Filed Pursuant to Rule 424(b)(3)
File No. 333-130972
XSUNX, INC.
72,879,263 SHARES OF COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
72,879,263 shares of our common stock. The selling stockholders may sell common
stock from time to time in the principal market on which the stock is traded at
the prevailing market price or in negotiated transactions.
The total number of shares sold herewith includes the following shares owned by
or to be issued to Cornell Capital Partners LP:
(i) up to 9,520,000 shares issuable upon conversion of secured
convertible debentures, including interest, at a fixed conversion
price of $0.10 per share;
(ii) up to 50,000,000 shares issuable upon conversion of secured
convertible debentures at a conversion price equal to the lesser of
$0.38 or 95% of the lowest daily volume weighted average price of
our common stock for the 30 trading days immediately preceding the
conversion date;
(iii) 4,250,000 shares issuable upon the exercise of warrants at $0.15 per
share;
(iv) 2,125,000 shares issuable upon the exercise of warrants at $0.20 per
share;
(v) 3,125,000 shares of common stock issuable upon the exercise of
warrants at $0.45 per share;
(vi) 1,250,000 shares of common stock issuable upon the exercise of
warrants at $0.55 per share; and
(vii) 2,544,031 shares previously issued.
We are also including 65,232 shares owned by another shareholder.
We are not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. We will, however, receive
proceeds from the exercise of warrants to purchase 10,750,000 shares of common
stock. All costs associated with this registration will be borne by us.
Our common stock currently trades on the Over the Counter Bulletin Board ("OTC
Bulletin Board") under the symbol "XSNX.OB."
On January 9, 2006, the last reported sale price for our common stock on the OTC
Bulletin Board was $.80 per share.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS TO READ ABOUT FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by XsunX,
Inc. with the Securities and Exchange Commission. The selling stockholders may
not sell these securities until the registration statement becomes effective.
This Prospectus is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
The date of this Prospectus is February 9, 2006
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 1
Risk Factors............................................................... 4
Forward Looking Statements................................................. 8
Use of Proceeds............................................................ 8
Management's Discussion and Analysis or Plan of Operation.................. 9
Business................................................................... 15
Description of Property.................................................... 21
Legal Proceedings.......................................................... 21
Directors and Executive Officers........................................... 22
Executive Compensation..................................................... 25
Market for Common Equity and Related
Stockholder Matters........................................................ 26
Security Ownership of Certain Beneficial Owners
and Management............................................................. 27
Selling Shareholder........................................................ 28
Certain Relationships and Related Transactions............................. 28
Description of Securities.................................................. 30
Plan of Distribution....................................................... 31
Legal Matters.............................................................. 33
Experts.................................................................... 33
Where You Can Find More Information........................................ 33
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities............................................. 33
Index to Consolidated Financial Statements................................. F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common stock. XsunX, Inc. is
referred to throughout this prospectus as "XsunX," "we" or "us."
GENERAL
We are developing new and innovative thin film solar cell designs and
manufacturing process with the intent to provide commercially viable solar cell
designs that convert sun light into electrical energy. The process for producing
electricity from sunlight is known as Photovoltaics. Photovoltaic ("PV") is the
science of capturing and converting sun light into electricity.
We are focusing our research and product development efforts on thin film PV
devices in an effort to capitalize on what we perceive as cost and application
diversity advantages to current rigid multi-crystalline silicon wafer
technologies. Our thin film cell designs employ between .2 microns to 1.5
microns of material thickness as opposed to an approximate 400 microns of
material thickness for multi-crystalline cell designs. This significant
reduction in cell thickness and flexibility of the completed cell structure
leads to the use of "thin film" terminology in describing the solar cell design.
The focus of our development efforts is to deliver two aspects of technologies
in the form of an integrated solution providing, a) commercially scalable
manufactured processes and equipment designed for the specific manufacture of
our thin film solar technologies, and, b) proprietary thin film solar cell
designs that address new application opportunities in the growing field of
Building Integrated Photovoltaics.
Building Integrated Photovoltaics or ("BIPV") in concept, allows photovoltaic
material, in the form of photoelectric panels, to be incorporated into the
design of building materials; thus, providing a new and smart way to integrate
additional sources of power production into the operation of buildings. As the
BIPV category of the photovoltaic industry is beginning its growth into the US,
and worldwide markets, we intend to attempt to achieve commercialization of BIPV
through a combination of innovation and patented thin film designs and
manufacturing techniques.
BIPV technology might eventually enable every building to be a virtual power
plant by utilizing the power of the sun, through the skin of the building, in an
aesthetically sound and structurally safe environment if its economics and
productability can be proven.
Our principal executive office is located at 65 Enterprise, Aliso Viejo,
California 92656 and our telephone number at that location is (949) 330-8060.
RECENT FINANCING TRANSACTIONS
12% SECURED CONVERTIBLE DEBENTURES
On July 14, 2005, we completed a Securities Purchase Agreement (the "Purchase
Agreement") with Cornell Capital Partners L.P. providing for the sale to Cornell
of 12% secured convertible debentures in the aggregate principal amount of
$850,000 (the "July Debentures") of which $400,000 was advanced immediately. The
balance of $450,000 was advanced on August 16, 2005. The Securities Purchase
Agreement contains standard representations and warranties on our part and also
limits us in certain activities as long as the Debentures remain outstanding.
Among other things, without Cornell's prior written consent, we are restricted
from entering into certain transactions with affiliates and issuing additional
securities at a below market price.
The July Debentures mature on the first anniversary of the date of issuance and
bear interest at the annual rate of 12%. We are required to make monthly
principal and interest commencing on the first day of the month following the
declaration of effectiveness of the registration statement of which this
prospectus forms a part or 120 days from the date of issuance of the July
Debentures, whichever occurs first. To date, we have made $47,217 in interest
payments under the July Debentures. All principal payments under the July
Debentures have been deferred until the maturity date.
Holders of the July Debentures may convert, at any time, the principal amount
outstanding under the July Debentures into shares of our common stock, at a
conversion price per share equal to $0.10.
Upon three-business day advance written notice, we may redeem the July
Debentures, in whole or part. In the event that the closing bid price of our
common stock on the date that we provide advance written notice of redemption or
on the date redemption is made exceeds the conversion price then in effect, the
redemption will be calculated at 120% of the July Debentures' face value.
Under the Purchase Agreement, we also issued to Cornell five-year immediately
exercisable warrants to purchase 4,250,000 and 2,125,000 shares of Common Stock
at $0.15 and $0.20, respectively (collectively, the "July Warrants"). Both the
July Warrants and the December Warrants discussed below contain a cashless
exercise provision that permits Cornell, if the shares underlying the July
Warrants and the December Warrants are not then registered or if we are in
default under the Debentures, to exercise the July Warrants and the December
Warrants by surrendering some or all of these warrants and in lieu of paying the
exercise price receiving a number of shares that is less than the number it
would have received in case of a cash exercise.
1
Assuming cash exercise of all of the July Warrants and the December Warrants, we
will receive $3,210,250. There can be no assurance that all warrants will be
exercised for cash, if at all.
10% SECURED CONVERTIBLE DEBENTURES
On December 12, 2005, we consummated a Securities Purchase Agreement (the
"December Purchase Agreement") dated December 12, 2005 with Cornell providing
for the sale to Cornell of our 10% secured convertible debentures in the
aggregate principal amount of $5,000,000 (the "December Debentures") of which
$2,000,000 was advanced immediately. The second installment of $2,000,000 was
advanced on January 12, 2006. The last installment of $1,000,000 will be
advanced three days prior to the date the registration statement is declared
effective.
The December Debentures mature on the third anniversary of the date of issuance
and we are not required to make any payments until the maturity date.
Holders of the December Debentures may convert at any time amounts outstanding
under the December Debentures into shares of our common stock at a conversion
price per share equal to the lesser of $0.38 or 95% of the lowest daily volume
weighted average price of our common stock for the 30 trading days immediately
preceding the date of conversion (the "Variable Market Price"). Unless waived by
us (such as in the event that we determine that it is in our best interest to
reduce the amount outstanding under the December Debentures without depleting
our available cash), the holders may not, together with their affiliates,
convert more than an aggregate of $350,000 in any 30-day period of principal
amount of the December Debentures at the Variable Market Price.
We have the right to redeem a portion or all amounts outstanding under the
December Debenture at a 15% redemption premium provided that the closing bid
price of our common stock is less than $0.38.
Under the December Purchase Agreement, we also issued to Cornell five-year
warrants to purchase 3,125,000 and 1,250,000 shares of common stock at $0.45 and
$0.55, respectively (together with the July Warrants, the "Warrants").
In connection with the December Purchase Agreement, we also entered into a
registration rights agreement providing for the filing of a registration
statement of which this prospectus forms a part registering the common stock
issuable upon conversion of the July Debentures and the December Debentures and
exercise of the Warrants. We are obligated to use our best efforts to cause the
registration statement to be declared effective no later than April 11, 2006 and
to insure that the registration statement remains in effect until all of the
shares of common stock issuable upon conversion of the July Debentures, the
December Debentures and exercise of the Warrants have been sold. In the event of
a default of our obligations under that registration rights agreement, including
our agreement to file it no later than January 11, 2006, or if the registration
statement is not declared effective by April 11, 2006, we are required to pay to
Cornell, as liquidated damages, for each month that the registration statement
has not been filed or declared effective, as the case may be, either a cash
amount or shares of our common stock equal to 2% of the liquidated value of the
July Debentures and the December Debentures.
The July Debentures and the December Debentures contemplate that we will repay
the entire outstanding principal and all accrued interest in cash. To the extent
that Cornell, at its discretion, elects to convert all or part of the debentures
into shares of common stock, it will extinguish or reduce the amounts due under
the debentures. Since the July Debentures and the December Debentures limit
Cornell's stock ownership to 4.9%, it may not be able to convert the debentures
at all times. Our obligation to repay the debentures continues at any time that
Cornell does not elect to convert the debentures. In the event Cornell does not
convert, non-payment of cash amounts due under the debenture will be considered
a default, irrespective of whether the failure to elect to convert was
discretionary on the part of Cornell or was imposed by the 4.9% limitation.
Our obligations under the July Purchase Agreement and the December Purchase
Agreement are secured by substantially all of our assets. As further security
for our obligations, we have deposited into escrow 26,798,418 shares of Common
Stock. In the event of a default, Cornell will have the right to vote these
shares and receive dividends with respect to the shares. Cornell will also have
the right to deliver a notice of default. As soon as practicable after receipt
of this notice, the escrow agent will release the escrowed shares to Cornell. In
addition, Tom Djokovich, our Chief Executive Officer, has granted a security
interest in 925,000 shares of Common Stock that he owns to secure the Company's
obligations under the July Purchase Agreement only.
