FORM 10-QSB
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 December 31, 2005
[ ] 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 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 February 20, 2006 the number of shares outstanding of the registrant's
only class of common stock was 127,417,080.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
Table of Contents
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements.................................................................... 2
Independent Auditor's Report............................................................ F-1
Balance Sheets December 31, 2005 (unaudited) and September 30, 2005..................... F-2
Statements of Operations for the Three Months ended December 31, 2005
and 2004 (unaudited) and the period February 25, 1997 (inception)
to December 31, 2005.................................................................... F-3
Statements of Stockholders Equity for the period February 25, 1997
(inception) to December 31, 2005 unaudited)............................................. F-5
Statements of Cash Flows for the Three Months ended December 31, 2005
and 2004 (unaudited) and the period February 27, 1997 (inception) to
December 31, 2005....................................................................... 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. Controls and Procedures.................................................................. 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 7
Item 2. Changes in Securities................................................................... 7
Item 3. Defaults upon Senior Securities......................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
Item 5. Other Information ...................................................................... 8
Item 6. Exhibits and Reports on Form 8-K........................................................ 8
Signatures....................................................................................... 9
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
XSUNX, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
THREE-MONTHS ENDED DECEMBER 31, 2005
(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 December 31, 2005, 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
February 13, 2006
F-1
XSUNX, INC.
(A Development Stage Company)
BALANCE SHEETS
(Unaudited)
December 31, September 30,
2005 2005
----------------- ------------------
ASSETS:
Current assets:
Cash $ 1,278,163 $ 175,869
Accounts Receivable 8,000 -
Prepaid Expenses 300,946 79,984
----------------- ------------------
Total current assets 1,587,109 255,853
----------------- ------------------
Fixed assets:
Office Equipment 165,831 165,831
----------------- ------------------
Total fixed assets 165,831 165,831
----------------- ------------------
Other assets:
Patents 20,000 20,000
----------------- ------------------
Total other assets 20,000 20,000
----------------- ------------------
TOTAL ASSETS $ 1,772,940 $ 441,684
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 26,636 $ 78,377
Accrued Expenses 65,636 45,856
Notes Payable 2,850,000 850,000
----------------- ------------------
Total current liabilities 2,942,272 974,233
----------------- ------------------
Stockholders' Equity:
Preferred Stock, par value $0.01 per share; 50,000,000
shares authorized; no shares issued and outstanding - -
Treasury Stock, no par value; 26,798,418 issued and outstanding - -
Common Stock, no par value; 500,000,000 shares authorized;
123,917,080 shares issued and outstanding at December 31, 2005
and 123,876,633 shares issued and outstanding at September 30, 2005 4,004,235 3,996,735
Common Stock Warrants 2,151,250 1,200,000
Deficit accumulated during the development stage (7,324,817) (5,729,284)
----------------- ------------------
Total stockholders' profit (deficit) (1,169,332) (532,549)
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,772,940 $ 441,684
================= ==================
See Accountants' Review Report
F-2
XSUNX, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(Unaudited)
Three-Months Ended Feb. 25, 1997
December 31, (Inception) to
------------------------------------ December 31,
2005 2004 2005
---------------- --------------- ------------------
