FORM 10-Q
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended December 31, 2006
Commission file number: 000-29621
XSUNX, INC.
-----------------
(Exact name of registrant as specified in its charter)
Colorado 84-1384159
------------------------ ------------------
(State of incorporation) (I.R.S. Employer Identification No.)
65 Enterprise, Aliso Viejo, CA 92656
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 330-8060
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None
Name of each exchange on which registered: N/A
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [X] No [ ]
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 14, 2006 the number of shares outstanding of the registrant's
only class of common stock was 157,019,856.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
Table of Contents
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Independent Auditor's Report...................................................... F-1
Balance Sheets December 31, 2006 (unaudited) and September 30, 2006............... F-2
Statements of Operations for the Three Months ended December 31, 2006
and 2005 (unaudited) and the period February 25, 1997 (inception) to
December 31, 2006................................................................. F-3
Statements of Stockholders Equity for the period February 25, 1997
(inception) to December 31, 2006 unaudited)....................................... F-4
Statements of Cash Flows for the Three Months ended December 31, 2006
and 2005 (unaudited) and the period February 27, 1997 (inception) to
December 31, 2006................................................................. F-5
Notes to Condensed Consolidated Financial Statements
(Unaudited)....................................................................... F-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 3
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 5
Item 4. Controls and Procedures........................................................... 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 6
Item 1A. Risk Factors...................................................................... 9
Item 2. Changes in Securities............................................................. 9
Item 3. Defaults upon Senior Securities................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............................... 9
Item 5. Other Information................................................................. 9
Item 6. Exhibits and Reports on Form 8-K.................................................. 9
Signatures................................................................................. 10
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
XSUNX
(AN DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
THREE-MONTHS ENDED December 31, 2006
(UNAUDITED)
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, 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.
/s/ Jaspers + Hall, PC
Jaspers + Hall, PC
Denver, CO
February 13, 2007
F-1
Unaudited Audited
December 31, September 30,
2006 2006
----------------- -----------------
ASSETS:
Current assets:
Cash $3,692,139 $ 4,305,105
Prepaid Research and Development Expense 3,200 3,200
Prepaid Professional Expense 330,917 330,917
Prepaid Legal Expense 15,000 15,000
----------------- -----------------
Total current assets 4,041,256 4,654,222
----------------- -----------------
Fixed assets:
Office Equipment 30,086 9,774
Research and Development Equipment 392,301 392,301
Leasehold Improvement 88,540 80,492
----------------- -----------------
Total Fixed Assets 510,927 482,567
Less Depreciation (111,988) (84,941)
----------------- -----------------
Total fixed assets 398,939 397,626
----------------- -----------------
Other assets:
Patents 40,000 40,000
Security Deposit 4,315 2,615
Marketable Prototype 1,765,000 1,765,000
----------------- -----------------
Total other assets 1,809,315 1,807,615
----------------- -----------------
TOTAL ASSETS $6,249,510 $ 6,859,463
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 556,008 $ 582,161
Accrued Expenses 6,418 6,538
----------------- -----------------
Total current liabilities 562,426 588,699
----------------- -----------------
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;
157,169,856 shares issued and outstanding at December 31, 2006 13,290,868 13,290,868
and September 30, 2006 - -
Common Stock Warrants 2,151,250 2,151,250
Deficit accumulated during the development stage (9,755,034) (9,171,354)
----------------- -----------------