Prior to executing the December Purchase Agreement, we had withdrawn the
registration statement that included common stock issued to Cornell and common
stock to be issued upon the conversion of the July Debentures and the exercise
of the July Warrants as well as common stock to be issued pursuant to an equity
line of credit extended by Cornell. We also agreed with Cornell to terminate
that equity line of credit. Pursuant to that termination agreement, we allowed
Cornell to retain 2,544,031 shares of our common stock representing the $390,000
commitment fee under the equity line of credit. In addition, we allowed
Newbridge Securities, Inc. to retain 65,232 shares of common stock issued as
compensation for placement agent services in connection with the equity line of
credit. All of these shares are included herein.
2
THIS OFFERING
Shares offered by Selling
Stockholders.................. Up to 72,879,263 shares, including 59,520,000
shares issuable upon conversion of secured
debentures, including interest and 10,750,000
shares issuable upon exercise of warrants of
which 4,250,000 warrants are exercisable at
$0.15, 2,125,000 warrants are exercisable at
$0.20 per share, 3,125,000 warrants are
exercisable at $0.45 per share and 1,250,000
warrants are exercisable at $0.55 per share*
Common Stock to be outstanding
after the offering............ 196,796,343
Use of Proceeds............... We will not receive any proceeds from the sale
of the common stock hereunder However, we will
receive proceeds from the cash exercise, if any,
of the warrants owned by the selling
stockholders.
Risk Factors.................. The purchase of our common stock involves a high
degree of risk. You should carefully review and
consider "Risk Factors" beginning on page 4
OTC Bulletin Board
Trading Symbol................ XSNX.OB
* Based on the current issued and outstanding number of shares of 123,917,080
(without giving effect to 26,798,418 shares that were issued and deposited into
escrow) as of January 9, 2005, and assuming issuance of all shares registered
herewith, the number of shares offered herewith represents approximately 37.03%
of the total issued and outstanding shares of common stock.
3
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 in
this prospectus. If any of the risks discussed in this prospectus 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 "Forward-Looking Statements."
RISKS RELATED TO OUR BUSINESS
WE HAVE NOT GENERATED ANY REVENUES AND MAY NEVER ACHIEVE PROFITABILITY
We are a development stage company and, to date, have not generated any
revenues. From inception through September 30, 2005, we had an accumulated
deficit of $6,204,284. For the years ended September 30, 2005 and 2004, we
incurred net losses of $1,400,839 and $1,509,068, respectively. We cannot assure
you that we can achieve or sustain profitability in the future. Our operations
are subject to the risks and competition inherent in the establishment of a
business enterprise. There can be no assurance that future operations will be
profitable. Revenues and profits, if any, will depend upon various factors,
including whether our product development can be completed, and if it will
achieve market acceptance. We may not achieve our business objectives and the
failure to achieve such goals would have an adverse impact on us. These matters
raise substantial doubt about our ability to continue as a going concern.
OUR AUDITORS HAVE INCLUDED A GOING CONCERN QUALIFICATION IN THEIR OPINION WHICH
MAY MAKE IT MORE DIFFICULT FOR US TO RAISE CAPITAL
Our auditors have qualified their opinion on our financial statements because of
concerns about our ability to continue as a going concern. These concerns arise
from the fact that we have not generated sufficient cash flows to meet our
obligations and sustain our operations. If we are unable to continue as a going
concern, you could lose your entire investment in us.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE
TERMS OR AT ALL
Since July 2005, we have received $4,850,000 in debt financing from Cornell
Capital Partners LP. Pursuant to a securities purchase agreement, it has
committed to advance an additional $1,000,000 at the time of effectiveness of
the registration statement. In the future, we may be required to raise
additional funds, particularly if we exhaust the funds advanced under that
agreement, are unable to generate positive cash flow as a result of our
operations and are required to repay the convertible debentures as a result of
Cornell Capital's failure to convert the debentures into common stock. There can
be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain additional capital may
reduce our ability to continue to conduct business operations. If we are unable
to obtain additional financing, we will likely be required to curtail our
research and development plans. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES
WHICH WOULD RESULT IN CONTINUED LOSSES AND MAY REQUIRE US TO CURTAIL OR CEASE
OPERATIONS
While we have made progress in the development of our products, it has not
generated any revenues and we are unable to project when we will achieve
profitability, if at all. As is the case with any new technology, we expect the
development process to continue. We cannot assure that our engineering resources
will be able to modify the product fast enough to meet market requirements. We
can also not assure that our product will gain market acceptance and that we
will be able to successfully commercialize the technologies. The failure to
successfully develop and commercialize the technologies would result in
continued losses and may require us to curtail or cease operations
OUR REVENUES ARE DEPENDENT UPON ACCEPTANCE OF OUR PRODUCTS BY LICENSEES; THE
FAILURE OF WHICH WOULD CAUSE TO CURTAIL OR CEASE OPERATIONS
We believe that virtually all of our revenues will come from the licensing of
our proprietary Power Glass(TM) solar electric glazing technology to major
manufacturers. We intend to offer non-exclusive licensing rights. As a result,
we will continue to incur substantial operating losses until such time as we are
able to generate revenues from licensing and service fees for our products
through our distribution partners. There can be no assurance that businesses and
customers will adopt our technology and products, or that businesses and
prospective customers will agree to pay the licensing and service fees for our
products. In the event that we are not able to significantly increase the number
of customers that license our products, or if we are unable to charge the
necessary license fees, our financial condition and results of operations will
be materially and adversely affected.
4
WE DO NOT MAINTAIN THEFT OR CASUALTY INSURANCE, AND ONLY MAINTAIN MODEST
LIABILITY AND PROPERTY INSURANCE COVERAGE AND THEREFORE WE COULD INCUR LOSSES AS
A RESULT OF AN UNINSURED LOSS.
We do not maintain theft or casualty insurance and we have modest liability and
property insurance coverage. We cannot assure that we will not incur uninsured
liabilities and losses as a result of the conduct of our business. Any such
uninsured or insured loss or liability could have a material adverse affect on
our results of operations.
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 attempt to transition from a
development state company to a company with commercialized products and
services. If we were to lose Mr. Djokovich, or any other key employees or
consultants, we may experience difficulties in competing effectively, developing
our technology and implementing our business strategies.
THE LOSS OF STRATEGIC RELATIONSHIPS USED IN THE DEVELOPMENT OF OUR PRODUCTS AND
TECHNOLOGY COULD IMPEDE OUR ABILITY TO COMPLETE OUR PRODUCT AND RESULT IN A
MATERIAL ADVERSE EFFECT CAUSING THE BUSINESS TO SUFFER.
We have established a plan of operations under which we rely on a strategic
relationship with MVSystems, Inc, to provide general facilities, personnel, and
expertise in the research and development of the technology and manufacturing
process underlying our Power Glass (TM) product. A loss of this relationship for
any reason could cause us to experience difficulties in completing the
development of our product and 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 and development.
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.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE NOTES AND WARRANTS
THAT ARE BEING REGISTERED IN THIS PROSPECTUS AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of January 9, 2006, we had 123,917,080 shares of common stock issued and
outstanding. In connection with the financing arrangements that we entered into
in July and December 2005, we also have outstanding secured convertible
debentures or an obligation to issue callable secured convertible notes that may
be converted into an estimated 21,657,894 shares of common stock at current
market prices, and outstanding warrants or an obligation to issue warrants to
purchase 10,750,000 shares of common stock.
5
On January 9, 2006, the closing bid price of our common stock was $.80. The
debentures issued in July and August 2005 are convertible at a fixed conversion
price of $0.10. The debentures issued in December are convertible at the lower
of $0.38 or 95% of the lowest daily volume weighted average price of our common
stock for the 30 trading days immediately preceding the date of conversion. The
debentures issued in December 2005 limit the principal amount to be converted at
the floating conversion price during any 30-day period to $350,000.
Nevertheless, the number of shares of common stock issuable upon conversion of
the outstanding secured convertible debentures issued in December 2005 may
increase if the market price of our stock declines. Upon effectiveness of the
registration statement of which this prospectus forms a part, all of the shares,
including all of the shares issuable upon conversion of the notes and upon
exercise of our warrants, may be sold without restriction. The sale of these
shares may adversely affect the market price of our common stock.
The variable price feature of our convertible debentures issued in December 2005
could require us to issue a substantially greater number of shares, which will
cause dilution to our existing stockholders. The number of shares we will be
required to issue upon conversion of the debentures will increase if the market
price of our stock decreases. This will cause dilution to our existing
stockholders.
THE LOWER THE STOCK PRICE, THE GREATER THE NUMBER OF SHARES ISSUABLE UNDER THE
CONVERTIBLE DEBENTURES
The number of shares issuable upon conversion of the debentures issued in
December 2005 is determined by the market price of our common stock prevailing
at the time of each conversion. The debentures issued in December 2005 limit the
principal amount to be converted at the floating conversion price during any
30-day period to $350,000. Nevertheless, the lower the market price, the greater
the number of shares issuable under the debentures. Upon issuance of the shares,
to the extent that holders of those shares will attempt to sell the shares into
the market, these sales may further reduce the market price of our common stock.
This in turn will increase the number of shares issuable under the debentures.
This may lead to an escalation of lower market prices and an increasing number
of shares to be issued. A larger number of shares issuable at a discount to a
continuously declining stock price will expose our shareholders to greater
dilution and a reduction of the value of their investment.
A LOWER STOCK PRICE WILL PROVIDE AN INCENTIVE TO CORNELL TO SELL ADDITIONAL
SHARES INTO THE MARKET
The number of shares that Cornell will receive under the convertible debentures
is determined by the market price of our common stock prevailing at the time of
each conversion. The lower the market price, the greater the number of shares
issuable under the debentures. As a result, Cornell will have an incentive to
sell as large a number of shares as possible to obtain a lower conversion price.
This will lead to greater dilution of exiting shareholders and a reduction of
the value of their investment
THE ISSUANCE OF OUR STOCK UPON CONVERSION OF THE DEBENTURES COULD ENCOURAGE
SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF
OUR STOCK PRICE AND MATERIALLY DILUTE EXISTING STOCKHOLDERS' EQUITY AND VOTING
RIGHTS.
The debentures have the potential to cause significant downward pressure on the
price of our common stock. This is particularly the case if the shares being
placed into the market exceed the market's ability to absorb the increased
number of shares of stock. Such an event could place further downward pressure
on the price of our common stock. , which presents an opportunity to short
sellers and others to contribute to the future decline of our stock price. If
there are significant short sales of our stock, the price decline that would
result from this activity will cause the share price to decline more so, which,
in turn, may cause long holders of the stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for the stock, our stock price will decline. If this
occurs, the number of shares of our common stock that is issuable upon
conversion of the debentures issued in December 2005 will increase, which will
materially dilute existing stockholders' equity and voting rights.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE,
OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE
DEBENTURES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD
REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
In July and December 2005, we entered into a Securities Purchase Agreements for
the sale of an aggregate of $5,850,000 principal amount of secured convertible
debentures of which to date $2,850,000 has been funded. Pursuant to a securities
purchase agreement, the investor has committed to advance an additional
$2,000,000 at the time of filing of the registration statement of which this
prospectus forms a part and $1,000,000 at the time of effectiveness of the
registration statement. These debentures are due and payable, with interest,
three years from their respective dates of issuance, unless sooner converted
into shares of our common stock. Any event of default such as our failure to
repay the principal or interest when due, our failure to issue shares of common
stock upon conversion by the holder, or our failure to timely file a
registration statement or have such registration statement declared effective,
could require the early repayment of the convertible debentures. We anticipate
that the full amount of the convertible debentures will be converted into shares
of our common stock, in accordance with the terms of these debentures. If we
were required to repay the convertible debentures, we would be required to use
our limited working capital and raise additional funds. If we were unable to
repay the debentures when required, the holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
6
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.OB."