Revenue
Service Income $ 8,000 $ - $ 8,000
Other Income - - -
---------------- --------------- ------------------
Total Revenue 8,000 - 8,000
---------------- --------------- ------------------
Expenses:
Abandoned Equipment - - 808
Advertising 349 1,860 4,328
Bank Charges 64 190 2,677
Conferences & Seminars 1,500 - 1,500
Consulting - - 1,344,983
Depreciation - - 21,613
Directors' Fees - - 11,983
Due Diligence - - 45,832
Equipment Rental - - 1,733
Filing Fees - - 1,800
Impairment loss - - 923,834
Insurance - - 758
Legal & Accounting 33,750 9,124 329,359
Licenses & Fees - - 6,435
Loan Fees 213,000 - 328,000
Meals & Entertainment - - 4,119
Miscellaneous 800 2,475
Office Expenses 1,473 1,405 23,306
Patent Fees - - 663
Postage & Shipping 458 174 5,836
Printing 2,943 39 12,823
Public Relations 33,352 7,189 260,731
Research & Development 274,603 98,897 905,519
Rent 2,250 1,500 28,213
Salaries 44,229 40,885 699,551
Subscription Reports 85 945
Taxes - - 4,657
Telephone 1,390 1,004 41,694
Transfer Agent Expense - 1,759 19,954
Travel 4,860 961 79,027
Warrant Option Expense 951,250 - 2,151,250
---------------- --------------- ------------------
Total Operating Expenses 1,566,356 164,987 7,266,406
---------------- --------------- ------------------
See Accountants' Review Report
F-3
XSUNX, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(Unaudited)
(continued)
Three-Months Ended Feb. 25, 1997
December 31, (Inception) to
------------------------- December 31,
2005 2004 2005
---- ---- ----
Other Income (Expense)
Interest Expense 37,177 - 126,207
Interest Income - - (23)
Forgiveness of Debt - - (59,773)
---------------- --------------- ------------------
Total Other Income/Expense 37,177 - 66,411
---------------- --------------- ------------------
Net (Loss) $ (1,595,533) $ (164,987) $ (7,324,817)
================ =============== ==================
Per Share Information:
Weighted average number of
common shares outstanding 123,888,194 114,036,102
================ ===============
Net Loss per Common Share $ (0.01) *
================ ===============
* Less than $.01
See Accountants' Review Report
F-4
XSUNX, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 2005
(Unaudited)
Deficit
Accumulated
Treasury Stock Common Stock Common During the
-------------------------- ----------------------- Stock Exploration
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- ----------- ----------- ---------- ----------- ---------- ----------
Inception February 25, 1997 - - - - - - -
Issuance of stock for cash 3/97 - - 10,590 111,900 - - 111,900
Issuance of stock to Founders 3/97 - - 14,110 - - - -
Issuance of stock for consolidation 4/97 - - 445,000 312,106 - - 312,106
Issuance of stock for cash 8/97 - - 2,900 58,000 - - 58,000
Issuance of stock for cash 9/97 - - 2,390 47,800 - - 47,800
Net Loss for Year - - - - - (193,973) (193,973)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 1997 - - 474,990 529,806 - (193,973) 335,833
----------- ----------- ----------- ---------- ----------- ---------- ----------
Issuance of stock for services 11/97 - - 1,500 30,000 - - 30,000
Issuance of stock for cash 9/98 - - 50,200 204,000 - - 204,000
Consolidation stock cancelled 9/98 - - (60,000) (50,000) - - (50,000)
Net Loss for Year - - - - - (799,451) (799,451)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 1998 - - 466,690 713,806 - (993,424 (279,618)
----------- ----------- ----------- ---------- ----------- ---------- ----------
See Accountants' Review Report
F-5
XSUNX, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 2005
(Unaudited)
Deficit
Accumulated
Treasury Stock Common Stock Common During the
-------------------------- ----------------------- Stock Exploration
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- ----------- ----------- ---------- ----------- ---------- ----------
Issuance of stock for cash 10/98 - - 21,233 159,367 - - 159,367
Issuance of stock for services 1/99 - - 65,000 316,500 - - 316,500
Issuance of stock for cash 1/99 - - 37,500 296,125 - - 296,125
Issuance of stock for cash 2/99 - - 7,500 70,313 - - 70,313
Issuance of stock for cash 4/99 - - 45,225 122,108 - - 122,108
Issuance of stock for services 6/99 - - 70,000 147,000 - - 147,000
Issuance of stock for cash 9/99 - - 40,000 69,200 - - 69,200
