NovAccess Global Inc. - Quarter Report: 2009 June (Form 10-Q)
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 June 30, 2009
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:
Common
Stock, no par value per share
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, as amended,
during the preceding twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yesx No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
filer.
|
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer
¨
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares of common stock issued and outstanding as of August 10, 2009
was 189,342,437.
Table
of Contents
|
PAGE
|
||
|
PART
I - FINANCIAL INFORMATION
|
||
|
Item
1. Condensed Consolidated Financial Statements
|
||
|
Balance
Sheets June 30, 2009 (unaudited) and September 30, 2008
|
3
|
|
|
Statements
of Operations for the three and nine months ended June 30, 2009 and 2008,
and the period February 25, 1997 (inception) to June 30, 2009
(unaudited)
|
4
|
|
|
Statements
of Cash Flows for the nine months ended June 30, 2009 and 2008, and the
period February 27, 1997 (inception) to June 30, 2009
(unaudited)
|
5
|
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
6
|
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
11
|
|
|
Item
3 Qualitative and Quantitative Disclosures About Market
Risk
|
16
|
|
|
Item
4. Controls and Procedures
|
17
|
|
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PART
II - OTHER INFORMATION
|
17
|
|
|
Item
1. Legal Proceedings
|
17
|
|
|
Item
1a.Risk Factors
|
17
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
22
|
|
|
Item
3. Defaults upon Senior Securities
|
22
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|
|
Item
4. Submission of Matters to a Vote of Security Holders
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22
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|
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Item
5. Other Information
|
23
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|
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Item
6. Exhibits and Reports on Form 8-K
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23
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Signatures
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23
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XsunX,
Inc.
(A
Development Stage Company)
Balance
Sheets
|
June 30,
|
September 30,
|
|||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS:
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 603,354 | $ | 2,389,218 | ||||
|
Inventory
Held for Sale
|
1,417,000 | 1,417,000 | ||||||
|
Prepaid
Expenses
|
12,656 | 11,986 | ||||||
|
Total
current assets
|
2,033,010 | 3,818,204 | ||||||
|
Fixed
assets:
|
||||||||
|
Office
& Misc. Equipment
|
51,779 | 50,010 | ||||||
|
Research
and Development Equipment
|
469,382 | 435,910 | ||||||
|
Leasehold
Improvements
|
122,680 | 89,825 | ||||||
|
Total
Fixed Assets
|
643,841 | 575,745 | ||||||
|
Less:
Accumulated Depreciation
|
(417,285 | ) | (299,559 | ) | ||||
|
Net
fixed assets
|
226,556 | 276,186 | ||||||
|
Other
assets:
|
||||||||
|
Manufacturing
Equipment in Progress
|
1,725,500 | 5,824,630 | ||||||
|
Security
Deposit
|
5,815 | 5,815 | ||||||
|
Total
other assets
|
1,731,315 | 5,830,445 | ||||||
|
TOTAL
ASSETS
|
$ | 3,990,881 | $ | 9,924,835 | ||||
|
LIABILITIES AND STOCKHOLDERS'
EQUITY:
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
Payable
|
$ | 1,529,683 | $ | 465,953 | ||||
|
Accrued
Expenses
|
27,196 | 30,957 | ||||||
|
Total
current liabilities
|
1,556,879 | 496,910 | ||||||
|
Stockholders'
Equity:
|
||||||||
|
Preferred
Stock, par value $0.01 per share; 50,000,000
|
||||||||
|
shares
authorized; no shares issued and outstanding
|
- | - | ||||||
|
Common
Stock, no par value; 500,000,000 shares authorized;
|
||||||||
|
189,342,437
shares issued and outstanding at June 30, 2009
|
||||||||
|
and
186,292,437 shares issued and outstanding at September 30,
2008
|
23,224,369 | 22,613,369 | ||||||
|
Paid
in Capital - Common Stock Warrants
|
3,034,481 | 2,641,412 | ||||||
|
Additional
Paid in Capital
|
5,248,213 | 5,248,213 | ||||||
|
(Deficit)
accumulated during the development stage
|
(29,073,061 | ) | (21,075,069 | ) | ||||
|
Total
stockholders' equity
|
2,434,002 | 9,427,925 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 3,990,881 | $ | 9,924,835 | ||||
The
Accompanying Notes are an Integral Part of These Financial
Statements
3
XsunX,
Inc.
(A
Development Stage Company)
Statements
of Operations
(UNAUDITED)
|
Feb. 25, 1997
|
||||||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
(Inception) to
|
||||||||||||||||||
|
June 30,
|
June 30,
|
June 30,
|
||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
||||||||||||||||
|
Revenue
|
||||||||||||||||||||
|
Service
Income
|
$ | - | $ | - | $ | - | $ | - | $ | 14,880 | ||||||||||
|
Total
Revenue
|
- | - | - | - | 14,880 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Selling,
General and Administrative Expense
|
555,603 | 709,125 | 2,541,722 | 2,021,837 | 13,822,822 | |||||||||||||||
|
Depreciation
|
40,337 | 23,893 | 117,726 | 47,523 | 552,839 | |||||||||||||||
|
Impairment
of Asset
|
5,240,000 | - | 5,240,000 | - | 6,444,459 | |||||||||||||||
|
Option
/ Warrant Expense
|
238,568 | 168,322 | 393,069 | 504,966 | 3,308,671 | |||||||||||||||
|
Total
Operating Expenses
|
6,074,508 | 901,340 | 8,292,517 | 2,574,326 | 24,128,791 | |||||||||||||||
|
Other
(Income) Expense
|
||||||||||||||||||||
|
Interest
Expense
|
5,274 | 263 | 5,274 | 1,054 | 96,567 | |||||||||||||||
|
Interest
Income
|
(428 | ) | (47,461 | ) | (4,937 | ) | (161,575 | ) | (444,987 | ) | ||||||||||
|
Legal
Settlement
|
- | - | - | - | (1,100,000 | ) | ||||||||||||||
|
Loan
Fees
|
- | - | - | - | 7,001,990 | |||||||||||||||
|
Other
- Non Operating
|
- | 186 | (7,481 | ) | 381 | (2,266 | ) | |||||||||||||
|
Forgiveness
of Debt
|
- | - | (287,381 | ) | - | (592,154 | ) | |||||||||||||
|
Total
Other (Income) Expense
|
4,846 | (47,012 | ) | (294,525 | ) | (160,140 | ) | 4,959,150 | ||||||||||||
|
Net
(Loss)
|
$ | (6,079,354 | ) | $ | (854,328 | ) | $ | (7,997,992 | ) | $ | (2,414,186 | ) | $ | (29,073,061 | ) | |||||
|
Per
Share Information:
|
||||||||||||||||||||
|
Basic
and Diluted
|
||||||||||||||||||||
|
Weighted
average number of
|
||||||||||||||||||||
|
common
shares outstanding
|
189,342,437 | 176,107,775 | 189,026,503 | 173,085,015 | ||||||||||||||||
|
Net
(Loss) per Common Share
|
$ | (0.03 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | (0.01 | ) | ||||||||
The
Accompanying Notes are an Integral Part of These Financial
Statements
4
XsunX,
Inc.