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 no revenues to date, you may
consider any one of these factors to be material. Our stock price may fluctuate
widely as a result of any of the above listed factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. The payment of dividends on our
common stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.
OUR COMMON STOCK IS DEEMED TO BE PENNY STOCK WITH A LIMITED TRADING MARKET
Our common stock is currently listed for trading on the OTC Bulletin Board which
is generally considered to be a less efficient market than markets such as
NASDAQ or other national exchanges, and which may cause difficulty in conducting
trades and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
rules apply to non-NASDAQ companies whose common stock trades at less than $5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded in the OTC
Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to
obtain coverage for significant news events because major wire services, such as
the Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
7
FORWARD-LOOKING STATEMENTS
Our representatives and we may from time to time make written or oral statements
that are "forward-looking," including statements contained in this prospectus
and other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements within the
meaning of the Act. In addition, other written or oral statements which
constitute forward-looking statements may be made by us or on our behalf. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Important
factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital or to
obtaining the financing needed to implement its business plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
(i) insufficient revenues to cover operating costs.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by selling stockholders. We will receive no proceeds from
the sale of shares of common stock in this offering. However, we will receive
proceeds from the exercise, if any, of the warrants owned by the selling
stockholders.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Prospectus contains
forward-looking statements. The presentation of future aspects of XsunX, Inc.
("XsunX," the "Company" or "issuer") found herein is subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those reflected in our financial 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 our actual results to be materially different from
any future results expressed or implied by us in our financial statements.
Important facts that could prevent us 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 our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital to continue or expand our business, inability to raise
additional capital or financing to implement our business plans;
(e) failure to commercialize our 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 we will be profitable, we may not be able to
successfully develop, manage or market our products and services, we may not be
able to attract or retain qualified executives and technology personnel, our
products and services may become obsolete, government regulation may hinder our
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 our businesses.
We undertake 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 we file from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB filed by the
Company in 2005 and 2004 and any Current Reports on Form 8-K filed by the
Company.
For the year ended September 30, 2005, we have and continue to focus on the
development and refinement of commercially appealing solar cell designs,
proprietary manufacturing processes and facilities design that could be provided
to our future licensees as turn-key solutions for the mass production of Power
Glass(TM) thin films. A large part of our capital was used for product
development. However, this may begin to shift towards marketing, sales, and
business development in this new fiscal year ending September 30, 2006.
GROWTH, REVENUE AND DISTRIBUTION PLAN
We intend to market our integrated manufacturing systems as turnkey solutions
for the manufacture our current and future PV thin films designs. The
manufacturing systems will be sold to manufacturers as modular systems and
licensed for use in the manufacture our thin film designs. Manufacturers would
in turn agree to manufacture and distribute our PV thin films, or incorporate
the thin film PV technology into their product manufacturing process as an
"original equipment manufacturer" (OEM) and sell the finished product to their
consumers. No licenses or contracts now exist with any manufacturer.
We intend to target customers who are developing their own technology platforms
in which the manufacture of or the integration of our thin film solar cells
could play an important role. We will offer non-exclusive manufacturing licenses
and expects to earn a royalty on thin films manufactured. In selling the
manufacturing equipment and licensing the technology to manufacturers, we reduce
operating expenses and save capital in plant, property and equipment. As a
result, should we realize earnings, we intend to reinvest our retained earnings
in R&D in an effort to continuously develop related new technologies that will
help us achieve sustainable competitive advantages.
9
MARKETING STRATEGY
We intend to enhance, promote and support the idea that our manufacturing
systems and thin film technologies present a compelling and efficient solution
for the scalable manufacture of diverse photovoltaic thin films. In order to
create a favorable environment for sales, we plan to undertake advertising and
promotion efforts. These efforts may be outsourced and will require the services
of an advertising relations firm. We plan to interview various firms and select
those most capable of assisting us with comprehensive advertising and promotion
plans. We intend to commence building and staffing our marketing department to
accelerate these efforts in the first part of 2006. We have not yet finalized
the potential costs of our marketing strategy.
We will invest in small test campaigns before committing to large promotions or
marketing campaigns. Our initial marketing strategy we will be to market to
potential manufacturer partners in our target markets representing solar device
manufactures, glass, and building materials manufacturers.
PLAN OF OPERATIONS
We anticipate the 12-month capital operational requirements of the company to be
$4,500,000 dollars. Since our reorganization on September 30, 2003 we have
raised amounts necessary to finance operations through the placement of equity
capital in the form of one or more private offering's of common stock to
accredited investors. On July 14, 2005 and December 12, 2005 we issued
convertible debentures in the amount of $850,000, and $5,000,000, respectively
to an accredited investor. The net proceeds from the placement of equity capital
and the debentures will be applied to our 12 month plan of operations as
follows: (i) approximately $550,000 will be used to pay costs associated with
completion of product development of the Power Glass(R) product under our Phase
III development plan, (ii) approximately $675,000 will be used to pay costs
associated with the development of a 4-Terminal nano-crystalline solar cell
patent for commercialization purposes, (iii) approximately $1,700,000 will be
used for the manufacture of a marketable commercial scale manufacturing system,
(iv) approximately $210,000 will be used for the engineering and adaptation of
certain manufacturing devices and techniques to provide product manufacturing
demonstration capabilities, (v) approximately $50,000 will be used to purchase
testing and development equipment or expand existing facilities, (vi)
approximately $100,000 will be used to pay for third party engineering, testing,
and consulting services, (vii) approximately $485,000 will be used to pay
salaries and general administrative costs, and for intellectual property
protection, (viii) approximately $225,000 will be used to pay for sales and
market development, general competitive research and publicity costs, and (v)
approximately $505,000 will be used for general working capital.
We may change any or all of the budget categories in the execution of our
business attempts. None of the items is to be considered fixed or unchangeable.
We will need substantial additional capital to support our budget. We have no
revenues. No representation is made that any funds will be available when
needed. In the event funds cannot be raised when needed, we may not be able to
carry out our business plan, may never achieve sales or royalty income, and
could fail in our business as a result of these uncertainties.
We will need to seek additional financing for our budget.
Management believes the summary data and audit presented herein is a fair
presentation of our results of operations for the periods presented. Due to our
change in primary business focus and new business opportunities these historical
results may not necessarily be indicative of results to be expected for any
future period. As such, our future results may differ significantly from
previous periods.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005, COMPARED TO
FISCAL YEAR ENDED SEPTEMBER 30, 2004
We generated no revenues in the period ended September 30, 2005 as well as for
the same period in 2004.
We incurred expenses totaling $1,383,406 in 2005 compared to $1,528,193 in 2004.
The decrease of $144,787 resulted from the absence of a one time non-cash
warrant issuance expense of $900,000 for the licensure of patents accounted for
in the period ended September 30, 2004. Excluding this non-cash warrant expense
in the comparative analysis between the periods results in an increase of
$755,213 in normal and customary operational expenses for the period ending
September 30, 2005 as compared to the same period 2004.
Primary sources for the increase to operating expense of $755,213 include: an
increase of $371,930 in Research and Development activities totaling $501,423 as
compared to $129,493 incurred for the same period in 2004, an increase of
$109,773 in Public Relations activity totaling $116,413 as compared to activity
totaling $6,640 for the same period in 2004, an increase of $35,900 in Salaries
totaling $155,236 as compared to Salaries totaling $119,336 for the same period
in 2004, an increase in consulting fees of $301,000 to $320,944 in the period in
2005 compared to $19,900 in the period in 2004, an increase of $80,046 in Legal
and Accounting expenses totaling $107,249 as compared to Legal and Accounting
totaling $27,203 for the same period in 2004, an increase of $115,000 for Loan
Origination and Service fees as compared to $0 expenses for the same period in
2004, and an increase of $42,564 in General and Administrative expenses related
to an increase in travel, advertising, depreciation and business development
expenses. The $1,383,406 in operating expenses includes non-cash charges of
$360,944 for the issuance of unregistered stock for public relations, advisory
services, and financing fees in lieu of cash payment for services and financing
fees.
10
For the twelve months ended September 30, 2005, our consolidated net loss was
$(1,400,839), including an interest expense of $17,433 as compared to a
consolidated net loss of $(1,509,068) for the same period ended September 30,
2004, including an interes expense of $251. The decrease of $108,229 resulted
from the absence of a one time non-cash warrant issuance expense of $900,000 for
the licensure of patents accounted for in the period ended September 30, 2004.
Excluding this one time non-cash warrant expense, in the comparative analysis
between the period's, results in an increase of $791,771 in net loss for the
period ended September 30, 2005 as compared to the same period 2004. The net
loss per share was less than $(0.02) for the twelve month period ended September
30, 2005, compared to ($.01) per share loss in the prior year.
Due to our change in primary business focus in October 2003 and the developing
nature of our business opportunities these historical results may not
necessarily be indicative of results to be expected for any future period. As
such, future results of the Company may differ significantly from previous
periods. Since inception in 1997 we have accumulated deficits totaling
($6,204,284) to September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (deficit) at September 30, 2005 was $(718,380) as compared to
$(38,819) at September 30, 2004.
During the year ended, September 30, 2005, we used $1,049,650 net cash in
operating activities as compared to using $1,436,630 net cash for the year
ended, September 30, 2004. The decrease of $386,980 resulted from the absence of
a one time non-cash warrant issuance expense of $900,000 for the licensure of
patents accounted for in the period ended September 30, 2004. Excluding this one
time non-cash warrant expense, in the comparative analysis between the period's,
results in an increase of $513,020 in net cash used in operations for the period
ended September 30, 2005.This increase of net cash used in operations was
primarily a result of an increase of $371,930 in Research and Development
activities and an increase to operational costs associated with the development
of our business plan.
For the twelve months ended, September 30, 2005, our capital needs have
primarily been met from the proceeds of (i) private placement of common stock
made by us pursuant to Regulation S of the Act, as amended (the "Act"), to an
accredited investor at $0.15 per share which raised gross proceeds of $169,785;
(ii) private placements of common stock made by us pursuant to Regulation S of
the Act, at a variable price ranging from 25% to 30% of the closing bid price on
the date of the purchase of the stock, which raised gross proceeds of $301,283;
(iii) private placements of common stock made by the Company pursuant to
Regulation S of the Act, at prices ranging from $.0944 to $.0589, which raised
gross proceeds of $60,327; (iv) loans to us of $3,775 with a remaining balance
of $0.0; and (v) the sale of a secured convertible 12% debenture in the amount
of $850,000. Total cash provided by financing activities during the year ended
September 30, 2005 increased to $1,385,170 from $283,895 during the period ended
September 30, 2004. The increase of $1,101,275 was mainly attributable to an
increase of $248,725 in the sale of unregistered securities and the sale of a
$850,000 secured convertible 12% debenture.