Total stockholders' profit (deficit) 5,687,084 6,270,764
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,249,510 $ 6,859,463
================= =================
See Accountants' Review Report
F-2
XSUNX, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
Feb. 25, 1997
Three-Months Ended (Inception) to
December 31, December 31,
----------------------------------
2006 2005 2006
--------------- -------------- -------------
Revenue
Service Income $ - $ 8,000 $ 8,000
Other Income - - -
--------------- -------------- -------------
Total Revenue - 8,000 8,000
--------------- -------------- -------------
Expenses:
Advertising 16,747 349 29,776
Bank Charges 25 64 2,932
Conferences & Seminars 9,271 1,500 20,538
Consulting 35,982 - 1,428,815
Depreciation 27,047 - 131,601
Directors' Fees - - 11,983
Due Diligence - - 45,832
Equipment Rental - - 1,733
Filing Fees - - 6,425
Impairment loss - - 924,642
Insurance 3,535 - 6,998
Legal & Accounting 77,418 33,750 513,320
Licenses & Fees 20 - 6,475
Loan Fees - 213,000 741,834
Meals & Entertainment - - 4,119
Miscellaneous 2,135 800 7,822
Office Expenses 6,229 1,473 32,643
Patent Fees 1,181 - 2,469
Postage & Shipping 688 458 7,189
Printing 6,911 2,943 25,521
Public Relations 26,630 33,352 436,160
Research & Development 209,945 274,603 1,790,333
Rent 14,860 2,250 60,681
Salaries 140,615 44,229 1,071,026
Subscription Reports 10 85 3,765
Taxes - - 4,657
Telephone 7,162 1,390 59,784
Transfer Agent Expense 283 - 20,648
Travel 29,829 4,860 145,819
Warrant Option Expense - 951,250 2,151,250
--------------- -------------- -------------
Total Operating Expenses 616,523 1,566,356 9,696,790
--------------- -------------- -------------
Other Income (Expense)
Interest Expense - 37,177 247,363
Interest Income (32,843) - (121,346)
Forgiveness of Debt - - (59,773)
--------------- -------------- -------------
Total Other Income/Expense (32,843) 37,177 66,244
--------------- -------------- -------------
Net (Loss) $ (583,680) $(1,595,533) $ (9,755,034)
=============== ============== =============
Per Share Information:
Weighted average number of
common shares outstanding 157,169,856 123,888,194
=============== ==============
Net Loss per Common Share $ (0.003) $ (0.013)
=============== ==============
See Accountants' Review Report
F-3
XSUNX, INC.
(A Development Stage Company)
Statement of Cash Flows
(Unaudited)
Indirect Method
Feb. 25, 1997
Three-Months Ended (Inception) to
December 31, December 31,
-----------------------------------
2006 2005 2006
--------------- --------------- ----------------
Cash Flows from Operating Activities:
Net Loss $ (583,680) $(1,595,533) $ (9,755,034)
Issuance of Common Stock for Services - 7,500 1,348,997
Issuance of Common Stock for Loan Inducement - - 310,117
Warrant Expense - - 2,151,250
Issuance of Stock for Interest - - 241,383
Depreciation 27,047 - 128,423
Depreciation Written Off Equipment - - (16,435)
Adjustments to reconcile net loss to cash used in operating activities:
(Increase) Accounts Receivable - (8,000) -
(Increase) Security Deposit (1,700) (4,315)
(Increase) in Prepaid Expense - (220,962) (349,117)
Increase in Accrued Expenses 449,880 19,780 456,418
(Decrease) in Accounts Payable (476,153) (51,741) 106,008
--------------- --------------- ----------------
Net Cash Flows Used for Operating Activities (584,606) (1,848,956) (5,382,305)
--------------- --------------- ----------------
Cash Flows from Investing Activities:
Purchase of Equipment (28,360) - (527,362)
Equipment Written Off - - 16,435
Purchase of Intangible Assets - - (1,805,000)
--------------- --------------- ----------------
Net Cash Flows Used for Investing Activities (28,360) - (2,315,927)
--------------- --------------- ----------------
Cash Flows from Financing Activities:
Proceeds from Notes Payable - 2,000,000 -
Proceeds from Warrant Conversion - 951,250 3,171,250
Proceeds from Debenture Conversion - - 5,000,000
Issuance of Common Stock for cash - - 3,219,121
--------------- --------------- ----------------
Net Cash Flows Provided by Financing Activities - 2,951,250 11,390,371
--------------- --------------- ----------------
Net Increase (Decrease) in Cash (612,966) 1,102,294 3,692,139
--------------- --------------- ----------------
Cash and cash equivalents - Beginning of period 4,305,105 175,869 -
--------------- --------------- ----------------
Cash and cash equivalents - End of period $ 3,692,139 $ 1,278,163 $3,692,139
=============== =============== ================
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-4
XSUNX, INC. Continued...