Net Loss for Year - - - - - (1,482,017) (1,482,017)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 1999 - - 753,148 1,894,419 - (2,475,441) (581,022)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Issuance of stock for cash 9/00 - - 15,000 27,000 - - 27,000
Net Loss for year - - - - - (118,369) (118,369)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 2000 - - 768,148 1,921,419 - (2,593,810) (672,391)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Extinquishment of debt - - - 337,887 - - 337,887
Net Loss for year - - - - - (32,402) (32,402)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 2001 - - 768,148 2,259,306 - (2,626,212) (366,906)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Net Loss for year - - - - - (47,297) (47,297)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 2002 - - 768,148 2,259,306 - (2,673,509) (414,203)
----------- ----------- ----------- ---------- ----------- ---------- ----------
See Accountants' Review Report
F-6
XSUNX, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 2005
(Unaudited)
Deficit
Accumulated
Treasury Stock Common Stock Common During the
-------------------------- ----------------------- Stock Exploration
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- ----------- ----------- ---------- ----------- ---------- ----------
Issuance of stock for Assets 7/03 - - 70,000,000 3 - - 3
Issuance of stock for Cash 8/03 - - 9,000,000 225,450 - - 225,450
Issuance of stock for Debt 9/03 - 115,000 121,828 - - 121,828
Issuance of stock for Accruals 9/03 - - 115,000 89,939 - - 89,939
Issuance of stock for Services 9/03 - - 31,300,000 125,200 - - 125,200
Net Loss for year - - - - - (145,868) (145,868)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 2003 - - 111,298,148 2,821,726 - (2,819,377) 2,349
----------- ----------- ----------- ---------- ----------- ---------- ----------
Issuance of stock for cash 3/04 - - 181,750 21,071 - - 21,071
Issuance of stock for cash 4/04 - - 217,450 22,598 - - 22,598
Issuance of stock for cash 5/04 - - 254,956 34,669 - - 34,669
Issuance of stock for cash 6/04 - - 694,649 96,306 - - 96,306
Issuance of stock for cash 7/04 - - 157,649 21,421 - - 21,421
Issuance of stock for cash 8/04 - - 57,000 5,133 - - 5,133
Issuance of stock for cash 9/04 - - 1,174,500 81,472 - - 81,472
Issuance of Common Stock Warrants - - - - 1,200,000 - 1,200,000
Net Loss for Year - - - - - (1,509,068) (1,509,068)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 2004 114,036,102 3,104,396 1,200,000 (4,328,445) (24,049)
----------- ---------- ----------- ---------- ----------
See Accountants' Review Report
F-7
XSUNX, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 2005
(Unaudited)
Deficit
Accumulated
Treasury Stock Common Stock Common During the
-------------------------- ----------------------- Stock Exploration
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- ----------- ----------- ---------- ----------- ---------- ----------
Issuance of stock for cash - - 5,919,537 471,068 - - 471,068
Issuance of stock for cash - - 300,500 20,067 - - 20,067
Issuance of stock for services - - 10,000 3,000 - - 3,000
Issuance of stock for services - - 300,000 24,000 - - 24,000
Issuance of stock for cash - - 527,000 40,260 - - 40,260
Issuance of stock for services - - 125,000 10,000 - - 10,000
Issuance of stock for services - - 114,469 13,827 - - 13,827
Issuance of stock for collateral 26,798,418 - - - - - -
Issuance of stock for loan inducement - - 2,544,031 310,117 - - 310,117
Net Loss for Year - - - (1,400,839) (1,400,839)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance - September 30, 2005 26,798,418 - 123,876,639 3,996,735 1,200,000 (5,729,284) (532,549)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Issuance of stock for services - - 40,441 7,500 - - 7,500
Issuance of Common Stock Warrants - - - 951,250 - 951,250
Net Loss for Period - - - - - (1,595,533) (1,595,533)
----------- ----------- ----------- ---------- ----------- ---------- ----------
Balance December 31, 2005 26,798,418 $ - 123,917,080 $4,004,235 $ 2,151,250 $(7,324,817)$(1,169,332)
=========== =========== =========== ========== =========== ========== ===========
All shares have been adjusted for the 1 for 20 reverse split.