(A
Development Stage Company)
Statements
of Cash Flows
(UNAUDITED)
|
Feb. 25, 1997
|
||||||||||||
|
Nine Months Ended
June 30,
|
(Inception) to
June 30,
|
|||||||||||
|
2009
|
2008
|
2009
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
(Loss)
|
$ | (7,997,992 | ) | $ | (2,414,186 | ) | $ | (29,073,061 | ) | |||
|
Adjustments
to reconcile net loss to cash used in
|
||||||||||||
|
operating
activities:
|
||||||||||||
|
Issuance
of Common Stock for Interest
|
- | - | 241,383 | |||||||||
|
Issuance
of Common Stock for Services
|
11,000 | - | 1,599,251 | |||||||||
|
Amortization of Cornell financing warrants, commitment fees and beneficial
conversion
|
- | - | 5,685,573 | |||||||||
|
Option
/ Warrant Expense
|
393,069 | 504,966 | 3,308,671 | |||||||||
|
Asset
Impairment
|
5,240,000 | - | 6,444,459 | |||||||||
|
Depreciation
|
117,726 | 47,523 | 552,839 | |||||||||
|
Changes
in Operating Assets and Liabilities:
|
||||||||||||
|
Decrease(Increase)
in Inventory Held for Sale
|
- | 88,250 | (1,417,000 | ) | ||||||||
|
Decrease(Increase)
in Prepaid Expense
|
(670 | ) | 54,377 | (12,656 | ) | |||||||
|
Decrease
(Increase) in Other Assets
|
- | - | (5,815 | ) | ||||||||
|
Increase
(Decrease) in Accounts Payable
|
1,063,730 | (267,355 | ) | 3,135,972 | ||||||||
|
Increase
(Decrease) in Accrued Expenses
|
(3,761 | ) | 90,219 | 27,196 | ||||||||
|
Net
Cash Flows Used in Operating Activities
|
(1,176,898 | ) | (1,896,206 | ) | (9,513,188 | ) | ||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Purchase
of Fixed Assets
|
(68,096 | ) | (2,460,890 | ) | (643,841 | ) | ||||||
|
Purchase
of Marketable Prototype and Patent
|
- | - | (1,780,396 | ) | ||||||||
|
Purchase
of Manufacturing Equipment and Facilities - In process
|
(1,140,870 | ) | - | (6,965,499 | ) | |||||||
|
Payments
on Note Receivable
|
- | - | (1,500,000 | ) | ||||||||
|
Receipts
on Note Receivable
|
- | 1,500,000 | 1,500,000 | |||||||||
|
Accrued
Interest Earned on Notes Receivable
|
- | 143,452 | - | |||||||||
|
Net
Cash Flows Used in Investing Activities
|
(1,208,966 | ) | (817,438 | ) | (9,389,736 | ) | ||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Proceeds
from Warrant Conversion
|
- | (182,320 | ) | 3,306,250 | ||||||||
|
Proceeds
from Debentures
|
- | - | 5,850,000 | |||||||||
|
Net
Proceeds from Sale of Common Stock
|
600,000 | 5,700,000 | 10,350,028 | |||||||||
|
Net
Cash Flows Provided by Financing Activities
|
600,000 | 5,517,680 | 19,506,278 | |||||||||
|
Net
Increase (Decrease) in Cash
|
(1,785,864 | ) | 2,804,036 | 603,354 | ||||||||
|
Cash
and cash equivalents - Beginning of period
|
2,389,218 | 1,773,748 | - | |||||||||
|
Cash
and cash equivalents - End of period
|
$ | 603,354 | $ | 4,577,784 | $ | 603,354 | ||||||
|
Supplemental
Disclosure of Cash Flow Information
|
||||||||||||
|
Cash
Paid During the Period for:
|
||||||||||||
|
Interest
|
$ | - | $ | 1,054 | $ | 119,617 | ||||||
|
Income
Taxes
|
$ | - | $ | - | $ | - | ||||||
The
Accompanying Notes are an Integral Part of These Financial
Statements
5
XSUNX,
INC.
(A
Development Stage Company)
Notes
to Financial Statements
June 30,
2009
(Unaudited)
Note
1 — Presentation of
Interim Information:
The
unaudited interim consolidated financial statements of the Company included
herein have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions for Form 10-Q under Article 8.03 of Regulation S-X. These
statements do not include all of the information and notes to the financial
statements required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Operating
results for the nine month period ended June 30, 2009, are not necessarily
indicative of the results that may be expected for the year ending September 30,
2009. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended September 30, 2008, included in the Company’s Annual
Report on Form 10-K\A, as filed with Securities and Exchange
Commission.
Note
2 – Restatement
of Financial Statements for the Fiscal Periods 2007 and
2006:
As a
result of the suspension of our prior auditor, Jasper – Hall PC, by the Public
Company Accounting Oversight Board (PCAOB) on October 28, 2008, the Company
engaged new auditors and was required to re-audit the financial statements for
the years ended September 30, 2006 and September 30, 2007. The financial
statements for the fiscal periods 2006 and 2007 have been restated to reflect
the adjustments to accounting estimates in those periods. In fiscal year 2007,
the total impact of these changes was to increase net loss by $679,349. $447,012
of this additional loss was related to a change in estimate for option and
warrant expenses and did not impact cash. There was also an increase to non-cash
depreciation expense of $62,354, and a decrease to accrued interest income of
approximately $77,882 that resulted from adjustments in interest calculations
corrected in the 2008 fiscal period. Additionally, there was a $65,000 asset
impairment charge and a $27,111impact to cash expenses as a result of the audit
adjustments. There was no impact to loss per share as it remained $0.01 loss per
share for the period.
In fiscal
year ended September 30, 2006, there were audit adjustments totaling $5,671,048
as reduction to net income resulting in minimal impact to cash expenses. The
largest adjustment relates to the amortization of loan fees associated with
convertible debentures issued in the 2005 and 2006 fiscal years. We took a
$6,373,156 additional charge for the amortization of expenses associated with
debenture structuring fees, debenture commitment fees, and expenses attributable
to the beneficial conversion costs for in the money stock and warrant conversion
under the debentures. Of this total, $47,216 was paid in cash, the remainder in
common stock. Depreciation expense was reduced by $66,265 and warrant and option
expenses were reduced by $486,250 for the period. This resulted in additional
non-cash net income of $552,519 that partially offset the amortization of the
loan fees associated with the convertible debentures. Interest expense was also
reduced by $111,117 and there were $38,472 of other expense adjustments made.
There was an increased loss per share associated with these restatements of
$0.05 per share bringing the total to $0.07 loss per share.
In the
three months ended June 30, 2008, the total impact of the restatement was an
increase in net loss of $167,185. $168,322 resulted from increased option and
warrant expense, and $1,137 of other expense adjustments.
In the
nine months ended June 30, 2008, the total impact of the restatement was a
decreased net loss of $870,648. $803,899 resulted from decreased
option and warrant expense, $77,882 increase in interest income and $11,133 of
other expense adjustments.
Reclassification: Certain
amounts in the prior year financials have been reclassified to conform to the
current year presentation.
Note
3 — Going
Concern:
We are a
development stage company and, to date, have not generated any significant
revenues. The accompanying consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate our continuation as a going concern.
Net loss for the nine months ended June 30, 2009 was $7,997,992. In addition,
the Company has an accumulated deficit of $29,073,061 since
inception.
6
The items
discussed above raise substantial doubt about our ability to continue as a going
concern. 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 we will be successful in licensing our
technologies and developing joint venture manufacturing relationships, and
whether we obtain additional financing. We may not achieve our business
objectives and the failure to achieve such goals would have a material adverse
impact on us.
The
Company is currently working to transition from the development stage to the
implementation phase and as of the period ended June 30, 2009, did not have any
significant revenues. The transition to revenue recognition may exceed cash
generated from operations in the current and future periods. We have in the past
experienced substantial losses and negative cash flow from operations and have
required financing, including equity and debt financing, in order to pursue the
commercialization of products based on our technologies. We expect that we will
continue to need significant financing to operate our business. The
Company needs to raise additional capital to complete its operational
plan.