CASH FLOWS
There were no cash flows provided by operations during the twelve months ended
September 30, 2005. Cash and cash equivalents at September 30, 2005 were
$255,853, an increase of $198,509 from September 30, 2004.
During the year ended, September 30, 2005, we used $191,995 for investing
activities as compared to $12,267, for the year ended, September 30, 2004. The
increased use of cash for investing activities resulted from an increase in the
acquisition of assets in the form of equipment and trademark rights.
We had, at September 30, 2005, working capital of $255,853. We anticipate that
there will not be sufficient cash generated from operations in the current year
necessary to fund our current and anticipated cash requirements. We plan to
obtain additional financing from equity and debt placements. We have been able
to raise capital in a series of equity and debt offerings in the past. While
there can be no assurances that we will be able to obtain such additional
financing, on terms acceptable to us and at the times required, or at all, we
believe that sufficient capital can be raised in the foreseeable future. On
December 12, 2005 we sold a secured 10% convertible debenture in the amount of
$5,000,000.
12% SECURED CONVERTIBLE DEBENTURES
On July 14, 2005, we completed a Securities Purchase Agreement (the "Purchase
Agreement") with Cornell Capital Partners L.P. providing for the sale to Cornell
of 12% secured convertible debentures in the aggregate principal amount of
$850,000 (the "July Debentures") of which $400,000 was advanced immediately. The
balance of $450,000 was advanced on August 16, 2005. The Securities Purchase
Agreement contains standard representations and warranties on our part and also
limits us in certain activities as long as the Debentures remain outstanding.
Among other things, without Cornell's prior written consent, we are restricted
from entering into certain transactions with affiliates and issuing additional
securities at a below market price.
The July Debentures mature on the first anniversary of the date of issuance and
bear interest at the annual rate of 12%. We are required to make monthly
principal and interest commencing on the first day of the month following the
declaration of effectiveness of the registration statement of which this
prospectus forms a part or 120 days from the date of issuance of the July
Debentures, whichever occurs first. To date, we have made $47,217 in payments
under the July Debentures. All principal payments under the July Debentures have
been deferred until the maturity date.
11
Holders of the July Debentures may convert, at any time, the principal amount
outstanding under the July Debentures into shares of our common stock, at a
conversion price per share equal to $0.10 Upon three-business day advance
written notice, we may redeem the July Debentures, in whole or part. In the
event that the closing bid price of our common stock on the date that we provide
advance written notice of redemption or on the date redemption is made exceeds
the conversion price then in effect, the redemption will be calculated at 120%
of the July Debentures' face value.
Under the Purchase Agreement, we also issued to Cornell five-year immediately
exercisable warrants to purchase 4,250,000 and 2,125,000 shares of Common Stock
at $0.15 and $0.20, respectively (collectively, the "July Warrants"). Both the
July Warrants and the December Warrants discussed below contain a cashless
exercise provision that permits Cornell, if the shares underlying the July
Warrants and the December Warrants are not then registered or if we are in
default under the Debentures, to exercise the July Warrants and the December
Warrants by surrendering some or all of these warrants and in lieu of paying the
exercise price receiving a number of shares that is less than it would have
received in case of a cash exercise. Assuming cash exercise of all of the July
Warrants and the December Warrants, we will receive $3,210,250. There can be no
assurance that all warrants will be exercised for cash, if at all.
10% SECURED CONVERTIBLE DEBENTURES
On December 12, 2005, we consummated a Securities Purchase Agreement (the
"December Purchase Agreement") dated December 12, 2005 with Cornell providing
for the sale to Cornell of our 10% secured convertible debentures in the
aggregate principal amount of $5,000,000 (the "December Debentures") of which
$2,000,000 was advanced immediately. The second installment of $2,000,000 was
advanced on January 12, 2006. The last installment of $1,000,000 will be
advanced three days prior to the date the registration statement is declared
effective.
The December Debentures mature on the third anniversary of the date of issuance
and we are not required to make any payments until the maturity date.
Holders of the December Debentures may convert at any time amounts outstanding
under the December Debentures into shares of our common stock at a conversion
price per share equal to the lesser of $0.38 or 95% of the lowest daily volume
weighted average price of our common stock for the 30 trading days immediately
preceding the date of conversion (the "Variable Market Price"). Unless waived by
us (such as in the event that we determine that it is in our best interest to
reduce the amount outstanding under the December Debentures without depleting
our available cash), the holders may not, together with their affiliates,
convert more than an aggregate of $350,000 in any 30-day period of principal
amount of the December Debentures at the Variable Market Price.
We have the right to redeem a portion or all amounts outstanding under the
December Debenture at a 15% redemption premium provided that the closing bid
price of our common stock is less than $0.38.
Under the December Purchase Agreement, we also issued to Cornell five-year
warrants to purchase 3,125,000 and 1,250,000 shares of common stock at $0.45 and
$0.55, respectively (collectively, the "Warrants").
In connection with the December Purchase Agreement, we also entered into a
registration rights agreement providing for the filing of a registration
statement of which this prospectus forms a part registering the common stock
issuable upon conversion of the July Debentures and the December Debentures and
exercise of the warrants. We are obligated to use our best efforts to cause the
registration statement to be declared effective no later than April 11, 2006 and
to insure that the registration statement remains in effect until all of the
shares of common stock issuable upon conversion of the July Debentures, the
December Debentures and exercise of the July Warrants and the December Warrants
have been sold. In the event of a default of our obligations under that
registration rights agreement, including our agreement to file it no later than
January 11, 2006, or if the registration statement is not declared effective by
April 11, 2006, we are required pay to Cornell, as liquidated damages, for each
month that the registration statement has not been filed or declared effective,
as the case may be, either a cash amount or shares of our common stock equal to
2% of the liquidated value of the July Debentures and the December Debentures.
The July Debentures and the December Debentures contemplate that we will repay
the entire outstanding principal and all accrued interest in cash. To the extent
that Cornell, at its discretion, elects to convert all or part of the debentures
into shares of common stock, it will extinguish or reduce the amounts due under
the debentures. Since the July Debentures and the December Debentures limit
Cornell's stock ownership to 4.9%, it may not be able to convert the debentures
at all times. Our obligation to repay the debentures continues at any time that
Cornell does not elect to convert the debentures, irrespective of whether the
failure to elect to convert was discretionary on the part of Cornell or was
imposed by the 4.9% limitation.
Our obligations under the July Purchase Agreement and the December Purchase
Agreement are secured by substantially all of our assets. As further security
for our obligations, we have deposited into escrow 26,798,418 shares of Common
Stock. In the event of a default, Cornell will have the right to vote these
shares and receive dividends with respect to the shares. Cornell will also have
the right to deliver a notice of default. As soon as practicable after receipt
of this notice, the escrow agent will release the escrowed shares to Cornell. In
addition, Tom Djokovich, our Chief Executive Officer, has granted a security
interest in 925,000 shares of Common Stock that he owns to secure the Company's
obligations under the July Purchase Agreement only.
12
Prior to executing the December Purchase Agreement, we had withdrawn the
registration statement that included common stock issued to Cornell and common
stock to be issued upon the conversion of the July Debentures and the exercise
of the July Warrants as well as common stock to be issued pursuant to an equity
line of credit extended by Cornell. We also agreed with Cornell to terminate
that equity line of credit. Pursuant to that termination agreement, we allowed
Cornell to retain 2,544,031 shares of our common stock representing the $390,000
commitment fee under the equity line of credit. In addition, we allowed
Newbridge Securities, Inc. to retain 65,232 shares of common stock issued as
compensation for placement agent services in connection with the equity line of
credit.
We believe that the funds received and to be received from Cornell will be
sufficient to fund and expand our business over the next 12months. If for some
reason we are required to repay the entire $5,850,000 under the convertible
debentures, , we may have to obtain additional operating capital from other
sources to enable us to execute our business plan. We anticipate that we will
obtain any additional required working capital through the private placement of
Common Stock to domestic accredited investors pursuant to Regulation D of the
Securities Act of 1933, as amended (the "Act"), or to offshore investors
pursuant to Regulation S of the Act. There is no assurance that we will obtain
the additional working capital that we need through the private placement of
Common Stock. In addition, such financing may not be available in sufficient
amounts or on terms acceptable to us.
NET OPERATING LOSS
For federal income tax purposes, we have net operating loss carry forwards of
approximately $6,204,284 as of September 30, 2005. These carry forwards will
begin to expire in 2010. The use of such net operating loss carry forwards to be
offset against future taxable income, if achieved, may be subject to specified
annual limitations.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2005 COMPARED TO
THE SAME PERIOD IN 2004
We generated no revenues in the period ended June 30, 2005 as well as for the
same period in 2004. We incurred operating expenses totaling $282,343 for the
three months ended June 30, 2005 compared to $122,213 for the same period in
2004. Primary sources for the increase to operating expense of $160,130 include:
an increase of $82,665 in Research and Development activities, an increase of
$42,295 in Public Relations activity, and an increase of $35,170 in General and
Administrative expenses related to an increase in legal, accounting and business
development expenses. The $282,343 operating expenses includes non-cash charges
of $22,950 for the issuance of unregistered stock for business development and
advisory services in lieu of cash payment for services.
The net loss for the three months ended June 30, 2005 was ($282,245) as compared
to a net loss of ($122,213) for the same period 2004. The increase of $160,032
includes (i) an increase in research and development expenditures of $82,665
which is anticipated to continue to increase for the foreseeable future as we
further our efforts to complete the commercial development of a licensable
process for the manufacture of semi-transparent solar electric glazing
technologies and (ii) an increase of $77,367 in General and Administrative
expenses attributed to our business development and investor awareness efforts.
These expenses are anticipated to continue to increase as we continue the
development of our business plan as a developer and provider of solar electric
technologies.
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED JUNE 30, 2005 COMPARED TO
SAME PERIOD ENDED JUNE 30, 2004
We had no revenues in the nine-month period ended June 30, 2005 as well as for
the same period in 2004.
We incurred operating expenses totaling $652,765 in the nine-month period ended
June 30, 2005 compared to $228,355 in the same period ended June 30, 2004. The
major components of the expenses in the nine-month period were Contract R&D of
$357,646, salaries of $120,144, legal and accounting fees of $49,783, public
relations expenses of $81,871, and general and administrative expenses of
43,312. These expenses were all incurred in preparing to commercialize a
licensable process for the manufacture of semi-transparent solar electric
glazing technologies.