See Accountants' Review Report
F-8
XSUNX, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(unaudited)
Feb. 25, 1997
Three-Months Ended (Inception) to
December 31, December 31,
-----------------------------------
2005 2004 2005
---------------- -------------- -----------------
Cash Flows from Operating Activities:
Net Loss $ (1,595,533) $ (164,889) $ (7,324,817)
Issuance of Common Stock for Services 7,500 - 1,295,884
Issuance of Common Stock for Loan Inducement - - 310,117
Depreciation - - 21,613
Adjustments to reconcile net loss to cash used in
operating activities:
(Increase) Accounts Receivable (8,000) (8,000)
Decrease (Increase) in Prepaid Expense (220,962) - (300,946)
Increase (Decrease) in Accrued Expenses 19,780 (155) 65,636
Increase (Decrease) in Accounts Payable (51,741) (14,045) 26,636
---------------- -------------- -----------------
Net Cash Flows Used for Operating Activities (1,848,956) (179,089) (5,913,877)
---------------- -------------- -----------------
Cash Flows from Investing Activities:
Purchase of Equipment - - (187,444)
Purchase of Intangible Assets - - (20,000)
---------------- -------------- -----------------
Net Cash Flows Used for Investing Activities - - (207,444)
---------------- -------------- -----------------
Cash Flows from Financing Activities:
Proceeds from Notes Payable 2,000,000 - 2,850,000
Issuance of Common Stock Warrants 951,250 - 2,151,250
Issuance of Common Stock - 471,068 2,398,234
---------------- -------------- -----------------
Net Cash Flows Provided by Financing Activities 2,951,250 471,068 7,399,484
---------------- -------------- -----------------
Net Increase (Decrease) in Cash 1,102,294 291,979 1,278,163
---------------- -------------- -----------------
Cash and cash equivalents - Beginning of period 175,869 37,344 -
---------------- -------------- -----------------
Cash and cash equivalents - End of period $ 1,278,163 $ 329,323 $ 1,278,163
================ ============== =================
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
$ - $ - $ 1,237,557
================ ============== =================
See Accountants' Review Report
F-9
XSUNX, INC.
(A Development Stage Company
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
(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 December 31, 2005 and the results of
operations for the three-months ended December 31, 2005 and 2004 and for the
period February 25, 1997 (inception) to December 31, 2005, and cash flows for
the three-months ended December 31, 2005 and 2004 and the for the period
February 25, 1997 (inception) to December 31, 2005. 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 as of the period ending December 31,
2005, did not have any products for sale, and had not generated any 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. 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.
The Company has made substantial investments this last year in the development
of intellectual property assets as part of a business-restructuring plan. The
purpose of these investments was to acquire patented solar electric glass
technology. The Company believes that its patented solar electric technology has
a number of marketing opportunities in the multi-billion dollar worldwide
architectural glass markets.
F-10
XSUNX, INC.
(A Development Stage Company
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
(Unaudited)
NOTE 3 - EQUITY TRANSACTIONS:
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.
(3) The balance of five million (5,000,000) warrants will vest upon the
date the technologies licensed within the Expanded Use License are
licensed to a third party in a bona fide arms-length commercial
setting.
In December 2005, 4,375,000 warrants were issued to Cornell Capital Partners, LP
at $.15 (3,125,000 warrants) and $.05 (1,250,000 warrants) over market.
The total charged to expense was $951,250 for these warrant issuances.
Issuance of Shares For Services
On or about December 5, 2005 the Company issued 40,441 shares of common stock to
1 consultant as compensation for three months of services that had been rendered
to the company for a period prior to this quarter. The shares were valued at the
average market price of the Company's common stock over the three month period
of services which was $0.18559 per share for a total compensated value of
$7,500.
F-11
XSUNX, INC.