The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that my result from the possible inability of
the Company to continue as a going concern.
Note
4 — Common Stock
Transactions:
The
authorized common stock of the Company was established at 500,000,000 shares
with no par value.
Financing
There
were no shares issued for financing during the quarter ended June 30,
2009
In the
nine months ended June 30, 2009, there was a placement of the Company’s common
stock pursuant to an S-1 Registration declared effective by the U.S. Securities
and Exchange Commission on April 10, 2008, the Company has sold 3,000,000 shares
of common stock at a price of $0.20 each, for total proceeds of $600,000 to
Fusion Capital Fund II, LLC during the three months ending December 31,
2008.
Pursuant
to the S-1 Registration Statement declared effective by the SEC on April 10,
2008, the Company has sold to Fusion Capital Fund II, LLC through December 31,
2008, approximately 18,347,581 shares for a total investment of
$5,800,000. These shares were sold at various pricing between $0.405
and $0.20 per share. Including 3,500,000 shares issued to Fusion as
financing commitment shares leaving 18,152,419 registered shares available for
future sales. The registration statement is currently not available for use for
sales to Fusion.
Issuance
of Shares for Services
There
were no shares issued for services during the quarter ended June 30,
2009
For the
nine months ended June 30, 2009, the Company issued 50,000 shares of its
restricted common stock in connection with a services agreement to provide
marketing and financing service to the Company. The shares were
valued at $0.22 per share, the share price on the date the agreement was
reached. The agreement ended on December 31, 2008.
Employee
Incentive Option Grants
During
the three month period ended June 30, 2009, the Company did not authorize any
employee incentive grants.
A summary
of option/ warrant activity for the nine month period ended June 30, 2009 is as
follows:
7
|
Number of
Options /
Warrants
|
Weighted-
Average
Exercise
Price
|
Accrued
Options /
Warrants
Vested
|
Weighted-
Average
Exercise
Price
|
|||||||||||||
|
Outstanding,
September 30, 2007
|
17,312,000 | $ | 0.33 | 8,270,500 | $ | 0.38 | ||||||||||
|
Granted
2008
|
7,133,332 | $ | 0.53 | 5,048,332 | $ | 0.53 | ||||||||||
|
Exercised/Cancelled
|
(14,500,000 | ) | $ | 0.19 | (7,000,000 | ) | $ | 0.19 | ||||||||
|
Vested
|
825,000 | $ | 0.46 | |||||||||||||
|
Outstanding,
September 30, 2008
|
9,945,332 | $ | 0.29 | 7,143,832 | $ | 0.36 | ||||||||||
|
Granted
2009
|
5,350,000 | $ | 0.17 | 526,666 | $ | 0.17 | ||||||||||
|
Exercised/Cancelled
|
$ | - | - | $ | - | |||||||||||
|
Vested
|
916,875 | $ | 0.18 | |||||||||||||
|
Outstanding,
June 30, 2009
|
15,295,332 | $ | 0.25 | 8,587,373 | $ | 0.31 | ||||||||||
At June
30, 2009 the range of warrant/option prices for shares under warrants/options
not exercised and the weighted-average remaining contractual life is as
follows:
|
Options/Warrants Outstanding
|
Options/Warrants Exercisable
|
|||||||||||||||||||
|
Range of
Option/
Warrant Prices
|
Number of
Options/
Warrants
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Life (yr)
|
Number of
Options/
Warrants
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||
|
$
0.16
|
5,115,000 | $ | 0.16 | 5.0 | 735,000 | $ | 0.16 | |||||||||||||
|
$
0.20
|
250,000 | $ | 0.20 | 4.3 | 250,000 | $ | 0.20 | |||||||||||||
|
$
0.36
|
4,035,000 | $ | 0.36 | 4.0 | 2,007,041 | $ | 0.36 | |||||||||||||
|
$
0.41
|
100,000 | $ | 0.41 | 3.9 | 100,000 | $ | 0.41 | |||||||||||||
|
$
0.45
|
100,000 | $ | 0.45 | 3.6 | 100,000 | $ | 0.45 | |||||||||||||
|
$
0.46
|
1,650,000 | $ | 0.46 | 3.3 | 1,350,000 | $ | 0.46 | |||||||||||||
|
$
0.50
|
1,666,666 | $ | 0.50 | 4.1 | 1,666,666 | $ | 0.50 | |||||||||||||
|
$
0.51
|
500,000 | $ | 0.51 | 2.8 | 500,000 | $ | 0.51 | |||||||||||||
|
$
0.53
|
100,000 | $ | 0.53 | 3.4 | 100,000 | $ | 0.53 | |||||||||||||
|
$
0.75
|
1,666,666 | $ | 0.75 | 4.1 | 1,666,666 | $ | 0.75 | |||||||||||||
|
$
1.69
|
112,000 | $ | 1.69 | 2.5 | 112,000 | $ | 1.69 | |||||||||||||
| 15,295,332 | 8,587,373 | |||||||||||||||||||
Note 5 - Stock-Based
Compensation:
The
Company follows SFAS No. 123(R), (“Share-Based Payment” (SFAS No. 123(R)). This
statement requires that all stock-based compensation be recognized as an expense
in the financial statements and that such cost be measured at the fair value of
the grant. This statement was adopted using the modified prospective method of
application, which requires us to recognize compensation expense on a
prospective basis. Therefore, prior period financial statements have not been
restated. Under this method, in addition to reflecting compensation expense for
new share-based grants, expense is also recognized to reflect the remaining
service period of grants that had been included in pro-forma disclosures in
prior periods.
8
XsunX
records the fair value of stock-based compensation grants as an expense. In
order to determine the fair value of stock options on the date of grant, XsunX
applies the Black-Scholes option-pricing model. Inherent in this model are
assumptions related to expected stock-price volatility, option life, risk-free
interest rate and dividend yield. While the risk-free interest rate and dividend
yield are less subjective assumptions, typically based on factual data derived
from public sources, the expected stock-price volatility and option life
assumptions require a greater level of judgment.
XsunX
uses an expected stock-price volatility assumption that is based on historical
implied volatilities of the underlying stock which is obtained from public data
sources. With regard to the weighted-average option life assumption, XsunX
considers the exercise behavior of past grants and models the pattern of
aggregate exercises. Patterns are determined on specific criteria of the
aggregate pool of optionees.
Forfeiture
rates are based on the Company’s historical data and future estimates for stock
option forfeitures. There are 15,295,332 options and warrants issued of which
8,587,373 are vested. The exercise price range for the Company’s options and
warrants are $0.15 to $1.69. The weighted average remaining life of the option
and warrant grants range from 2.5 years to 5 years. We have based our expected
volatility on the historical performance of our stock adjusted for extreme
period of volatility that resulted from unusual events. The range of volatility
for our options and warrants is 53% to 122% based on the specific grant. The
risk free interest rate used in our calculation was 3.54%. Total net stock-based
compensation expense is attributable to the granting of and the remaining
requisite service periods of stock options previously granted. We have recorded
$238,568 of option and warrant expense in the quarter ended June 30, 2009 and
$393,069 for the nine months ending June 30, 2009 relating to current vesting of
historically granted stock options.
