE MARKET
The number of shares that Cornell, our financier, will receive under the
convertible debentures is determined by dividing the amount of a conversion
notice by either $.38 or if the current market price for the Company shares is
below $.38 the holder may convert at a floating conversion price of 95% of the
lowest daily volume weighted average price of our common stock for the 30
trading days immediately preceding the date of conversion. In the event of a
floating price conversion, the lower the market price, the greater the number of
shares issuable under the debenture. As a result, Cornell will have an incentive
to sell as large a number of shares as possible to obtain a lower conversion
price. This will lead to greater dilution of exiting shareholders and a
reduction of the value of their investment
THE ISSUANCE OF OUR STOCK UPON CONVERSION OF THE DEBENTURES COULD ENCOURAGE
SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF
OUR STOCK PRICE AND MATERIALLY DILUTE EXISTING STOCKHOLDERS' EQUITY AND VOTING
RIGHTS.
The debentures have the potential to cause significant downward pressure on the
price of our common stock. This is particularly the case if the shares being
placed into the market exceed the market's ability to absorb the increased
number of shares of stock. Such an event could place further downward pressure
on the price of our common stock, which presents an opportunity to short sellers
and others to contribute to the future decline of our stock price. If there are
significant short sales of our stock, the price decline that would result from
this activity will cause the share price to decline more so, which, in turn, may
cause long holders of the stock to sell their shares thereby contributing to
sales of stock in the market. If there is an imbalance on the sell side of the
market for the stock, our stock price will decline. If this occurs, the number
of shares of our common stock that is issuable upon conversion of the debentures
issued in December 2005 will increase, which will materially dilute existing
stockholders' equity and voting rights.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE,
OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE
DEBENTURES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD
REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
In December 2005, we entered into a Securities Purchase Agreements for the sale
of an aggregate of $5,000,000 principal amount of secured convertible debentures
of which to date $5,000,000 has been funded. The principal remaining balance of
these debentures as of August 3, 2006 was $1,000,000. These debentures are due
and payable, with interest, three years from their respective dates of issuance,
unless sooner converted into shares of our common stock. Any event of default
such as our failure to repay the principal or interest when due, our failure to
13
issue shares of common stock upon conversion by the holder, or our failure to
maintain the effectiveness of the registration statement, could require the
early repayment of the convertible debentures. We anticipate that the full
amount of the convertible debentures will be converted into shares of our common
stock, in accordance with the terms of these debentures. If we were required to
repay the convertible debentures, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the
debentures when required, the holders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action would
require us to curtail or cease operations.
THE FOLLOWING RISKS RELATE PRINCIPALLY TO OUR COMMON STOCK AND ITS MARKET VALUE:
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK WHICH MAY MAKE IT MORE DIFFICULT
FOR YOU TO DISPOSE OF YOUR STOCK
Our common stock is quoted on the OTC Bulletin Board under the symbol "XSNX."
There is a limited trading market for our common stock. Accordingly, there can
be no assurance as to the liquidity of any markets that may develop for our
common stock, the ability of holders of our common stock to sell our common
stock, or the prices at which holders may be able to sell our common stock.
OUR STOCK PRICE MAY BE VOLATILE
The market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o additions or departures of key personnel;
o sales of our common stock;
o our ability to integrate operations, technology, products and services;
o our ability to execute our business plan;
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we have a limited operating history with limited revenues to date, you
may consider any one of these factors to be material. Our stock price may
fluctuate widely as a result of any of the above listed factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. The payment of dividends on our
common stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.
OUR COMMON STOCK IS DEEMED TO BE PENNY STOCK WITH A LIMITED TRADING MARKET
Our common stock is currently listed for trading on the OTC Bulletin Board which
is generally considered to be a less efficient market than markets such as
NASDAQ or other national exchanges, and which may cause difficulty in conducting
trades and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
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rules apply to non-NASDAQ companies whose common stock trades at less than $5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded in the OTC
Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to
obtain coverage for significant news events because major wire services, such as
the Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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) This Option 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 the 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.
Sale of Shares
--------------
Debenture Conversion - On February 8, 2006 Cornell Capital Partners, LLP
converted $350,000 of the principal balance of an $850,000 debenture issued to
Cornel in July 2005. On March 1, 2006 Cornell converted the remaining principal
and accrued interest balance totaling $510,550. Upon conversion of these notes
XsunX issued 8,605,500 shares of common stock to Cornell. The remaining balance
of the debenture is $0.
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Warrant Conversion - In February 2006, a consultant exercised 100,000 of the
available 1,000,000 available $.15 cents warrants. The amount of $15,000 dollars
was paid to XsunX by the consultant.
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 the $5,000,000 debenture issued to
Cornell in December 2005 and the Company issued 5,263,158 shares of common stock
to Cornell. Subsequently, on June 12 Cornell converted another $1,000,000 and
the Company issued 2,631,579 shares of common stock to Cornell, and on July 17,
2006 another $1,000,000 was converted by Cornell for which the Company issued
2,631,579 shares of common stock to Cornell. The conversion price for all of the
above issued shares was $.38 each. The remaining un-paid principal balance of
the Debenture as of August 3, 2006 is $1,000,000.
Issuance of Shares For Services
-------------------------------
XSUNX has accounted for $18,000 dollars in services rendered in accounts payable
to the Company in the nine-months ended June 30, 2006, and for which XSUNX is
required to issue non-registered shares in the aggregate value of $18,000. The
shares may be issued based on the then current market price for the Company's
common stock at the end of each month of services. Upon issuance approximately
23,058 shares may be issued to this service provider.
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Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
31 Section 302 Sarbanes-Oxley Certification
32 Section 906 Sarbanes-Oxley Certification
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: August 4, 2006 XSUNX, INC.
By: /s/ Tom M. Djokovich
------------------------------------
Tom M. Djokovich, Chief Executive
Officer, President, and acting Chief
Financial Officer
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.
By: /s/ Tom M. Djokovich Dated: August 7, 2006
---------------------------
Director, President, CEO and acting CFO
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