(A Development Stage Company
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
(Unaudited)
NOTE 4 - CONVERTIBLE DEBENTURES:
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 as is included in convertible notes payable at December
31, 2005. The second installment of $2,000,000 will be advanced immediately
prior to the filing by the Company, with the Securities and Exchange Commission,
of a Registration Statement. The last installment of $1,000,000 will be advanced
three days prior to the date the Registration Statement is declared effective by
the Commission. The Debenture is convertible into shares of Common Stock at the
option of the Holder at a conversion price per share equal to the lesser of
$0.38 or 95% of the lowest daily volume weighted average price of the Common
Stock, as quoted by Bloomberg, LP, for the 30 trading days immediately preceding
the date of conversion (the "Variable Market Price"). Unless waived by the
Company, the Holders may not, together with their affiliates, convert more than
an aggregate of $350,000 in any 30-day period of principal amount of the
Debentures at the Variable Market Price. Cornell has agreed not to short any of
the shares of Common Stock.
On July 14, 2005, XSUNX, Inc. entered into a Secured Convertible Debenture
agreement with Cornell Capital Partners, LP in the amount of $400,000. The
interest shall accrue on the outstanding principal balance hereof at an annual
rate equal to twelve percent (12 %.) This Debenture shall be convertible into
shares of Common Stock at the option of the Holder, with a conversion price in
effect on any Conversion Date shall be equal to ten cents ($.10), which may be
adjusted pursuant to the other terms of this Debenture.
On August 16, 2005, XSUNX, Inc. received an additional $450,000 from Cornell
Capital Partners, LP with the same interest and conversion rights. The
Debentures are secured by the assets of the Company and mature on the first
anniversary of the date of issuance and bear interest at the annual rate of 12%
in cash.
F-12
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-KSB contains
forward-looking statements. The presentation of future aspects of XsunX, Inc.
("XsunX", the "Company" or "issuer") found in these statements is subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those reflected in such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", or "could" or the negative variations thereof or
comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties that may cause XsunX's actual results to be materially
different from any future results expressed or implied by XsunX in those
statements. Important facts that could prevent XsunX from achieving any stated
goals include, but are not limited to, the following:
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-QSB 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 Power Glass(TM) - an innovative thin film
solar technology that is intended to allow glass windows to produce electricity
from the power of the sun. This process for producing electricity is known as
Photovoltaics. Photovoltaic ("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 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, the Company anticipates
being able to take advantage opportunities to provide a commercially viable
method for converting large areas of architectural glass into electrical power
producing systems. Upon the completion of its commercialization process 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.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2005
COMPARED TO THE SAME PERIOD IN 2004
The Company generated $8,000 in revenues in the period ended December
31, 2005 as compared to $0.0 for the same period in
2004.
The Company incurred operating expenses totaling $1,566,359 for the
three months ending December 31, 2005 compared to $164,987 for the same period
in 2004. Primary sources for the increase to operating expense of $1,401,369
include: Research and Development expenses increased by $175,706 to $274,603 as
compared to $98,897 for the same period in 2004, Public Relations activity
increased by $26,163 to $33,352 as compared to $7,189 for the same period in
2004, Legal and Accounting expenses increased by $24,626 to $33,750 from $9,124
in 2004. 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 debentures in
the aggregate principal amount of $5,000,000. The Company incurred additional
one-time cash expenses for loan and structuring fees associated with the above
referenced debenture totaling $213,000. The $1,566,359 operating expenses
includes non-cash charges of $7,500 for the issuance of unregistered stock for
business development and advisory services in lieu of cash payment for services.
4
The net loss for the three months ending December 31, 2005 was
($1,595,533) as compared to a net loss of ($164,889) for the same period 2004.
The increase of $1,430,644 in first quarter of this fiscal year includes (i) an
increase in research and development expenditures of $175,706 over the first
quarter in the previous fiscal year which is anticipated to continue to increase
for the foreseeable future as the Company furthers efforts to complete the
commercial development of a licensable process for the manufacture of
semi-transparent solar electric glazing technologies, (ii) an increase to
General and Administrative expenses totaling $61,413 representing the continued
increase in costs associated with expansion of the Company's business plan,
(iii) $420,000 in expenses 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, (iv)
$744,250 in expenses associated with fees resulting from financing activities
from the sale by the Company of a 10% secured convertible debenture in the
aggregate principal amount of $5,000,000 and, (v) $37,177 for accrued interest
expenses. These expenses in the first quarter of the current fiscal year were
all incurred in preparing to commercialize a licensable process for the
manufacture of semi-transparent solar electric glazing technologies.