Note
6 — Asset Valuation:
In
response to changes within the financial markets and solar industry in the three
month period ended June 30, 2009 the Company modified its business development
efforts. The change to operation and business development plans required the
review and valuation assessment of each of the assets that make up the total
under the Company’s Manufacturing Equipment in Process account. The review has
resulted in a write down of certain assets related to the Company’s efforts to
establish amorphous silicon solar module manufacturing infrastructure that the
Company does not anticipate utilizing under its new plan. This impairment
resulted in an expense of $5,240,000 and an elimination of $260,000 of accounts
payable from the associated vendors as a result of the Company’s decision to no
longer purchase the equipment for a total impact on Other Assets – Manufacturing
Equipment in Progress of $5,500,000. This represents a total write down to zero
for the portion of the Company’s Manufacturing Equipment in Process account that
cannot be utilized in the amorphous silicon solar module manufacturing
infrastructure that the Company does not anticipate using. The
valuation adjustment was the result of an analysis of certain significant
unobservable events and the inputs used in determining the amount of the
valuation adjustment include the decision to move to new manufacturing
technology, the Company’s determination that it does not intend to use this
equipment in the new manufacturing technology, the current state of the
financial markets ability to finance the equipment and the discussions with the
vendors of the equipment regarding the Company’s intent to not pursue the
acquisition of the equipment. As these assets are not in service,
there was no impact to depreciation expense or accumulated
depreciation. This is a non-cash expense item for the quarter ending
June 30, 2009.
The
remaining value in the Company’s Manufacturing Equipment in Process account of
$1,725,500 was not adjusted for fair value as the Company anticipates utilizing
that equipment in its new manufacturing technology.
While the
Company continues to work to secure additional financing for its planned
operations, it has implemented cost reductions to salaries, facility costs, and
day to day operations which have resulted in a reduction in monthly operating
costs by approximately 30% and the use of cash by approximately 45% compared to
average monthly operating costs in the January and February periods
2009. As a result of this change in the Company’s plan of operation,
the value of certain assets that were to be exclusively used under the Company’s
previous plan have been written down.
9
Note
7 — Notes, Commitments, and Contingencies:
Leased
Facility Transactions
Effective
April 1, 2009 the Company reduced its leased facilities at its Aliso Viejo, CA
offices by approximately 50%. This resulted in associated reductions to monthly
lease and facility expenses totaling approximately $2,000 leaving a monthly
lease and facility liability of approximately $1,400.
The
Company and Merix Corp., its landlord for the Company’s facilities located at
its 23365 Halsey, Wood Village Oregon have agreed to the application
of approximately $99,000 in monthly lease and facility over-payments
made by XsunX to Merix under monthly lease and facility billings that over
stated actual insurance and property tax liabilities. This credit was applied to
accrued monthly facility lease obligation in the period ended March
31, 2009. As of June 30, 2009, the Company had booked as a liability
approximately $225,000 in unpaid rent liabilities to Merix under the terms of
the sub-lease agreement. That liability is included in accounts payables
in the financial statements. The amount of unpaid liabilities
increases at approximately $53,000 per month. The Company is working with
Merix to either negotiate alternate lease terms or to terminate the lease. There
is a $106,000 letter of credit that supports these lease payments backed by a
segregated cash account of the Company.
The
Company extended the lease at its Golden, Colorado facility for an additional
three months expiring on September 30, 2009 at the lease rate of $1,790 per
month plus $945.00 in triple net for a total of $2,735 per month
Marketable
Production Prototype Machine:
Under the
terms of an Expanded Use License Agreement dated October 12, 2005 between XsunX
and MVSystems, Inc. the parties had agreed to build a machine to prove
technology for intended resale and split any associated profits from the sale of
the machine 50/50. As of the date of this report XsunX has taken possession of
the machine. An inspection of the machine by the Company on April 30 resulted in
the determination that the machine continues to fail to meet contractual
requirements and on May 4, 2009 XsunX provided MVSystems a notice asserting that
MVSystems is in material default of the terms of the Separation Agreement. No
resolution to this notice of default has been agreed to by the
parties.
Marketable
Production Prototype Machine Sales Efforts
XsunX is
engaged in efforts to market and sell a production prototype machine for its
booked value of $1,417,000. We are engaged in efforts to solicit buyers which
have resulted in purchase inquires. The Company is scheduling on-site
demonstrations with interested parties in efforts to sell the machine. While we
believe that under these efforts the sale of the machine may occur we cannot be
assured that a sale of the machine will be finalized.
Marketable
Production Prototype Sales Tax Dispute
Under a
notice of default provided to XsunX in November 2008 by MVSystems, Inc.,
MVSystems has claimed that a sale of the production prototype machine to XsunX
by MVSystems had occurred, and that state sales tax in the amount of
approximately $60,000 is due. XsunX disputes this claim. MVSystems subsequently
filed a request with the State of Colorado Department of Revenue for a
determination on this matter without the consent of XsunX and for what the
Company believes are strategic purposes related to the parties’ ongoing dispute
over the machine. In March 2009 XsunX received notice from the State of Colorado
offering determination that a sale had occurred and that sales tax and penalties
in the amount of approximately $91,000 were due on what XsunX believes to be an
incorrect basis cost for the machine of $1,775,000. The Company believes that
the tax auditor’s findings contain material faults related to the interpretation
of the transaction as a result of the information provided by MVSystems in their
determination request. On April 10, 2009 the Company filed a protest and hearing
request disputing the findings of the tax auditor requesting that the total tax
liability determination be reversed. As of the date of this report we have not
received a response from the Colorado State tax auditor office. While we believe
that the material facts outlined within the auditor’s determination were based
on information interpreted incorrectly and is likely to be reversed upon appeal,
we have a potential contingent liability in the amount of $72,800 for tax on the
actual basis cost of the machine of $1,417,000 for payment of this
tax.
10
Note
8 — Subsequent Events:
Management
evaluated the subsequent events as of August 10, 2009, the date the financial
statements were issued. Management has found no material or
reportable subsequent events as of this date.
|
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 Quarterly Report on 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:
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 or license its technology
;
|
|
|
(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 or license its technology, and the Company may
not be able to attract or retain qualified executives and technology
personnel. Additionally, the Company's products and services may
become obsolete, government regulation may hinder the Company's business, and
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. These and other risks are 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 Quarterly Reports on Form 10-Q , Annual Reports on Form 10-K and any
Current Reports on Form 8-K filed by the Company.
11
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 business development efforts and new technology 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.
Business
Overview
In
response to unprecedented changes within the capital finance markets, and
resulting changes to the solar industry that have limited access to capital and
slowed growth in demand for certain solar technologies, XsunX has been exploring
opportunities to combine the Company’s thin film expertise with advances in
manufacturing technologies from related industries that we believe may work
together to overcome current solar technology manufacturing
limitations.
These
efforts have resulted in the development of a new plan of operations that have
modified the Company’s plans to directly establish product manufacturing
infrastructure. We have re-focused operations on the development of a
cross-industry thin film solar manufacturing concept that we believed provides
an opportunity for XsunX to combine proven thin film solar processes with
state-of-the-art mature magnetic media thin film manufacturing technologies
derived from the hard disc drive (HDD) industry to improve manufacturing output,
increase cell efficiency and production yields, and lower the costs for the
production of high efficiency Copper Indium Gallium (di) Selenide (CIGS) thin
film solar cells. We plan to generate revenues through the licensing of this
manufacturing technology and the establishment of joint venture manufacturing
infrastructure with our licensees.