We incurred consolidated net loses of ($652,249) and ($228,355) in the
nine-month period ended June 30, 2005 and 2004 respectively. The associated net
loss per share was nominal in the nine-month period ended June 30, 2005 and
2004.
We expect the trend of losses to continue at an accelerated rate in future
quarters until we are able to begin sales of significance of which there is no
assurance
13
LIQUIDITY AND CAPITAL RESOURCES
We had cash at June 30, 2005 of $3,620 and prepaid expenses in the amount of
$43,500 equaling total current assets of $47,120 as compared to cash of $37,344
in cash and prepaid expenses in the amount of $20,000 equaling total current
assets of $57,344 as of September 30, 2004. We had a net working capital
(deficit) of ($306,173) as compared to a working capital (deficit) of ($38,819)
at September 30, 2004. There were no cash flows provided from operations during
the nine-month period ended June 30, 2004 and increases to general,
administrative, research and development expenses in these periods resulted in
an overall increase to working capital deficits.
Cash flow from financing activities used in operating activities during the
nine-month period ended, June 30, 2005, was ($380,894) as compared to using
($112,416) for the same period 2004. The increase of cash used in operations of
$268,478 included (i) an increase in research and development expenses of
$82,665 (ii) non-cash charges of $34,000 for un-registered stock issued for
investor relations and advisory services in lieu of cash payments (iii) and an
increase of $151,813 in general and administrative expenses in the commercial
development of our new business objectives. The value of the stock issued for
services was determined by using the value of the last sale closing price or a
monthly average closing price as quoted on the OTCBB on the date of issuance.
For the nine-months ended June 30, 2005, our capital needs have been met from
the proceeds of a series of private placements of Common Stock. We completed
private placements of our common stock pursuant to Regulation S totaling
$531,394.97 in the nine-months ended June 30, 2005 of which $40,260 was
completed in the quarter ended June 30, 2005 as compared to $179,212 for the
nine-months ended June 30, 2004. The proceeds from the above sales of
unregistered securities were used to fund our research and developments and
day-to-day operations and to pay the accrued liabilities associated with these
operations.
Cash and cash deposits at June 30, 2005 were $47,500, a decrease of $125,494
from March 31, 2005. We had, at June 30, 2005, a working capital (deficit) of
($306,173).We anticipate that there will not be sufficient cash generated from
operations in the current year necessary to fund our current and anticipated
cash requirements. We are currently engaged in efforts to obtain additional
financing from equity and debt placements as discussed immediately below.
14
BUSINESS
COMPANY HISTORY
We were incorporated in Colorado on February 25, 1997, under the name Sun River
Mining Inc. Effective September 24, 2003, we completed a Plan of Reorganization
and Asset Purchase Agreement with Xoptix, Inc., a California corporation.
Pursuant to the Plan of Reorganization, we issued 110,530,000 (post reverse
split) common shares and changed our name to XsunX, Inc. Prior to the Plan we
had no tangible assets and insignificant liabilities.
Also pursuant to the Plan of Reorganization, we acquired the following three
patents for 70,000,000 shares (post reverse split one for twenty): No. 6,180,871
for Transparent Solar Cell and Method of Fabrication (Device), granted on
January 30, 2001; No. 6,320,117 for Transparent Solar Cell and Method of
Fabrication (Method of Fabrication), granted on November 20, 2001; and No.
6,509,204 for Transparent Solar Cell and Method of Fabrication (formed with a
Schottky barrier diode and method of its manufacture), granted on January 21,
2003.
OVERVIEW
We are developing new and innovative thin film solar cell designs and
manufacturing process with the intent to provide commercially viable solar cell
designs that convert sun light into electrical energy. The process for producing
electricity from sunlight is known as Photovoltaics. Photovoltaic ("PV") is the
science of capturing and converting sun light into electricity.
We are focusing our research and product development efforts on thin film PV
devices in an effort to capitalize on what we perceive as cost and application
diversity advantages to current rigid multi-crystalline silicon wafer
technologies. Our thin film cell designs employ between .2 microns to 1.5
microns of material thickness as opposed to an approximate 400 microns of
material thickness for multi-crystalline cell designs. This significant
reduction in cell thickness and flexibility of the completed cell structure
leads to the use of "thin film" terminology in describing the solar cell design.
The focus of our development efforts is to deliver two aspects of technologies
in the form of an integrated solution providing, a) commercially scalable
manufactured processes and equipment designed for the specific manufacture of
our thin film solar technologies, and, b) proprietary thin film solar cell
designs that address new application opportunities in the growing field of
Building Integrated Photovoltaics.
Building Integrated Photovoltaics or ("BIPV") in concept, allows photovoltaic
material, in the form of photoelectric panels, to be incorporated into the
design of building materials; thus, providing a new and smart way to integrate
additional sources of power production into the operation of buildings. As the
BIPV category of the photovoltaic industry is beginning its growth into the US,
and worldwide markets, we intend to attempt to achieve commercialization of BIPV
through a combination of innovation and patented thin film designs and
manufacturing techniques.
BIPV technology might eventually enable every building to be a virtual power
plant by utilizing the power of the sun, through the skin of the building, in an
aesthetically sound and structurally safe environment if its economics and
productability can be proven.
PRODUCT DEVELOPMENT
The first of our product development efforts is Power Glass(TM) - an innovative
thin film solar technology that is intended to allow windows to produce
electricity from the power of the sun without significantly altering the
appearance or use of the window or transparent surface. Using proprietary and
patented solar cell designs and manufacturing processes, we are focused on the
development of thin film solar cell designs for semi-transparent coatings on
thin flexible plastics that create large area monolithic in appearance solar
cell structures that you can see through.
The design of the Power Glass solar cell provides for the manufacture of
numerous small cells on thin transparent flexible plastics. As part of the
manufacturing process numerous individual cells are produced simultaneously on
rolls of thin plastic substrates and interconnected using minimally apparent
segmentations. The result is a large area integrated solar cell device that is
monolithic or uniform in appearance and simulates tinted solar control films
used in window shading applications. We believe the advantages to the use of our
films in solar glass designs, over current solar glass designs, lie in improved
esthetic appearance, reduced manufacturing or assembly requirements, and lower
finished product costs.
These cells are single-junction amorphous silicon based (a-Si) solar cells that
depending on the degree of light transmission, or transmisivity, are expected to
operate at 4% + efficiencies. That is approximately 4 or more watts of direct
current can be produced per square foot of Power Glass film. While lower in
efficiency than opaque thin film multi-junction amorphous silicon at
approximately 5.3-6.4%, and rigid silicon wafers at 12-15% efficiencies the
Power Glass films benefit from cost reductions in the manufacturing process. We
believe that the following combined attributes will provide Power Glass films a
competitive advantage while at the same time addressing architectural glass
facade applications that have been under utilized as a platform for the
integration of photovoltaic technologies;
15
o Low temperature processing techniques of (<150C) allow the use less
expensive plastic or polyester substrates that will not be exposed to
higher temperature manufacturing processes of multi-junction amorphous at
(250C) and silicon wafer at (600-800C)
o Significant reductions in the amount of silicon used with only .2 microns
for Power Glass as compared to 1 micron for multi-junction amorphous, and
400 microns for silicon wafers.
o Fully integrated large area solar modules as part of the manufacturing
process on rolled substrate materials that can be integrated into glass
assemblies.
As part of our plan to develop new and innovative solar cell designs, and use
applications, we expanded our business focus in October 2005 to include the
development of thin film opaque solar cell designs and manufacturing methods.
The focus of this product development will be aimed at the commercialization of
U.S. Provisional Patent Application serial number 60/536,151 - three terminal
and four terminal solar cells, solar cell panels, and method of manufacture. We
refer to the design of this solar cell as a 4 terminal solar cell and believes
that it may provide a number of improvements over current multi-junction solar
cell deigns.
This unique 4 terminal solar cell design uses a combination of thin film
transparent cell technology, derived from our Power Glass initiative, with that
of a thin film nano-crystalline solar cell structure. We believe that the
combination of these two technologies into a single device holds an opportunity
to deliver low cost, high efficiency, flexible, and light weight solar cells
providing performance characteristics commonly found only in various forms of
expensive crystalline wafer technologies.
Preliminary and rudimentary laboratory tests of this technology have produced
conversion efficiencies of 9.9%. We believe that through the further refinement
of the cell structure deposition processes and enhanced material, open circuit
voltage, and band gap properties the 4 terminal thin film device may provide
conversion efficiencies approaching 14-15%, although this is not assured nor is
it proven in lab tests.
The design of the 4 terminal thin film solar cell provides several advantages to
existing multi-junction solar cell designs. A primary benefit is that the 4
terminal cell does not require electrical current matching between each cell.
This circumvents a common problem plaguing multi-junction devices that can cause
reduced overall solar cell power output. Stability issues are also addressed
through the use of low band gap nano-crystalline junction materials and
ultra-thin amorphous silicon materials to create a stable and efficient solar
cell stack. Low temperature processing capabilities of this design may further
increase manufacturing efficiencies allowing the use of less expensive substrate
materials.
The decision to diversify our product development efforts to include opaque
solar cell designs was fueled by what we see as growth opportunities for
domestic and international demand in opaque solar cell products and
applications. In countries such as China, Japan, Germany, and the U.S., there is
a growing trend supporting the increased use of green building designs promoting
the use of integrated solar technologies within building materials. We
anticipate that the development of a stable, high efficiency, thin film solar
cell could provide building material manufacturers with a preferred alternative
to the use of lower efficiency multi-junction thin films and the more costly
multi-crystalline solutions.
The process of integrating renewable power generating properties into building
materials such as glass and onto buildings is known as Building Integrated
Photovoltaics or "BIPV." If our research efforts produce a design that provides
more efficiency of power production at economic costs, we intend to be a leader
in the design and delivery of BIPV thin film designs and manufacturing methods.
We believe that our thin film designs could provide a solution for the wide
scale integration of BIPV energy producing products into living and working
environments - all without causing disruptive and costly changes to lifestyles.
Upon the completion of our commercialization process we anticipate the majority
of revenues to be derived from the sale and licensure of its manufacturing
process equipment and solar cell designs.
COMPANY SPONSORED RESEARCH AND DEVELOPMENT
Management has established a plan under which we are conducting research to
commercialize our technologies and developing new technology through the
contracting for research, development and planning for commercialization
processes with certain qualified facilities that specialize in our technology.
Management believes this product development process provides us with the
fastest path to marketable products, the maximization of corporate resources,
and, the broadest access to capable device, optical and material engineering
facilities, and technical expertise.
In June 2004 we established, and continue to maintain, a primary strategic
relationship with Colorado based MVSystems, Inc. that designs, builds, and
delivers state-of-the-art manufacturing tools designed specifically for the thin
film semiconductor market. MVSystems, Inc. ("MVSystems") is equipped with both
the technical staff and tools necessary for the development and
commercialization of XsunX technologies. The terms of the working relationship
provides us with complete R&D facilities without mark-up for profit on the use
of staff and equipment. In return MVSystems received warrants for the purchase
of our common stock. The objective of this ongoing plan is to provide us with
technical expertise necessary for the development of manufacturing techniques
necessary for the development of demonstrable and marketable manufacturing
techniques and thin film solar cell designs.