The Company incurred net loses of ($1,595,533) and ($164,889) in the
three-month period ended December 31, 2005 and 2004 respectively. The associated
net loss per share was ($.01) in the three-month period ended December 31, 2005
and nominal in the period in 2004. The Company expects the trend of losses to
continue at an accelerated rate in future quarters until the Company is able to
begin sales of significance of which there is no assurance.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at December 31, 2005 of $1,278,163 and prepaid
expenses in the amount of $300,964 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 (deficit) of ($1,355,163) as compared to a working capital
(deficit) of ($718,380) at September 30, 2005.
For the three-months ended December 31, 2005, the Company's capital
needs have been met from the proceeds of the sale of secured convertible
debentures made by the Company. In July 2005 the Company sold a 12% secured
convertible debenture in the principal amount of $850,000 and 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 $2,000,000 as of December
31, 2005. The proceeds from the above sale of debentures were used primarily to
fund the research and developments efforts and day-to-day operations of the
Company and to pay the accrued liabilities associated with these operations.
We had, at December 31, 2005, cash and cash equivalents of $1,587,109
and net working capital (deficit) of ($1,355,163). We anticipate that there will
not be sufficient cash generated from operations in the current year necessary
to fund our current and anticipated cash requirements. The Company may engage in
efforts to obtain additional financing from equity and debt placements.
CASH FLOWS
Cash flow used in operating activities during the three-month period
ended, December 31, 2005, was ($1,848,956) as compared to using ($179,089) for
the same period 2004. The increase of cash used in operations of $1,669,867
included (i) an increase in research and development expenditures of $175,706,
(ii) an increase to General and Administrative expenses totaling $61,413
representing the continued increase to costs associated with expansion of the
Company's business plan, (iii) $420,000 in expenses 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, (iv) $744,250 in expenses associated with fees resulting
from financing activities from the sale by the Company of 10% secured
convertible debentures in the aggregate principal amount of $5,000,000, (v)
$37,177 for accrued interest expenses and, (vi) non-cash charges of $7,500 for
the issuance of unregistered stock for business development and advisory
services in lieu of cash payment for services. The value of the stock issued for
services was determined by using the average of the last sale closing price as
quoted on the OTCBB over the three month period the services were rendered.
The Company had net cash flows from financing activities of $2,951,250,
$2,000,000 of which was from debentures sold and $951,250 was charged as a cost
for issuance of warrants.
5
NEED FOR ADDITIONAL FINANCING
The Company anticipates that there will be insufficient cash generated
from operations in the current year necessary to fund its anticipated cash
requirements. 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 is dependent on
raising additional capital necessary to meet the Company's 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 is actively pursuing additional financing in the
form of loans or equity placements to cover on going 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 a licensable process for the manufacture of semi-transparent
solar electric glazing technologies.
The Company has registered on Form SB-2, effective February 9, 2006,
72,879,263 shares. The registration relates to the resale by the selling
stockholders of up to 72,879,263 shares of our common stock. The selling
stockholders may sell common stock from time to time in the principal market on
which the stock is traded at the prevailing market price or in negotiated
transactions. The total number of shares sold herewith includes the following
shares owned by or to be issued to Cornell Capital Partners LP: (i) up to
9,520,000 shares issuable upon conversion of secured convertible debentures,
including interest, at a fixed conversion price of $0.10 per share; (ii) up to
50,000,000 shares issuable upon conversion of secured convertible debentures at
a conversion price equal to the lesser of $0.38 or 95% of the lowest daily
volume weighted average price of our common stock for the 30 trading days
immediately preceding the conversion date; (iii) 4,250,000 shares issuable upon
the exercise of warrants at $0.15 per share; (iv) 2,125,000 shares issuable upon
the exercise of warrants at $0.20 per share; (v) 3,125,000 shares of common
stock issuable upon the exercise of warrants at $0.45 per share; (vi) 1,250,000
shares of common stock issuable upon the exercise of warrants at $0.55 per
share; and (vii) 2,544,031 shares previously issued.