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
December 31, 2006
(Unaudited)
Deficit
Accumulated
Common During the
Treasury Stock Common Stock Stock Exploration
-------------------------- ------------------------
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- ----------- ----------- ----------- ----------- ---------- ----------
Inception February 25, 1997 - - - - - - -
Issuance of stock for cash - - 15,880 217,700 - - 217,700
Issuance of stock to Founders - - 14,110 - - - -
Issuance of stock for consolidation - - 445,000 312,106 - - 312,106
Net Loss for Year - - - - - (193,973) (193,973)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 1997 - - 474,990 529,806 - (193,973) 335,833
----------- ----------- ----------- ----------- ----------- ---------- ----------
Issuance of stock for services - - 1,500 30,000 - - 30,000
Issuance of stock for cash - - 50,200 204,000 - - 204,000
Consolidation stock cancelled - - (60,000) (50,000) - - (50,000)
Net Loss for Year - - - - - (799,451) (799,451)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 1998 - - 466,690 713,806 - (993,424) (279,618)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Issuance of stock for cash - - 151,458 717,113 - - 717,113
Issuance of stock for services - - 135,000 463,500 - - 463,500
Net Loss for Year - - - - - (1,482,017) (1,482,017)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 1999 - - 753,148 1,894,419 - (2,475,441) (581,022)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Issuance of stock for cash - - 15,000 27,000 - - 27,000
Net Loss for year - - - - - (118,369) (118,369)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 2000 - - 768,148 1,921,419 - (2,593,810) (672,391)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Extinguishment of debt - - - 337,887 - - 337,887
Net Loss for year - - - - - (32,402) (32,402)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 2001 - - 768,148 2,259,306 - (2,626,212) (366,906)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net Loss for year - - - - - (47,297) (47,297)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 2002 - - 768,148 2,259,306 - (2,673,509) (414,203)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Issuance of stock for Assets - - 70,000,000 3 - - 3
Issuance of stock for Cash - - 9,000,000 225,450 - - 225,450
Issuance of stock for Debt - 115,000 121,828 - - 121,828
Issuance of stock for Expenses - - 115,000 89,939 - - 89,939
Issuance of stock for Services - - 31,300,000 125,200 - - 125,200
Net Loss for year - - - - - (145,868) (145,868)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 2003 - - 111,298,148 2,821,726 - (2,819,377) 2,349
----------- ----------- ----------- ----------- ----------- ---------- ----------
Issuance of stock for cash - - 2,737,954 282,670 - - 282,670
Issuance of Common Stock Warrants - - - - 1,200,000 - 1,200,000
Net Loss for Year - - - - - (1,509,068) (1,509,068)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 2004 114,036,102 3,104,396 1,200,000 (4,328,445) (24,049)
----------- ----------- ----------- ----------- ----------- ---------- ----------
F-5
XSUNX, INC. ...Continued
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
December 31, 2006
(Unaudited)
Deficit
Accumulated
Common During the
Treasury Stock Common Stock Stock Exploration
-------------------------- ------------------------
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- ----------- ----------- ----------- ----------- ---------- ----------
Issuance of stock for cash - - 6,747,037 531,395 - - 531,395
Issuance of stock for services - - 3,093,500 360,944 - - 360,944
Issuance of stock for collateral 26,798,418 - - - - - -
Net Loss for Year - - - (1,400,969) (1,400,969)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - September 30, 2005 26,798,418 - 123,876,639 3,996,735 1,200,000 (5,729,414) (532,679)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Issuance of stock for services - - 72,366 31,500 - - 31,500
Issuance of Common Stock Warrants - - - - 951,250 - 951,250
Issuance of stock for debenture conversion - - 21,657,895 5,850,000
Issuance of stock for interest expense - - 712,956 241,383
Issuance of stock for warrant conversion - - 10,850,000 3,171,250
Net Loss for Year - - - - - (3,441,940) (3,441,940)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance September 30, 2006 26,798,418 - 157,169,856 13,290,868 2,151,250 (9,171,354) (2,991,869)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net Loss for Period - - - - - (583,680) (583,680)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Balance - December 31, 2006 26,798,418 $ - 157,169,856 $13,290,868 $2,151,250 $(9,755,034) $(3,575,549)
=========== =========== =========== =========== =========== ========== ==========
See Accountants' Review Report
F-6
XSUNX, INC.
(A Development Stage Company
Notes to Financial Statements
December 31, 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 December 31, 2006 and the results of
operations for the three-months ended December 31, 2006 and 2005 and for the
period February 25, 1997 (inception) to December 31, 2006, and cash flows for
the three-months ended December 31, 2006 and 2005 and the for the period
February 25, 1997 (inception) to December 31, 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, 2006.