16
In September 2004 we increased our patent and technology assets by acquiring an
exclusive royalty free license from MVSystems to a suite of patents and
technologies specific to the design and manufacture of its semi-transparent
solar electric glazing initiative, Power Glass. In October of 2005 we further
expanded our licensing rights with MVSystems to include the design and
manufacture of opaque solar cell designs thereby also expanded our intended
product base to include both semi-transparent and non-transparent thin film
solar cell designs, and manufacturing methods. We believe that the licensed
technologies provide us with key aspects to facilitate development efforts and
which may enable designs for the commercial viability of future products.
As part of the October 2005 license expansion with MVSystems we also received
the benefit of equipment manufacturing services from MVSystems under an "at
cost, without mark up for profit, plus ten percent" pricing structure. This
provided us with access to equipment manufacturing facilities and the ability to
market and deliver integrated manufacturing systems capable of producing its
thin film solar cell designs. During our operating history MVSystems has
designed, constructed, installed, and provided support for over 70 systems
ranging from small research and development systems to multi-megawatt production
systems.
For the year ended September 30, 2005, we committed 36% or $501,423 of our
operating budget towards product development and another $181,995 was used for
the addition of development equipment. We intend to continue to focus on the
development and refinement of solar cell designs, proprietary manufacturing
processes, and facilities design that could be provided to our future licensees
as turnkey solutions for the core requirements necessary for the mass production
of our thin film designs. A large part of our capital is used for on going
product design development efforts.
At present we continue to develop our Power Glass(TM) process for future
commercial applications. Areas of current process development include:
(a) Process development on thin-film sheet and rolled polymers, plastics, and
metals (b) Qualify deposition processes and enhance material, open circuit
voltage, and band gap properties (c) Complete the integration of reel-to-reel
processing systems into the manufacturing process; and (d) Refine and integrate
cell segmentation process into manufacturing process
We have and continue to make investments in the development of intellectual
property assets as part of our business plan. For the year ending September 30,
2006 we have developed a plan of operations that commits 34% of our budget or
$1,535,000 to research and development, and another 37% of its budget or
$1,700,000 to the manufacture of our first production line system for eventual
re-sale to future licensees. The purpose of these investments is to develop and
market patented and proprietary solar electric thin film designs and
manufacturing processes for sale and licensure to target markets.
PRODUCT DESIGN STRATEGY
Our development effort is intended to deliver two aspects of marketable
technologies in the form of an integrated solution providing, a) commercially
scalable manufactured processes and equipment designed for the specific
manufacture of our thin film solar technologies, and b) proprietary thin film
solar cell designs that address new application opportunities. The manufacture
and sale of these items as a systems provides us with the ability to deliver our
thin films technologies as an integrated licensable design.
Our manufacturing systems design is based upon its licensees from MVSystems to
combine industry standards of in-line roll-to-roll processing techniques with
the exact processing capabilities of vacuum deposition cluster tool systems.
While in-line roll-to-roll processing systems are widely used in the manufacture
of thin film solar cells, their ability to provide higher unit volumes comes at
the cost of reduced solar cell efficiency due to cross contamination of
materials, the inefficient use of materials, and a manufacturing design that is
rigid and not easily adaptable to increased scale and the introduction of new
technologies.
Conversely multi-chamber based cluster tool systems are modular in design
allowing for expandability, the introduction of new technologies, provide the
extreme control and exacting standards necessary to produce such high value
items as thin film transistors, and rigid crystalline solar cells, but cluster
tool systems sacrifice throughput resulting in lower unit volumes and yield.
We believe that the selective integration of the better attributes of each of
these separate system types provides a hybrid type of system for use in the
fabrication of an array of new thin film devices on flexible substrates. It is
this design that we have an exclusive license for from MVSystems, among other
technology. We believe that these patented manufacturing designs may offer
economies of increased throughput resulting in yield advantages, while providing
expandability of manufacturing capabilities and the introduction of new
technologies at reduced cost from present models.
In additional benefit to the hybrid system is the ability to employ the use of a
smaller initial foot print, or facilities area, requiring less initial capital
expenditure. As production requirements increase, the efficiencies of
replicating only portions of the system design to move from single to
multi-megawatt capabilities may provide in theory improved cost-competitiveness.
Ultimately, multi-megawatt factories producing thin film solar cells may be an
enabling factor in achieving the necessary price thresholds required for solar
to compete with traditional power generation choices.
17
TRADEMARK, PROPRIETARY TECHNOLOGY AND PATENTS
We entered into an agreement for the purchase of the U.S. registered trademark
"Power Glass(TM)" and Internet domain name PowerGlass.com in May 2004 from
Western Gas and Electric Company, a California corporation. We have not been
issued registered trademarks for our "XsunX" trade name. We may file trademark
and trade name applications with the United States Office of Patents and
Trademarks for our proposed trade names and trademarks.
In September 2003 we were assigned the rights to three patents as part of an
Asset Purchase Agreement with Xoptix Inc., a California corporation. The patents
acquired were No. 6,180,871 for Transparent Solar Cell and Method of Fabrication
(Device), granted on January 30, 2001; No. 6,320,117 for Transparent Solar Cell
and Method of Fabrication (Method of Fabrication), granted on November 20, 2001;
and No. 6,509,204 for Transparent Solar Cell and Method of Fabrication (formed
with a Schottky barrier diode and method of its manufacture), granted on January
21, 2003.
In addition, we licensed the patent and technology portfolio of MVSystems, Inc.,
a Colorado corporation ("MVSystems") in September 2004. The license granted us
the royalty free exclusive rights for use by us in our attempt to establish a
commercially viable process for the manufacture of semi-transparent solar cells
and solar electric glazing processes and, accordingly, included all MVSystems
technology, know how, and resources which are part of or related to the licensed
patents and technology that was then or may become applicable or beneficial to
the furtherance of our business objectives in the future. The license was
exclusive as to technology pertaining to our field of use as it pertains to the
business of developing, commercializing and licensing processes for the
manufacture of semi-transparent (greater than 5% transparency) solar cells or
photovoltaic glazing technologies.
In October of 2005 we further expanded our licensing rights with MVSystems to
include the design and manufacture of opaque solar cell designs thereby also
expanding the Company's intended product base to include both semi-transparent
and non-transparent thin film solar cell designs, and manufacturing methods. We
believe that the licensed technologies provide them with key aspects to
successful completion of our product development efforts, the commercial
viability of future products, and the ability to deliver those products.
The following are two of the patents licensed from MVSystems that are management
believes to be beneficial to the development of scalable manufacturing processes
for its thin film technology. Semiconductor Vacuum Deposition System And Method
Having A Reel-To-Reel Substrate Cassette: US6, 258,408 B1: July 10th, 2001.
(Method of Fabrication); and US Provisional Patent Application serial number
60/536,151- three terminal and four terminal solar cells, solar cell panels, and
method of manufacture. (Device and Method of Fabrication)
As part of the October 2005 license expansion with MVSystems we also received
the benefit of equipment manufacturing services from MVSystems under a pricing
structure of cost, without mark up for profit, plus ten percent. This provided
us with access to initial equipment manufacturing facilities and an initial
ability to market and deliver integrated manufacturing systems capable of
producing its thin film solar cell designs. During our operating history
MVSystems has designed, constructed, installed, and provided support for over 70
systems ranging from small research and development systems to multi-megawatt
production systems. We may have to seek additional facilities if demand were to
exceed MVSystems' delivery capacity.
We continue to develop additional processes, techniques, and device designs.
These research and development efforts may provide the Company with additional
proprietary technology that may lead to the filing of new provisional and patent
applications.
APPLICATIONS FOR OUR PHOTOVOLTAIC THIN FILMS
Our thin film solar cell designs are intended to provide benefits associated
with the use of light weight materials, the use of low processing or
manufacturing temperatures providing diversity in the use of substrates
necessary to meet specific application requirements, flexibility for molding to
shapes, and semi-transparency provide characteristics beneficial in the design
of diverse use applications.
The first of our product development efforts is Power Glass(TM) - an innovative
thin film solar technology that is intended to allow windows to produce
electricity from the power of the sun without significantly altering the
appearance or use of the window or transparent surface. Using proprietary and
patented solar cell designs and manufacturing processes, we are focused on the
development of thin film solar cell designs for semi-transparent coatings on
thin flexible plastics that create large area monolithic in appearance solar
cell structures that you can see through. We believe that Power Glass(TM) may
have ubiquitous applications -- including, but not limited to:
LARGE BUILDINGS - ARCHITECTURAL GLASS:
Power Glass thin films could be applied to the windows in the manufacture of
large buildings, turning these structures into virtual power plants. Electrical
power generated can be used to run building systems augmenting other power
sources.
18
INDUSTRIAL, AGRICULTURAL, AND PUBLIC FACILITIES - CANOPY, SKYLIGHT, & ROOFS:
Power Glass thin films could be applied to the various transparent surfaces of
manufacturing, green house, and public facilities to supply a clean and
renewable portion of electrical power. XsunX believes that these types of
products and applications will provide economic incentives for the wide scale
adoption of the integrated use of Power Glass(TM) thin film technologies. Film
produced by Company licensees using the XsunX process could be supplied to
building material manufacturers worldwide for development and use in numerous
applications.
GROWTH, REVENUE AND DISTRIBUTION PLAN
We intend to market its integrated manufacturing systems as turnkey solutions
for the manufacture it's current and future PV thin films designs. The
manufacturing systems will be sold to manufacturers as modular systems and
licensed for use in the manufacture our thin film designs. Manufacturers would
in turn agree to manufacture and distribute our PV thin films, or incorporate
the thin film PV technology into their product manufacturing process as an
"original equipment manufacturer" (OEM) and sell the finished product to their
consumers. No licenses or contracts now exist with any manufacturer.
We intend to also target customers who are developing their own technology
platforms in which the manufacture of or the integration of our thin film solar
cells could play an important role. We intend to offer non-exclusive
manufacturing licenses and expects to earn a royalty on thin films manufactured
under any licenses. In selling the manufacturing equipment and licensing the
technology to manufacturers, we reduce operating expenses and save capital in
plant, property and equipment. As a result, should we realize earnings we
intends to reinvest our retained earnings in R&D in an effort to continuously
develop related new technologies that will help us achieve sustainable
competitive advantages.
MARKET
Our thin film Power Glass technology, upon completion of commercialization may
be applied to the large and established glass and building material industries.
That is, transparent photovoltaic glazing may enable solar energy-production to
enter mainstream markets because it can become integral to the designs of
buildings. Builders and manufacturers already use glass, plastic and other
materials, so they may be attracted to the economic benefits of using the same
materials that also produce electrical energy.
Three key attributes of photovoltaics as an electricity source are fueling world
interest in photovoltaics "PV":
Environment: PV is truly a clean, emission-free renewable electrical generation
technology, with substantial potential for a supply rate in the world's future
energy demands.