Under our
new plan of operations, we are working to establish a complete process that
delivers proprietary new high rate, high efficiency, and low cost front end thin
film solar cell manufacturing systems coupled with customized backend solar
module assembly and packaging systems to deliver low cost products based on the
use of the CIGS solar thin film absorber. We anticipate that this system, when
completed, will initially produce individual 125mm format (about 5” square)
wafers or solar cells, eventually scaling to 156mm and 215mm formats (about 6”
and 8” squares), at per hour production rates we believe will provide
exceptional commercial opportunities. These wafers on flexible metallic foil are
similar in size to silicon wafers used in nearly all solar modules manufactured
today. We believe that system features and advantages for this new manufacturing
method and resulting thin film CIGS solar cell include:
|
§
|
Performance: System
architecture is derived from proven hard disc drive deposition systems
that account for the production of over 600 million disks per year –
equivalent to nearly 3GWp per year if this output were solar
cells.
|
|
§
|
Factory Efficient and
Flexible: Small system footprint allows for increased megawatt (MW)
production of solar product per factory square foot. Modular production
systems require as little as 2,500 sq. ft. and can be added in
stages.
|
|
§
|
Multi-Industry/Application
Solution: Production system and technology can produce
either just solar cells or complete solar modules offering opportunities
for manufacturers:
|
|
§
|
Seeking
to provide a low cost per watt drop in replacement for Poly-Si or c-Si
silicon wafers to a large group of solar module
assemblers
|
|
§
|
Of
building integrated photovoltaic (BIPV) products that require the use of
small flexible solar cells that can be adapted for use in a multitude of
different shaped and sized solar BIPV
products
|
|
§
|
Existing
Semi-Conductor and Hard Disc Drive companies seeking ways to put idle
floor space or systems to work in the green
economy
|
|
§
|
Thin
film solar module manufacturers looking to break the barriers to the
production of large area, low cost, high efficiency thin film solar
modules capable of delivering better value than silicon module
solutions
|
It is our
belief that by leveraging the manufacturing processes from the HDD industry and
adapting them to thin-film solar technologies, we can reduce the cost per watt
for solar to well below $1 per watt, thereby making solar a viable alternative
in the energy field. Furthermore, it is our belief that our
expertise, experience and proprietary technology in this area will allow us to
seek joint ventures with larger companies thereby generating revenue streams
through licensing fees and manufacturing royalties.
12
RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2009 COMPARED TO THE
SAME PERIOD IN 2008
Revenue:
The
Company generated no revenues in the three month periods ended June 30, 2009 and
2008. Additionally, there was no associated cost of sales.
Selling, General and
Administrative Expenses:
Selling,
General and Administrative Expenses for the three month period ended June 30,
2009 totaled $555,603. This represents a decrease of $153,522 as compared to the
same period in 2008 which totaled $709,125. The decreased operating expenses
between the periods is primarily attributable to decreased payroll expenses,
legal and accounting fees and travel and entertainment fees, partially offset by
increased rent and research and development expenses. A comparative
analysis of the period to period performance is provided below.
Salaries and
Wages:
Salaries
and wages for the three month period ended June 30, 2009 were $184,544 as
compared to $315,166 during the same period in 2008. The decrease of $130,622
was driven by reduced salaries and fewer employees on the payroll during the
period to manage the expense burn rate of the Company. There were six full
and part time employees at June 30, 2009. In March 2009, several
employees were placed on furlough, were changed from an employee to contract
status or were placed on part time in an effort to conserve
capital.
Professional
Services:
Public
relations and marketing expense for the three month period ended June 30, 2009
totaled $23,910 as compared to $96,162 during this same period in 2008. The
decrease of $72,252 represents decreased utilization of public relations during
the period after several quarters of intensive public relations efforts working
on building brand and market awareness.
Consulting
expenses for the three month period ended June 30, 2009 totaled $33,244 as
compared to $115,703 during the same period in 2008, a decrease of $82,459. This
decrease is due to lower utilization of consulting services associated with the
planning and preparation for our manufacturing facility and for the payment of
board of director fees. The Company terminated its contract HR
manager to reduce costs. Payments to the Board of Directors and the
scientific advisory committee continue to be suspended to conserve available
cash.
Legal and
accounting fees for the three month period ended June 30, 2009 totaled $52,884
as compared to $173,027 during the same period in 2008. This represents a
decrease of $120,143 largely driven by decreased expenditures for legal services
partially offset by higher accounting review fees.
Travel and
Entertainment:
Expenses
for travel and entertainment were $13,453 for the three month period ended June
30, 2009. This compared to $84,093 for the same period in 2008. This decrease of
$70,639 was a cost containment move to conserve cash by limiting travel and
entertainment expenses to high priority travel only.
Depreciation
Expense:
Depreciation
expense for the three months period ending June 30, 2009 has a non-cash impact
of $40,337. $643,841 of total fixed assets placed in service is
depreciated using the straight line method of depreciation over periods ranging
from three to five years. Lease hold improvements are depreciated on
a straight line basis over the life of the lease.
13
Impairment of
Asset:
During
the three months ended June 30, 2009, the Company wrote down Manufacturing
Equipment in Process associated with portion of the manufacturing equipment
related to the Company’s efforts to establish amorphous silicon solar module
manufacturing infrastructure that the Company does not anticipate utilizing
under its new plan of operations. This impairment resulted in an
expense of $5,240,000 and an elimination of associated accounts payable of
$260,000 as a result of not continuing to purchase the
equipment. This is a non-cash expense item for the quarter ended June
30, 2009.
Option and Warrant
Expenses:
Option
and Warrant expense for the three month period ending June 30, 2009 was $238,568
as compared to $168,322 during the same period in 2008. This increase
of $70,246 was related primarily to the vesting of current options additional
vesting from those issued in previous periods.
The net
loss for the three months ended June 30, 2009 was $(6,079,354) as compared to a
net loss of ($854,328) for the same period 2008. The increased net loss of
$5,225,026 includes (i) The operating expense changes discussed above and (ii)
the impairment of asset discussed above in the amount of
$5,240,000.
The
associated net loss per share was $(0.03) for the three month period ended June
30, 2009 and less than $(0.01) for the same period in 2008. 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.
RESULTS
OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 2009 COMPARED TO THE SAME
PERIOD IN 2008
Revenue:
The
Company generated no revenues in the nine-month periods ended June 30, 2009 and
2008. Additionally, there was no associated cost of sales.
Selling, General and
Administrative Expenses:
Selling,
General and Administrative Expenses for the nine month period ended June 30,
2009 totaled $2,541,722. This represents an increase of $519,885 as compared to
the same period in 2008 which totaled $2,021,837. The increase in operating
expenses between the periods is primarily attributable to increased rent,
research and development, use taxes, utilities, payroll expenses and insurance,
partially offset by reduced expenses on public relations, travel and
entertainment, forgiveness of debt and option and warrant expenses. A
comparative analysis of the period to period performance is provided
below.
Salaries and
Wages:
Salaries
and wages for the nine month period ended June 30, 2009 were $878,985 as
compared to $834,258 during the same period in 2008. The increase of $44,727 was
driven by an increase to salaries related to retention of key employees and the
addition of new employee’s early in the period necessary for the launch of our
plans to build and establish thin film solar module manufacturing
infrastructure. Subsequently, the Company reduced salaries and
reduced total full time employees as cost savings measures partially offsetting
the increase early in the nine month period ending June 30,
2009. There were six full and part time employees at June 30,
2009. In March 2009, several employees were placed on furlough
pending continued build out of the manufacturing facility, were changed from an
employee to contract status or were placed on part time in an effort to conserve
capital.