Note 2 - Lease - Golden Suite:
--------------------
As of July 1, 2006 a new lease was signed for the Golden Office in the amount of
$1,687.50 per month plus a fee of $825.00 for utilities. This will increase to
$1.787.50 per month on 7/1/07 and $1,790.00 per month on 7/1/08. The lease
expires on 6/30/09.
Note 3 - Lease - Office Space California:
-------------------------------
On November 1, 2006 a new lease was signed for additional space at the
California office in the amount of $1,330 per month plus fax and telephone
access costs.
Note 4 - Subsequent Events:
-----------------
Effective January 1, 2007, XSUNX, Inc. entered into two year Employment
Agreements with the following individuals:
Joseph Grimes Chief Operating Officer $150,000.00
Jeff Huitt Chief Financial Officer $135,000.00
Robert Wendt Vice President of Engineering $150,000.00
Kurt Laetz Vice President of Global Sales $120,000.00
F-7
XSUNX, INC.
(A Development Stage Company
Notes to Financial Statements
December 31, 2006
(Unaudited)
Effective January 26, 2007, XSUNX, Inc. entered into a two year Consulting and
Advisory Agreement with Dr. John Moore to become the Chairman of the Company's
Scientific Advisory Board.
The company authorized employment incentive option grants to the following
employees on January 26th 2007 at an exercise price per share of $0.46 with a
first vesting date of April 1, 2007:
Joseph Grimes 500,000 Option Shares
Jeff Huitt 500,000 Option Shares
Robert Wendt 500,000 Option Shares
The common vesting schedules for the above grantee's is:
(a) The Option shall become exercisable in the amount of
50,000 shares upon the First Vesting Date. Thereafter, the
Option shall vest and become exercisable at the rate of
50,000 Shares per calendar quarter up to a total of
400,000 shares.
(b) This Option shall become exercisable in the amount of
50,000 shares for each of the first two sales/licensure of
an XsunX system
Kurt Laetz 250,000 Option Shares
The vesting schedule is:
(b) The Option shall become exercisable in the amount of
15,000 shares upon the First Vesting Date. Thereafter, the
Option shall vest and become exercisable at the rate of
15,000 Shares per calendar quarter.
(c) During the second year of employment of Optionee by XsunX
the Option will vest and become exercisable at the rate of
22,500 Shares per calendar quarter, or any apportioned
amount thereof, during the term of the second year of
employment by XsunX, Inc. of the Optionee.
(d) This Option shall become exercisable in the amount of
50,000 shares for each of the first two sales/licensure of
an XsunX system.
F-8
XSUNX, INC.
(A Development Stage Company
Notes to Financial Statements
December 31, 2006
(Unaudited)
The company authorized the issuance of an option grant on January 26, 2007 to a
consultant in the amount of 150,000 option shares at an option exercise price of
$0.46 with a first vesting date of April 26, 2007 with following vesting
schedule:
(e) The Option shall become exercisable in the amount of
18,750 shares upon the First Vesting Date. Thereafter, the
Option shall vest become exercisable at the rate of 18,750
Shares per calendar quarter, or any apportioned amount
thereof, during the term of engagement by XsunX, Inc. of
the Optionee.
On January 1, 2007, XSUNX, Inc. issued a secured, seven year, 10% note to
Sencera, LLC in the amount up to $1,500,000. Under the terms, the company
provided Sencera, LLC with $400,000 at the time of signing and $137,500 per
month for up to eight months. These funds are to be used to develop Technology
and obtain licenses in agreement with the Technology Development and License
Agreement between Sencera and XSUNX, Inc. also signed on January 1, 2007. The
note may be converted into a membership interest in Sencera, LLP and an
extension of the license for a period of three years. The security consists of
the license rights, the ability to exercise the conversion and all other rights
and remedies provided by law.
In December 2006 the Company entered into a settlement agreement with a service
provider in which the service provider returned to the Company 150,000 of the
300,000 shares of common stock issued to the service provider in the period
ended March 31, 2005. The shares were received and cancelled effective January
2007. As a result of the return and cancellation of these shares the Company
will record a credit to expenses in the amount of $12,000 and a debit to paid in
capital of $12,000 for the period ending March 31, 2007.The $12,000 dollars
represents one half of the monetary value expensed by the Company in the period
in which the shares were issued.