Technology: PV is reliable, manufacturable, consumer-friendly, and can be
deployed in a wide range of applications.
National Interest: PV is critical to our energy security, strategic technology,
and long-term economic growth. As a "distributed" generation source, this
technology acts as a network--not a grid--and is much less susceptible to
large-scale outages caused by disasters of natural or human origin. It mitigates
our dependence on foreign energy supplies, while providing distinct benefits to
our domestic economy.
According to the Energy Information Administration of the US Department of
Energy, the global photovoltaic industry reached $4.7 billion in worldwide sales
in 2003 and is expected to grow at a rate in excess of 15-20% per year over the
next several decades. The department further estimates that between the years
2000 and 2020 the demand for electrical power in the United States will require
the addition of approximately 355 gigawatts of new energy production capacity.
This presents a 40% increase over present electrical energy production capacity.
In the long view, we believe solar energy production is intrinsically
attractive, not only environmentally but also economically. Sunlight is readily,
regularly, and widely available; it is renewable; and it is easily accessible
without the massive expense of mining, drilling, or constructing huge dams or
other facilities. Tapping the sun directly, rather than through the solar energy
stored in fossil fuels, wood, or ethanol, makes too much economic sense not to
be inevitable.
MARKETING STRATEGY
We intend to enhance and promote the idea that our manufacturing systems and
thin film technologies, when ready to market, present a compelling and efficient
solution for the manufacture of diverse photovoltaic thin films. In order to
create a favorable environment for sales, we plan to undertake advertising and
promotion efforts. These efforts may be outsourced and will require the services
of an advertising relations firm. We plan to interview various firms and select
those most capable of assisting us with comprehensive advertising and promotion
plans. We intend to commence building and staffing our marketing department to
accelerate these efforts in the first part of 2006. We have not yet finalized
the potential costs of our marketing strategy.
We will invest in small test campaigns before committing to large promotions or
marketing campaigns. Our initial marketing strategy we will be to market to
potential manufacturer partners in our target markets representing solar device
manufactures, glass, and building materials manufacturers.
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BACKLOG OF ORDERS
There are currently no orders for sales at this time.
GOVERNMENT CONTRACTS
There are no government contracts at this time.
COMPETITIVE CONDITIONS
Currently, management is not aware of other products substantially similar to
our products on the market. However, a number of solar cell technologies have
and are being developed by a number of companies. Such technologies include
amorphous silicon, cadmium telluride, copper-indium-gallium-selenide (CIGS), and
copper indium diselenide as well as advanced concepts in thin film crystalline
silicon, and the use of organic materials. Given the benefit of time,
investment, and advances in manufacturing technologies any of these competing
technologies may achieve manufacturing costs per watt lower than the cost per
watt to manufacture our thin film solar cells.
In accessing the principal competitive factors in the market for solar electric
power products we use price per watt, stability and reliability, conversion
efficiency, diversity in use applications and other performance metrics such as
scalability of manufacturing processes and the ability to adapt new technologies
into cell designs and the manufacturing process without antiquation of existing
infrastructure. If we do not compete successfully with respect to these or other
factors, it could materially and adversely affect our business, results of
operations, and financial condition.
A number of large companies are actively engaged in the development,
manufacturing and marketing of solar electric power products. The five largest
PV cell suppliers are Q-Cells Shell Solar, Sharp Corporation, BP Solar, and
Kyocera Corporation, which together supply the significant portion of the
current PV cell market. All of these companies have greater resources to devote
to research, development, manufacturing and marketing than we do.
Other competitive factors lie in the current use of other clean renewable energy
technologies such as wind, ocean thermal, ocean tidal, and geo-thermal power
sources, and conventional fossil fuel based technologies for the production of
electricity. We expect our primary competition will be within the solar cell
marketplace itself. Barriers to entering the solar cell manufacturing industry
include the technical know-how required to produce solar cells that maintain
acceptable efficiency rates and the design of efficient and scalable
manufacturing processes.
t 0 0 COMPLIANCE WITH ENVIROMENTAL LAWS AND REGULATIONS
Our operations are subject to local, state and federal laws and regulations
governing environmental quality and pollution control. To date, our compliance
with these regulations by has had no material effect on our operations, capital,
earnings, or competitive position, and the cost of such compliance has not been
material. We are unable to assess or predict at this time what effect additional
regulations or legislation could have on our activities.
ADMINISTRATIVE OFFICES
As of September 30, 2005 we leased administrative office facilities located at
65 Enterprise, Aliso Viejo CA 92656 for approximately $750 per month pursuant to
a six month lease agreement renewable in 6 month or greater increments
thereafter.
EMPLOYEES AND CONSULTANTS
We are a development stage company and as of September 30, 2005 had one salaried
employee. Through our strategic technology sharing and facilities use
relationship with MVSystems, Inc, we use the services of 15 additional
technologists and support staff. We intend to we retain our current President
and Chief Executive Officer, Mr. Tom M. Djokovich, on October 1, 2003. We
project that during the next 12 months our workforce is likely to increase to 8,
with 3 of the new employees being in Administrative, and 4 in marketing and
sales positions. It is anticipated that MVSystems will also expand the number of
employees by 2. In addition to the anticipated retention of new employees we
expect to continue to use outside consultants, subcontract labor, attorneys and
accountants as necessary, and may find a need to engage additional full-time
employees as necessary.
DESCRIPTION OF PROPERTY
We currently lease administrative office facilities located at 65 Enterprise,
Aliso Viejo CA 92656 for approximately $750 per month pursuant to a six month
lease agreement and month to month thereafter.
LEGAL PROCEEDINGS
We are not currently party to any legal proceedings.
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DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth current information regarding our executive
officers, senior managers and directors:
Name Age Positions
---- --- ---------
Tom Djokovich................. 48 President, Chief Executive Officer,
Chief Financial Officer and Director
Brian Altounian............... 42 Secretary, Director
Thomas Anderson............... 40 Director
Mr. Djokovich has been our Chief Executive Officer, President Chief Financial
Officer and a director since September 2003. From 2002 to September 2003, he
provided corporate consulting services as an independent consultant. He was the
founder and served from 1995 to 2002 as the Chief Executive Officer of
Accesspoint Corporation, a vertically integrated provider of electronic
transaction processing and e-business solutions for merchants. Under Mr.
Djokovich's guidance, Accesspoint became a member of the Visa/MasterCard
association, the national check processing association NACHA, and developed one
of the payment industry's most diverse set of network based transaction
processing, business management and CRM systems for both Internet and
conventional points of sale. Prior to Accesspoint, Mr. Djokovich founded TMD
Construction and Development in 1979. TMD provided management for
multimillion-dollar projects incorporating at times hundreds of employees,
subcontractors and international material acquisitions for commercial,
industrial and custom residential construction services as a licensed building
firm in California. In 1995 Mr. Djokovich developed an early Internet based
business-to-business ordering system for the construction industry. Mr.
Djokovich also currently serves as a Director and Chairman of the Audit
Committee for Roaming Messenger, Inc., a publicly reporting company that
provides a breakthrough software solution for delivering real-time actionable
information for Homeland Security, emergency response, military and enterprise
applications.
Mr. Altounian has over 16 years of experience in the area of finance,
administration and operations. He is currently Chief Operating Officer of
Platinum Studios, a Beverly Hills-based entertainment company that controls the
world's largest independent library of comic book characters, which it adapts
and produces for film, television and all other media. In addition to managing
fiscal growth and staffing, he is spearheading the company's digital strategy,
overseeing business development and acquisitions in the online, interactive, and
wireless industries. Mr. Altounian previously served as the Vice President of
Finance for Lynch Entertainment, a producer of family television series' for the
Nickelodeon and Disney Channels. Prior to joining Lynch Entertainment, Mr.
Altounian held key management positions at numerous entertainment companies
including Director of Finance and Administration at Time Warner Interactive;
Finance Manager for National Geographic Television; and Manager of Business
Services for WQED, the nation's first community-owned public television station.
He also founded his own consulting company, BKA Enterprises, a firm that
supported and advised entertainment and multimedia companies in the areas of
financial and business management. Mr. Altounian holds an undergraduate degree
from UCLA and an MBA from Pepperdine University.
Mr. Anderson presently works as a Senior Environmental Scientist for the Energy
and Environmental Engineering Division of Apogen Technologies in Los Alamos, New
Mexico. He earned his B.S. in Geology from Denison University and his M.S. in
Environmental Science and Engineering from Colorado School of Mines. Mr.
Anderson has worked for past 16 years in the environmental consulting field,
providing environmental compliance, characterization and remediation services to
Department of Energy, Department of Defense, and industrial clients. He formerly
worked as a Senior Environmental Scientist at Concurrent Technologies Corp. from
November 2000 to December 2004. From March 2000 to November 2000 he was employed
as a hydrologist at Stone & Webster Engineering, Inc. From July 1998 to March
2000 he was employed by advanced Integrated Management Services as an
Environmental Scientist/Engineer. From 1997 to 1998 he was a graduate research
assistant at Colorado School of Mines in the Environmental Science and
Engineering Program.
BOARD COMMITTEES
We do not currently have any board committees.
21
ADVISORY BOARD
In September 2004, we established a Scientific Advisory Board to attract
qualified specialists from the fields of material and device engineering, and,
industry specialists representing expertise in manufacturing, design,
certification and applications associated with glass, plastics and building
materials. It is anticipated that panel members will be engaged for a period of
two years. The advisory board retained a chairman, Dr. Arun Madan to lead the
panel, advise the development process and recommend additional candidates for
inclusion on the panel.
Effective September 17, 2004 our Board of Directors unanimously approved the
appointment of Dr. Arun Madan to chair the advisory board under the terms of a
5-year consulting agreement. As compensation for services rendered under the
terms of the agreement Dr. Madan was granted a Consulting and Advisory Warrant
for the purchase of up to 1,000,000 shares with an exercise price of $0.15 per
share, subject to the following vesting provisions:
o 25,000 Shares per month during the first twenty- four months (24) of his
engagement as a consultant; o 150,000 shares upon the satisfactory completion of
the development of a semi-transparent thin film silicon solar cell module, and
other technology; o 250,000 shares upon the sale and/or licensure of one of our
processes.
In addition, our Board of Directors has unanimously approved the appointment of
three additional scientists to our advisory board under the terms of 2-year
consulting agreements. They are Dr. Arokia Nathan on February 1, 2005, Dr.
Richard Rocheleau on February 1, 2005, and Dr. John Moore on March 8, 2005. As
compensation for services the above advisory board members were each granted
Consulting and Advisory Warrants for the purchase of up to 250,000 shares with
an exercise price of $0.20 per share. For of these persons, warrants to purchase
50,000 vested immediately Thereafter, the warrant to purchase 25,000 shares
become exercisable at each calendar quarter during the term of engagement .