14
Professional
Services:
Public
relations and marketing expense for the nine month period ended June 30, 2009
totaled $161,652 as compared to $299,066 during this same period in 2008. The
decrease of $137,414 represents decreased utilization of public relations during
the period after several quarters of intensive public relations efforts working
on building brand and market awareness.
Consulting
expenses for the nine month period ended June 30, 2009 totaled $296,485 as
compared to $255,492 during the same period in 2008, an increase of $40,993.
This increase is largely due to higher utilization of consulting services
associated with the planning and preparation for our manufacturing facility and
for the payment of board of director fees as well as the hiring of a contract HR
manager to facilitate hiring in Oregon. Payments to the Board of
Directors and the scientific advisory committee have been suspended late in the
period to conserve available cash.
Legal and
accounting fees for the nine month period ended June 30, 2009 totaled $254,820
as compared to $230,536 during the same period in 2008. This represents an
increase of $24,284 largely driven by increased expenditures for legal services
related to equipment and materials contract review and the efforts to defend
claims by a third party for payment of fees for claimed services and higher
audit fees related to the re-audit of the September 30, 2006 and 2008 financial
statements.
Travel and
Entertainment:
Expenses
for travel and entertainment were $64,362 for the nine month period ended June
30, 2009. This compared to $178,432 for the same period in 2008. This decrease
of $114,070 was a cost containment move to conserve cash by limiting travel and
entertainment expenses to high priority travel only.
Depreciation
Expense:
Depreciation
expense for the nine months period ending June 30, 2009 has a non-cash impact of
$117,726. $643,841 of total fixed assets placed in service is
depreciated using the straight line method of depreciation over periods ranging
from three to five years. Lease hold improvements are depreciated on
a straight line basis over the life of the lease.
Impairment of
Asset:
During
the three months ended June 30, 2009, the Company wrote down Manufacturing
Equipment in Process associated with portion of the manufacturing equipment
related to the Company’s efforts to establish amorphous silicon solar module
manufacturing infrastructure that the Company does not anticipate utilizing
under its new plan of operations. This impairment resulted in an
expense of $5,240,000 and an elimination of associated accounts payable of
$260,000as a result of not continuing to purchase the equipment. This
is a non-cash expense item for the quarter ended June 30, 2009.
Forgiveness of
Debt:
During
the nine months ended March 31, 2008, the Company wrote off the remainder of the
accounts payable associated with the settlement agreement with MVSystems for a
non-cash total of $287,381. This represents potential liabilities
that were eliminated as a result of the settlement agreement.
Option and Warrant
Expenses:
Option
and Warrant expense for the nine month period ending June 30, 2009 was $393,069
as compared to $504,966 during the same period in 2008. This
reduction of $111,897 was related primarily to the vesting of current options
and the cancellation of options that had vesting expenses in previous
periods.
The net
loss for the nine months ended June 30, 2009 was $(7,997,992) as compared to a
net loss of ($2,414,186) for the same period 2008. The increased net loss of
$5,583,806 includes (i) The operating expense changes discussed above, (ii) a
decrease in interest income of $109,605 relating to the repayment of the Sencera
note and associated interest income, (iii) a further write off of accounts
payable associated with the settlement agreement with MVS of $287,381 which is
no longer payable and (iv) the impairment of asset discussed above of
$5,240,000.
15
The
associated net loss per share was $(0.04) for the nine month period ended June
30, 2009 and $(0.01) for the same period in 2008. 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.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had cash at June 30, 2009 of $603,354, a as compared to cash of
$2,389,218 as of September 30, 2008. The Company had net working capital of
$476,131 as compared to a net working capital of $3,321,294 at September 30,
2008. Cash flow used in operating activities during the nine-month period ended
June 30, 2009 was $1,176,898 as compared to a use of cash of $1,896,206 for the
same period 2008.
For the
nine months ended June 30, 2009, the Company's capital needs have been met from
the use of working capital provided by the proceeds of (i) the Company’s working
capital and (ii) an additional $600,000 in cash from the issuance of common
stock to Fusion Capital.
DEVELOPMENT
STAGE COMPANY
The
Company is currently working to transition from the development stage to the
implementation phase and as of the period ended June 30, 2009, did not have any
significant revenues. The transition to revenue recognition may exceed cash
generated from operations in the current and future periods. We have in the past
experienced substantial losses and negative cash flow from operations and have
required financing, including equity and debt financing, in order to pursue the
commercialization of products based on our technologies. We expect that we will
continue to need significant financing to operate our
business. Although the Company entered into a financing arrangement
with Fusion Capital Fund II, LLC pursuant to which the Company has the right
over a 25-month period to receive $80,000 every two business days under such
financing arrangement unless our stock price equals or exceeds $0.30, in which
case we can sell greater amounts to Fusion Capital as the price of our common
stock increases, Fusion Capital shall not have the right or the obligation to
purchase any shares of our common stock on any business day that the market
price of our common stock is less than $0.20. As of August 6, 2009,
the Company’s stock was trading at approximately $0.12 and therefore, the
Company is not presently able to draw down on this financing
arrangement. In addition, until the registration statement underlying the
Fusion transaction is amended, the Company will not be able to draw down on the
Fusion Capital financing agreement. Furthermore, there can be no assurance that
additional financing will be available or that the terms of such additional
financing, if available, will be acceptable to us. If additional financing is
not available or not available on terms acceptable to us, our ability to fund
our operations, expand our sales network, maintain our research and development
efforts or otherwise respond to competitive pressures may be significantly
impaired. We could also be forced to curtail our business operations, reduce our
investments, decrease or eliminate capital expenditures and delay the execution
of its business plan, which would have a material adverse affect on our
business.
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.
16
Item
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
The
Company maintains disclosure controls and procedures and internal controls to
ensure that information required to be disclosed in the Company’s filings under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. Our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this report. The evaluation included certain
control areas in which we have made, and are continuing to make, changes to
improve and enhance controls. A material weakness is a condition in which the
design or operation of one or more of the internal control components does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud in amounts that would be material in relation to the financial statements
being audited may occur and not be detected within a timely period by employees
in the normal course of performing their assigned functions. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures were effective, and we have discovered no material
weakness.
Changes in Internal Control over
Financial Reporting
There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
In the
ordinary conduct of our business, we are subject to periodic lawsuits,
investigations and claims, including, but not limited to, routine employment
matters. We cannot predict with certainty the ultimate resolution of lawsuits,
investigations and claims that may be asserted against us. We are not currently
subject to any legal proceedings or claims. As a result of a change to our plan
of operations we are currently negotiating with vendors to resolve application
of payments made towards certain equipment planned for use under our previous
plans. While we believe that an acceptable resolution resulting in the
termination of certain purchase orders and the postponement of delivery of
others will occur, we cannot guarantee that negotiations, individually or in the
aggregate, will not have a material adverse affect on our business, financial
condition or operating results.
Item
1A. Risk Factors
An
investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, as well as the other information
in this Quarterly Report on Form 10-Q, in evaluating XsunX and our business. If
any of the following risks occur, our business, financial condition and results
of operations could be materially and adversely affected. Accordingly, the
trading price of our common stock could decline and you may lose all or part of
your investment in our common stock. The risks and uncertainties described below
are not the only ones we face. Additional risks that we currently do not know
about or that we currently believe to be immaterial may also impair our business
operations.
We Have Not Generated Any Significant
Revenues and Our Financial Statements Raise Substantial Doubt
About Our Ability to Continue As A Going Concern
We are a
development stage company and, to date, have not generated any significant
revenues. The accompanying consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate our continuation as a going concern.