F-9
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 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:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability to
raise additional capital or financing to implement its business
plans;
(e) failure to commercialize its technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside parties;
(h) insufficient revenues to cover operating costs.
There is no assurance that the Company will be profitable, the Company
may not be able to successfully develop, manage or market its products and
services, the Company may not be able to attract or retain qualified executives
and technology personnel, the Company's products and services may become
obsolete, government regulation may hinder the Company's business, additional
dilution in outstanding stock ownership may be incurred due to the issuance of
more shares, warrants and stock options, or the exercise of warrants and stock
options, and other risks inherent in the Company's businesses.
The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q and Annual Reports on
Form 10-K filed by the Company and any Current Reports on Form 8-K filed by the
Company.
3
CURRENT OVERVIEW
XsunX develops and markets proprietary Thin Film Photovoltaic (TFPV)
solar cell designs and core solar cell manufacturing systems, enabling licensees
to manufacture TFPV solar devices on various substrates. We function as a
strategic solar technology partner, supplying the advanced thin film solar cell
manufacturing know-how and capabilities that will enable original equipment
manufacturers ("OEM") customers to address the expanding market for thin film
solar products.
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.
XsunX is positioning itself as a leading provider of TFPV device
designs and core manufacturing products to an expanding global group of existing
and new entrant solar product manufacturers. The company is working to establish
an environment in which XsunX products and technologies are viewed as advanced
core support infrastructure to manufacturers increasing their opportunities for
success in servicing their regional solar markets. XsunX does not sell thin film
solar materials directly to the consumer market.
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, 2006
Compared to the Same Period in 2005
The Company generated no revenues in the period ended December 31, 2006 as
compared to $8,000 for the same period in 2005.
The Company incurred operating expenses totaling $616,523 for the
three months ending December 31, 2006 compared to $1,566,356 for the same period
in 2005. Primary sources for the decrease to operating expense of $949,833
include: Warrant Option Expenses decreased by $951,250 to zero as compared to
$951,250 in the same period in 2005. Loan Fees decreased by $213,000 to zero
from $213,000 during the same period in 2005. Research and Development expenses
decreased by $64,658 to $209,945 as compared to $274,603 for the same period in
2005, Legal and Accounting increased $43,668 to $77,418 as compared to $33,750
for the same period in 2005. Salaries increased by $96,386 to 140,615 from
$44,229 in the same period in 2005 as a result of the addition by the Company of
three management level employees. The decrease in overall expenses was primarily
attributable to the absence of a one-time expense of $951,250 associated with
the grant of in-the-money warrants from the sale by the Company of secured
convertible debentures in the period ended December 31, 2005 not present in the
three month period ending December 31, 2006. The $616,523 operating expenses
includes non-cash charges of $27,047 for depreciation.
The net loss for the three months ending December 31, 2006 was
($583,680) as compared to a net loss of ($1,595,533) for the same period 2005.
The decrease of $1,011,853 includes (i) prior period one-time expenditures of
$951,250 associated with Warrant Option Expenses, (ii) a prior period one-time
expenditure of $213,000 associated with loan fees, partially offset by (iii)
Salaries increased by $96,386 and Legal and Accounting increased by 43,668
The Company incurred net loses of ($583,680) and ($1,595,533) in the
three-month period ended December 31, 2006 and 2005 respectively. The associated
net loss per share was nominal in the three-month period ended December 31, 2006
and 2005. The Company anticipates the trend of losses to continue in future
quarters until the Company can recognize sales of significance of which there is
no assurance.
4
Liquidity and Capital Resources
The Company had cash at December 31, 2006 of $3,692,139 and prepaid
expenses in the amount of $349,117 as compared to cash of $4,305,105 and prepaid
expenses in the amount of $394,117 as of September 30, 2006. The Company had a
net working capital of $3,478,830 as compared to a working capital of $4,065,523
at September 30, 2006. Cash flow used in operating activities during the
three-month period ended, December 31, 2006, was ($584,606) as compared to using
($1,848,956) for the same period 2005. The decrease of cash used in operations
of $1,264,350 included (i) the decrease in net loss resulting primarily from
prior period one-time expenditures of $951,250 associated with Warrant Option
Expenses not incurred in the current period, (ii) a prior period one-time
expenditure of $213,000 associated with loan fees not incurred in the current
period. This decrease in Net Loss was partially offset by (i) Salary increases
of $96,386 and Legal and Accounting increases of 43,668. The current period
ending December 31, 2006 also included a non-cash deprecation expense of $27,047
while there was no deprecation expense in the period ending December 31, 2005.