We are also including 65,232 shares owned by another shareholder.
This registration may allow conversion of $5,850,000 in outstanding
debentures to registered common shares and also registered shares to further
allow exercise of 10,750,000 warrants for purchase of shares. Proceeds from
warrant exercise, if any, will be received and used by Company.
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.
GOING CONCERN
The Company is in the development stage and as of the period ending
December 31, 2005, did not have any products for sale, and had not generated any
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 six-month period ended December 31, 2005
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."
6
Item 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chairman have evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this quarterly report and, based
on this evaluation, have concluded that the disclosure controls and procedures
are effective.
There have been no changes in the Company's internal control over
financial reporting that occurred during the Company's first fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
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.
(3) The balance of five million (5,000,000) warrants will vest upon the
date the technologies licensed within the Expanded Use License are
licensed to a third party in a bona fide arms-length commercial
setting.
Funding Agreement
On December 12, 2005, XsunX, Inc. consummated a Securities Purchase
Agreement dated December 12, 2005 with Cornell Capital Partners L.P. providing
for the sale by the Company to Cornell of 10% secured convertible debentures in
the aggregate principal amount of $5,000,000 (the "Debentures") of which
$2,000,000 was advanced immediately. The second installment of $2,000,000 will
be advanced immediately prior to the filing by the Company, with the Securities
and Exchange Commission, of a Registration Statement. The last installment of
$1,000,000 will be advanced three days prior to the date the Registration
Statement is declared effective by the Commission. The Debenture is convertible
into shares of Common Stock at the option of the Holder at a conversion price
per share equal to the lesser of $0.38 or 95% of the lowest daily volume
weighted average price of the Common Stock, as quoted by Bloomberg, LP, for the
30 trading days immediately preceding the date of conversion (the "Variable
Market Price"). Unless waived by the Company, the Holders may not, together with
their affiliates, convert more than an aggregate of $350,000 in any 30-day
period of principal amount of the Debentures at the Variable Market Price.
Cornell has agreed not to short any of the shares of Common Stock
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").
7
Termination of Distribution Agreement
In July 2005, in association with the sale of a Convertible 12% Secured
Debenture, the Company entered into a Standby Equity Distribution Agreement (the
"Distribution Agreement") with an investor providing for the sale and issuance
of up to $10,000,000 of Common Stock over a period of up to 24 months after the
signing of the Distribution Agreement. The Company agreed to file a registration
statement registering the Common Stock issuable upon sales under the
Distribution Agreement and for the underlying shares associated with the sale of
a Convertible 12% Secured Debenture. On August 17, 2005 the Company filed a
registration statement with the U.S. Securities and Exchange Commission in
relation to these agreements. On December 9, 2005 the Company and the investor
agreed to the termination of the Distribution Agreement and withdrawal of the
registration statement as part of a subsequent financing agreement, (see
"Funding Agreement" above). No shares were sold under the Distribution Agreement
prior to its termination.
Issuance of Shares For Services
On or about December 5, 2005 the Company issued 40,441 shares of common
stock pursuant to Rule 144 of the Act to 1 consultant as compensation for three
months of services that had been rendered to the company for the periods between
July 7, 2005 and October 6, 2005. The shares were valued at the average market
price of the Company's common stock over the three month period of services
which was $0.18559 per share for a total compensated value of $7,500.00.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
31.1 Section 302 Sarbanes-Oxley Certification
32.1 Section 906 Sarbanes-Oxley Certification
B. Reports on Form 8-K:
Form 8-K Report filed on October 17, 2005.
Form 8-K Report filed on October 28, 2005.
Form 8-K Report filed on December 12, 2005.
8
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: February 21, 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: February 21, 2006
---------------------------
Director, President, CEO and acting CFO
9