Net loss for the three month periods ended June 30, 2009 and 2008 was
$6,079,354 and
$854,328, respectively. Net loss for the nine months ended June 30,
2009 and 2008 was $7,997,992 and $2,414,186, respectively. Net cash
used in operations was $1,176,898 and $1,896,206 for the nine months ended June
30, 2009 and 2008, respectively. From inception through June 30, 2009, we had an
accumulated deficit of $29,073,061.
17
The items
discussed above raise substantial doubt about our ability to continue as a going
concern. 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, whether we are successful in licensing our technology and developing
joint venture manufacturing relationships and whether we obtain additional
financing. We may not achieve our business objectives and the failure to achieve
such goals would have a materially adverse impact on us.
We will
require significant financing in order to execute our operating plan and
continue as a going concern. We cannot predict whether this additional
financing, if available, will be in the form of equity, debt, or another form.
We may not be able to obtain the necessary additional capital on a timely basis,
on acceptable terms, or at all. In any of these events, we may be unable to
implement our current plans, repay our debt obligations as they become due or
respond to competitive pressures, any of which circumstances would have a
material adverse effect on our business, prospects, financial condition and
results of operations. The financial statements do not include any adjustments
relating to the recoverability and reclassification of recorded asset amounts or
amounts and reclassification of liabilities that might be necessary, should we
be unable to continue as a going concern.
Should
financing sources fail to materialize, management would seek alternate funding
sources such as the sale of common and/or preferred stock, the issuance of debt,
or the sale of our marketable assets.
In the
event that these financing sources do not materialize, or that we are
unsuccessful in generating revenues and profits, we will be forced to further
reduce our costs, may be unable to repay our debt obligations as they become
due, or respond to competitive pressures, any of which circumstances would have
a material adverse effect on our business, prospects, financial condition and
results of operations. Additionally, if these funding sources or revenues and
profits do not materialize, and we are unable to secure additional financing, we
could be forced to reduce or cease our business operations.
We
will need to obtain significant additional financing to continue to operate our
business, including significant capital expenditures to complete the development
of our newly announced thin film manufacturing technology , and financing may be
unavailable or available only on disadvantageous terms which could cause the
Company to curtail its business operations and delay the execution of its
business plan
We have
in the past experienced substantial losses and negative cash flow from
operations during our development stage and have required financing, including
equity and debt financing, in order to pursue the commercialization of products
based on our technologies. We expect that we will continue to need significant
financing to operate our business including significant
capital expenditures to complete the development of our newly announced thin
film manufacturing technology. Although the Company entered into a
financing arrangement with Fusion Capital Fund II, LLC pursuant to which the
Company has the right over a 25-month period to receive $80,000 every two
business days under such financing arrangement unless our stock price equals or
exceeds $0.30, in which case we can sell greater amounts to Fusion Capital as
the price of our common stock increases, Fusion Capital shall not have the right
or the obligation to purchase any shares of our common stock on any business day
that the market price of our common stock is less than $0.20. As of
August 6, 2009, the Company’s stock was trading at approximately $0.12 and
therefore, the Company is not presently able to draw down on this financing
arrangement. In addition, until the registration statement underlying the
Fusion transaction is amended, the Company will not be able to draw down on the
Fusion financing agreement. Furthermore, there can be no assurance that
additional financing will be available or that the terms of such additional
financing, if available, will be acceptable to us. If additional financing is
not available or not available on terms acceptable to us, our ability to fund
our operations, develop and expand our sales network, maintain our research and
development efforts or otherwise respond to competitive pressures may be
significantly impaired. We could also be forced to curtail our business
operations, reduce our investments, decrease or eliminate capital expenditures
and delay the execution of its business plan, which would have a material
adverse affect on our business.
18
We
May Be Required To Raise Additional Financing By Issuing New Securities With
Terms Or Rights Superior To Those Of Our Shares Of Common Stock, Which Could
Adversely Affect The Market Price Of Our Shares Of Common Stock and Our
Business
We may
require additional financing to fund future operations, including expansion in
current and new markets, development and acquisition, capital costs and the
costs of any necessary implementation of technological innovations or
alternative technologies. We may not be able to obtain financing on favorable
terms, if at all. If we raise additional funds by issuing equity securities, the
percentage ownership of our current stockholders will be reduced, and the
holders of the new equity securities may have rights superior to those of the
holders of shares of common stock, which could adversely affect the market price
and the voting power of shares of our common stock. If we raise additional funds
by issuing debt securities, the holders of these debt securities would similarly
have some rights senior to those of the holders of shares of common stock, and
the terms of these debt securities could impose restrictions on operations and
create a significant interest expense for us which could have a materially
adverse affect on our business.
As
a result of a change to our plan of operations in the period ended June 30, 2009
we are working to develop new manufacturing technologies for thin film solar
cells, and our revenues and profits may never materialize if we are unable to
successfully complete our planned technology development or develop interest in
the licensure of this technology when completed.
We are
working to develop new manufacturing technologies for thin film solar cells. We
may experience delays, additional or unexpected costs and other adverse events
in connection with our project, including those associated with the equipment we
purchase from third parties or services we rely on from third parties.
Additionally, there can be no assurance that there will be market demand for the
technology upon completion or that our marketing capabilities will be
successful. As a result, we may not be able to realize revenues and profits, or
we may experience delays or reductions in to revenues and profits, and our
business could be materially adversely affected.
If
future products based on our technologies cannot be developed for manufacture
and sold commercially or if products based on our technology become obsolete or
noncompetitive, we may be unable to recover our investments or achieve
profitability which will have a materially adverse affect on our
business
There can
be no assurance that such research and development efforts will be successful or
that we will be able to develop commercial applications for our products and
technologies. Further, the areas in which we are developing technologies and
products are characterized by rapid and significant technological change. Rapid
technological development may result in our products becoming obsolete or
noncompetitive. If future products based on our technologies cannot be developed
for manufacture and sold commercially or our products become obsolete or
noncompetitive, we may be unable to recover our investments or achieve
profitability. In addition, the commercialization schedule may be delayed if we
experience delays in meeting development goals, if products based on our
technologies exhibit technical defects, or if we are unable to meet cost or
performance goals. In this event, potential purchasers of products based on our
technologies may choose alternative technologies and any delays could allow
potential competitors to gain market advantages.
There
is no assurance that the market will accept our technology or products once
development has been achieved which could have an adverse affect on our
business
There can
be no assurance that products based on our technologies will be perceived as
being superior to existing products or new products being developed by competing
companies or that such products will otherwise be accepted by consumers. The
market prices for products based on our technologies may exceed the prices of
competitive products based on existing technologies or new products based on
technologies currently under development by competitors. There can be no
assurance that the prices of products based on our technologies will be
perceived by consumers as cost-effective or that the prices of such products
will be competitive with existing products or with other new products or
technologies. If consumers do not accept products based on our technologies, we
may be unable to recover our investments or achieve
profitability.
19
Other
companies, many of which have greater resources than we have, may develop
competing products or technologies which cause products based on our
technologies to become noncompetitive which could have an adverse affect on our
business
We will
be competing with firms, both domestic and foreign, that perform research and
development, as well as firms that manufacture and sell solar products. In
addition, we expect additional potential competitors to enter the markets for
solar products in the future. Some of these current and potential competitors
are among the largest industrial companies in the world with longer operating
histories, greater name recognition, access to larger customer bases,
well-established business organizations and product lines and significantly
greater resources and research and development staff and facilities. There can
be no assurance that one or more such companies will not succeed in developing
technologies or products that will become available for commercial sale prior to
products based on our technologies, that will have performance superior to
products based on our technologies or that would otherwise render our products
noncompetitive. If we fail to compete successfully, our business would suffer
and we may lose or be unable to gain market share.