For the three-months ended December 31, 2006, the Company's capital
needs have been met from the use of working capital provided by the proceeds of
(i) the issuance of Common Stock for Debenture conversion and; (ii) the issuance
of Common Stock for warrant conversion which both occurred in the fiscal year
ended September 30, 2006.
We had, at December 31, 2006, cash and cash equivalents of $4,041,256 and net
working capital of $3,478,830.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage and as of the period ending
December 31, 2006, did not have any significant revenues. We have begun
marketing efforts and anticipate the sale of licenses in the 2007 period however
the cash flow requirements associated with the transition to revenue recognition
may exceed cash generated from operations in the current and future periods. We
may seek to obtain additional financing from equity and/or debt placements. 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.
While we have been able to raise capital in a series of equity and debt
offerings in the past there can be no assurances that we will be able to obtain
such additional financing, on terms acceptable to us and at the times required,
or at all.
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.
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 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.
5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 19th 2006, a service provider Office Radio Network filed a
lawsuit in the District Court in Colorado alleging that it has been damaged due
to refusal to allow it to sell its shares under Rule 144. The parties entered
into a settlement in December 2006 providing for the return of 150,000 shares of
the 300,000 shares issued to Office Radio Network, and the provisioning by
Office Radio Network of an additional six months of service to the Company.
The Company is currently not aware of nor has any knowledge of any
other legal proceedings or claims that we believe will have, individually or in
the aggregate, a material adverse affect on our business, financial condition or
operating results.
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 and Annual Reports on Form 10-K and Form 10KSB previously 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 December 31, 2006, we had an
accumulated deficit of $9,755,034. For the quarter ended December 31, 2006 and
2005, we incurred net losses of $583,680 and $1,595,533 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.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE
TERMS OR AT ALL
In the future, we may be required to raise additional funds, particularly if we
are unable to generate positive cash flow as a result of our operations. 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 COMMERCIALIZE OUR TECHNOLOGIES WHICH WOULD
RESULT IN CONTINUED LOSSES AND MAY REQUIRE US TO CURTAIL OR CEASE OPERATIONS
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 commercialize the
technologies would result in continued losses and may require us to curtail or
cease operations
6
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 those 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.
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 a portion of our operations
rely on strategic relationships with third parties, to provide general
facilities, personnel, and expertise in research, development, systems design,
assembly and support. A loss of any of our third party relationships for any
reason could cause us to experience difficulties in 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.
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.
7
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.
8
Item 2. Changes in Securities
In December 2006 the Company entered into a settlement agreement with a
service provider in which the service provider returned to the Company 150,000
of the 300,000 shares of common stock issued to the service provider in the
period ended March 31, 2005. The shares were received and cancelled effective
January 2007. As a result of the return and cancellation of these shares the
Company will record a credit to expenses in the amount of $12,000 and a debit to
paid in capital of $12,000 for the period ending March 31, 2007.The $12,000
dollars represents one half of the monetary value expensed by the Company in the
period in which the shares were issued.
In conjunction with the sale of convertible debentures in the amount
of $850,000 and $5,000,000 in the fiscal periods ended December 31, 2005 and
2006 respectively, the Company issued and deposited into escrow 26,798,418
shares of Common Stock as part of a security structure for the above referenced
obligations. As of September 30, 2006 the principal balance of the debentures
had been reduced to $0.0. Subsequently the holder of the debentures provided the
Company with a notice of release of its security interests and returned the
security shares to the Company for cancellation. On January 18, 2007 the above
shares were cancelled on the Company's books.
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:
32 Sarbanes-Oxley Certification
33 Sarbanes-Oxley Certification
B. Reports on Form 8-K:
None
9
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 14, 2007 XSUNX, INC.
By: /s/ Tom M. Djokovich
----------------------------
Tom M. Djokovich, Chief
Executive Officer, President
10