The
loss of strategic relationships used in the development of our products and the
systems and components necessary for the new manufacturing technologies we are
developing could impede our ability to complete and deliver our manufacturing
system and may have a material adverse affect on our business
We have
established a plan of operations under which a portion of our operations rely on
strategic relationships with third parties, to provide 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
may suffer the loss of key personnel or may be unable to attract and retain
qualified personnel to maintain and expand our business which could have a
material adverse affect on our business
Our
success is highly dependent on the continued services of a limited number of
skilled managers, scientists and technicians. The loss of any of these
individuals could have a material adverse effect on us. In addition, our success
will depend upon, among other factors, the recruitment and retention of
additional highly skilled and experienced management and technical personnel.
There can be no assurance that we will be able to retain existing employees or
to attract and retain additional personnel on acceptable terms given the
competition for such personnel in industrial, academic and nonprofit research
sectors.
Higher
raw material costs could negatively impact the perceived value of our technology
and our ability to successfully develop our products and technologies which
could have a material adverse affect on our business
Higher
costs for certain raw materials and commodities, principally glass, resin-based
polymers and industrial gases, as well as higher energy costs, could negatively
impact the costs associated with the use of our new manufacturing technologies
and reduce the perceived value for use of these new manufacturing
technologies. In addition, no assurances can be given that the
magnitude and duration of these cost increases or any future cost increases will
not have a larger adverse impact on our profitability and consolidated financial
position than currently anticipated. As part of our planned research and
development activities, we are attempting to reduce costs through improved
automation and substitution strategies. There can be no assurances that we will
succeed in these future cost-reduction efforts, which may be essential for the
continued development of our competitive presence.
Standards
For Compliance With Section 404 Of The Sarbanes-Oxley Act Of 2002 Are Uncertain,
And If We Fail To Comply In A Timely Manner, Our Business Could Be Harmed And
Our Stock Price Could Decline
Rules
adopted by the SEC, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of our assessment by our independent registered public accountants.
The standards that must be met for management to assess the internal control
over financial reporting as effective are new and complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards and will impose significant additional expenses on us. We may
encounter problems or delays in completing activities necessary to make an
assessment of our internal control over financial reporting. In addition, the
attestation process by our independent registered public accountants is new and
we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report on
such assessment, investor confidence and share value may be negatively
impacted.
20
Our
Common Stock Is Considered A “Penny Stock” And As A Result, Related
Broker-Dealer Requirements Affect It’s Trading And Liquidity.
Our
common stock is considered to be a “penny stock” since it meets one or more of
the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of
the Exchange Act. These include but are not limited to the following: (i) the
common stock trades at a price less than $5.00 per share; (ii) the common stock
is not traded on a “recognized” national exchange; (iii) the common stock is not
quoted on the NASDAQ Stock Market, or (iv) the common stock is issued by a
company with average revenues of less than $6.0 million for the past three (3)
years. The principal result or effect of being designated a “penny stock” is
that securities broker-dealers cannot recommend our Common Stock to investors,
thus hampering its liquidity.
Section
15(g) and Rule 15g-2 require broker-dealers dealing in penny stocks to provide
potential investors with documentation disclosing the risks of penny stocks and
to obtain a manually signed and dated written receipt of the documents before
effecting any transaction in a penny stock for the investor’s account. Potential
investors in our Common Stock are urged to obtain and read such disclosure
carefully before purchasing any of our shares.
Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives.
The
Trading Market In our Common Stock Is Limited And May Cause Volatility In The
Market Price.
Our
common stock is currently traded on a limited basis on the OTCBB. The OTCBB
provides significantly less liquidity than the NASDAQ Stock Market and the other
national markets. Quotes for stocks included on the OTCBB are not listed in the
financial sections of newspapers as are those for the NASDAQ Stock Market.
Therefore, prices for securities traded solely on the OTCBB may be difficult to
obtain.
The
quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists, and in recent years such
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many smaller companies like us. Thus,
the market price for our common stock is subject to volatility and holders of
common stock may be unable to resell their shares at or near their original
purchase price or at any price. In the absence of an active trading
market:
|
|
·
|
investors may have difficulty
buying and selling or obtaining market
quotations;
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|
|
·
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market visibility for our common
stock may be limited; and
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|
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·
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a lack of visibility for our
common stock may have a depressive effect on the market for our common
stock.
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21
Due to
the low price of the securities, many brokerage firms may not be willing to
effect transactions in the securities. Even if a purchaser finds a broker
willing to effect a transaction in these securities, the combination of
brokerage commissions, state transfer taxes, if any, and any other selling costs
may exceed the selling price. Further, many lending institutions will not permit
the use of such securities as collateral for any loans. Such
restrictions could have a materially adverse affect on our
business.
We
May Have Difficulty Raising Necessary Capital To Fund Operations As A Result Of
Market Price Volatility For Our Shares Of Common Stock.
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:
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|
·
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technological innovations or new
products and services by us or our
competitors;
|
|
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·
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additions or departures of key
personnel;
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·
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sales of our common
stock;
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|
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·
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our ability to integrate
operations, technology, products and
services;
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·
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our ability to execute our
business plan;
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·
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operating results below
expectations;
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·
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loss of any strategic
relationship;
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·
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industry
developments;
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·
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economic and other external
factors; and
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·
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period-to-period fluctuations in
our financial results.
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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 recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are successful,
we may require additional financing to continue to develop and exploit existing
and new technologies and to expand into new markets. The exploitation of our
technologies may, therefore, be dependent upon our ability to obtain financing
through debt and equity or other means.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
22
Item
5. Other information
Changes to Plan of
Operations
In
response to the slowdown in the global economy affecting the credit and equities
markets which has limited the Company’s access to financing, in the period ended
June 30, 2009, the Company began working to prepare an alternate plan of
operations to better address these limitations. While the Company continues to
work to secure additional financing for its new plan of operations, it has
implemented cost reductions to salaries, facility costs, and day to day
operations which have resulted in a reduction in monthly operating costs by
approximately 30% and the use of cash by approximately 45% compared to average
monthly operating costs in the January and February periods 2009.
Item
6. Exhibits and reports on Form 8-K -
(a)
Exhibits:
|
EXHIBIT
|
DESCRIPTION
|
|
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10.1
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Press
release announcing that it had begun to implement plans that would focus
the Company’s business development efforts on proprietary technology
development. (1)
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10.2
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Form
8-K related to a change in the Registrant’s Certifying Accountant and
dismissal of independent accountants. (2)
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31.1
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Certifications
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Certification Act of 2002 (3)
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31.2
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Certifications
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Certification Act of 2002 (3)
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32.1
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Certification
Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
the Sarbanes-Oxley Certification Act Of 2002 (3)
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32.2
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Certification
Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
the Sarbanes-Oxley Certification Act Of 2002
(3)
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(1)
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Incorporated by reference to
exhibits included with the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission dated June 19,
2009.
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(2)
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Incorporated
by reference to exhibits included with the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission dated July 22,
2009.
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(3)
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PROvided
herewith
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
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XSUNX,
INC.
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||
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Dated: August
10, 2009
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By:
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/s/ Tom M. Djokovich
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Tom
M. Djokovich,
Principal
Executive Officer
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||
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Dated:
August 10, 2009
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By:
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/s/ Jeff Huitt
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Jeff
Huitt
Chief
Financial Officer and Principal Financial and
Accounting
Officer
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||
23