BIOGRAPHICAL INFORMATION DR. ARUN MADAN
Dr. Madan is a Research Professor in the Department of Metallurgical and
Materials Engineering at The Colorado School of Mines, President of MVSystems
Inc. and an adjunct professor at The University of Waterloo, Canada. He became
one of the originators of Amorphous Silicon technologies in 1970 and fabricated
the first TFT (thin film transistor) as part of his Ph.D thesis. With over 30
years of leading edge scientific accomplishments he has published well over one
hundred scientific papers, published a textbook now in use at several
universities and holds fourteen patents on thin film semiconductor technology as
well as advanced vacuum semiconductor deposition systems. In addition to his
recognized leadership in the fields of thin film semiconductors and solar cells,
he is the founder of two firms, Glasstech Solar Inc. in 1985 and MVSystems, Inc.
in 1989. As founder of these firms he has gained over twenty years of
international business, marketing and management experience successfully
establishing technology sales exceeding $150 million dollars. Leveraging his
extensive scientific, business and leadership capabilities he has led teams of
scientists/engineers in multi-disciplinary programs providing contract research
and development work for a multitude of domestic and international agencies and
firms including the National Renewable Energy Laboratory (USA), BP-Solar (USA),
Shell (The Netherlands), Kovio (USA), Zettacore (USA), QinetiQ (UK), ENEA
(Italy) and Pacific Solar (Australia) etc. Dr Madan received his Ph.D. - Physics
from the University of Dundee, Scotland.
BIOGRAPHICAL INFORMATION DR. JOHN MOORE
Dr. John J. Moore is a Materials Scientist who holds the position of Trustees'
Professor and Head of Department of Metallurgical and Materials Engineering at
the Colorado School of Mines. Dr. Moore is also Director of the
interdisciplinary graduate program in Materials Science and Director of the
Advanced Coatings and Surface Engineering Laboratory, ACSEL, at the Colorado
School of Mines in Golden. Dr. Moore established the Advanced Coatings and
Surface Engineering Laboratory (ACSEL) at the Colorado School of Mines in 1994.
The main objective of ACSEL is to perform fundamental research in advanced PVD
and CVD systems that will aid the U.S. thin films, coatings and surface
engineering industry. ACSEL is a national and international leader in research
on advanced coatings, surface engineering and thin film processing. Dr. Moore
was awarded a B.Sc. in Materials Science and Engineering from the University of
Surrey, UK, in 1966, a Ph.D. in Industrial Metallurgy from the University of
Birmingham, UK, in 1969, and a D.Eng. from the School of Materials of the
University of Birmingham, UK, in 1996.
BIOGRAPHICAL INFORMATION DR. AROKIA NATHAN
Arokia Nathan (SM) is a Professor in Electrical and Computer Engineering,
University of Waterloo, and holds the Canada Research Chair in Nanoscale Elastic
Circuits. He is also the chief technology officer of Ignis Innovation Inc.,
Waterloo, Canada, a company he founded to commercialize technology on thin film
silicon backplanes and driving algorithms for active matrix organic light
emitting diode displays. Dr. Nathan has extensive experience in device physics
and modeling, and materials processing and integration. He has published
extensively in the field of sensor technology and CAD, and thin film transistor
electronics, and has over 15 patents filed/awarded. He is a co-author of two
books, Microtransducer CAD and CCD Image Sensors in Deep-Ultraviolet. He is a
Senior Member of the IEEE and a member of the American Physical Society,
Electrochemical Society, Materials Research Society, Society for Information
Displays, International Society for Optical Engineering, and the Institute of
Electrical Engineers (UK). He chairs the 2005 IEEE Lasers and Electro-Optics
Society Technical Committee on Displays and the Displays Sub-Committee in both
2004 and 2005. He serves as co-chair of the Fall 2005 Materials Research Society
22
Symposium M: Flexible and Printed Electronics, Photonics, and Biomaterials, and
is currently a Guest Editor for a Special Issue on Flexible Electronics
Technology in IEEE Proceedings. He received his PhD in Electrical Engineering
from the University of Alberta, Edmonton, Alberta, Canada, in 1988.
BIOGRAPHICAL INFORMATION DR. RICHARD ROCHELEAU
Dr. Rocheleau is the director of the Hawaii Natural Energy Institute (HNEI) of
the University of Hawaii designated as a US Department of Energy Center of
Excellence. At HNEI Dr. Rocheleau has established the HNEI Thin Films Laboratory
and developed a research program focused on thin film photovoltaics and
renewable hydrogen production having near-term applications in both the
commercial and military sectors. Dr. Rocheleau also serves as the PI of several
programs including the Hawaii Energy and Environmental Technology Initiative;
and the Hawaii Hydrogen Center for the Development and Deployment of Distributed
Energy Systems. He is the author of over 30 publications in peer reviewed
journals and over 20 conference proceedings in the areas of photovoltaics, photo
electrochemical hydrogen production, and thin-film electronic materials. Dr.
Rocheleau also holds six patents and three patent disclosures. Leveraging his
extensive scientific and leadership capabilities he has led teams of
scientists/engineers in multi-disciplinary programs providing contract research
and development of PV and semiconductor manufacturing processes for a number of
domestic and international firms including, Chronar Corporation, Solarex, First
Solar, Trex Enterprises, and Global Solar Inc. Dr. Rocheleau received his BChE
and PhD (1980) in Chemical Engineering from the University of Delaware and a
M.S. in Ocean Engineering (1977) from the University of Hawaii.
23
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer, Tom Djokovich. He
was the only person who received any compensation during the periods indicated.
Annual Compensation*
Other Annual
Name and Principal Salary Bonus Compensation
Position Year ($) ($) ($)
Tom Djokovich(1) 2005 $150,000 -0-
President, Chief 2004 $130,000 -0- -0-
Financial Officer 2003 -0- -0- -0-
2002 -0- -0- -0-
-----------------
* In accordance with the rules and regulations of the Securities and Exchange
Commission, this table omits columns pertaining to compensation that was not
awarded.
(1) As of January 2005, we have agreed to pay Mr. Djokovich $2,885 per week for
services provided as Chief Executive Officer up to and until we determine
executive compensation pursuant to an employment agreement as determined by the
Board. If necessitated by our financial condition, Mr. Djokovich has agreed to
the deferment of his monthly salary up to and until such time that we obtain the
funds to pay these amounts. In the year ended September 30, 2004 Mr. Djokovich
agreed to the deferment of $65,000 dollars of his salary until such time that we
have the funds to pay him. As of September 30, 2005, the remaining balance of
unpaid deferred salary due Mr. Djokovich was $29,423.
EMPLOYMENT AGREEMENTS
We do not have any employment agreements with our executive officers to date. We
may enter into employment agreements in the future.
24
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock has been quoted on the OTC Bulletin Board under the symbol
"XSNX.OB." The following table shows the reported high and low closing bid
quotations per share for our common stock based on information provided by the
OTC Bulletin Board. Particularly since our common stock is traded infrequently,
such over-the-counter market quotations reflect inter-dealer prices, without
markup, markdown or commissions and may not necessarily represent actual
transactions or a liquid trading market.
Year Ended September 30, 2006 High Low
---- ---
First Quarter December 31, 2005 $.60 $.274
Year Ended September 30, 2005 High Low
---- ---
First Quarter ended December 31, 2004 $ .51 $ .33
Second Quarter ended March 31, 2005 $ .23 $ .08
Third Quarter ended June 30, 2005 $ .21 $ .08
Fourth Quarter ended September 30, 2005 $ .28 $ .13
Year Ended September 30, 2004 High Low
---- ---
First Quarter ended December 31, 2003 $2.00 $.51
Second Quarter ended March 31, 2004 $1.25 $.25
Third Quarter ended June 30, 2004 $1.01 $.34
Fourth Quarter ended September 30, 2004 $ .75 $.30
Year Ended September 30, 2003 High Low
---- ---
First Quarter ended December 31, 2002 $.017 $.005
Second Quarter ended March 31, 2003 $.012 $.007
Third Quarter ended March 31, 2003 $.025 $.01
Fourth Quarter ended June 30, 2003 $.07 $.007
NUMBER OF STOCKHOLDERS
As of January 9, 2005, there were approximately 578 holders of record of our
common stock.
DIVIDEND POLICY
Historically, we have not paid any dividends to the holders of our common stock
and we do not expect to pay any such dividends in the foreseeable future as we
expect to retain our future earnings for use in the operation and expansion of
our business.
25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates beneficial ownership of our common stock as of
January 9, 2005 by each person or entity known by us to beneficially own more
than 5% of the outstanding shares of our common stock; each of our executive
officers and directors; and all of our executive officers and directors as a
group. Unless otherwise indicated, the address of each beneficial owner listed
below is c/o XsunX, Inc., 65 Enterprise, Aliso Viejo, California 92656.
Percentage of Shares
Name of Beneficial Owner Number of Shares Beneficially Owned (1)
------------------------ ---------------- ----------------------
Tom Djokovich (2) 17,903,000 14.45%
Brian Altounian 3,650,000 2.95%
Thomas Anderson 56,925 *
Djokovich Limited Partnership 16,978,000 13.7%
All Directors and Executive
Officers as a group (3 persons) 21,609,925 17.69%
----------
* less than 1%
(1) Applicable percentage ownership is based on 123,917,080 shares of common
stock outstanding as of January 9, 2006. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
January 9, 2006 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes 16,978,000 shares owned by the Djokovich Limited Partnership. Mr.
Djokovich shares voting and dispositive power with respect to these shares with
Mrs. Djokovich.
26
SELLING SHAREHOLDERS
The following table presents information regarding the selling shareholders.
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering After the Offering(2)
Selling Stockholder Number Percent(1) Number Percent(1)
------------------- --------- ---------- --------- ----------
Cornell Capital Partners LP. (3) 6,183,462(2) 4.99% -0- --
Newbridge Securities, Inc. (4) 65,232 *
Total 6,248,694 -0- -0-
* less than 1%.
(1) Applicable percentage ownership is based on 123,917,080 shares of common
stock outstanding as of December 15, 2005. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
December 15, 2005 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Applicable percentages are set forth
solely to indicate the percentage of total issued and outstanding shares that
may be sold by the selling shareholders.
(2) Consists of 2,544,031 shares and 3,639,431 shares issuable upon conversion
of convertible debentures. For purposes of calculating Cornell Capital Partners
LP's percentage beneficial ownership, does not include 28,768,463 registered on
behalf of this person, as follows: (i) 18,018,463 shares issuable upon
conversion of convertible debentures and (ii) 10,750,000 shares issuable upon
exercise of warrants. Pursuant to provisions in the convertible debentures and
the warrants, Cornell's beneficial ownership of our common stock is limited to
4.99% of the total outstanding, which limitation may only be waived upon 61-day
notice. As a result of this limitation on its percentage beneficial ownership,
we do not consider Cornell Capital to be an affiliate. In addition, does not
include 36,842,106 shares registered herewith pursuant to the terms of a
registration rights agreement dated December 12, 2005 between us and Cornell
Capital that requires us to register up to 50,000,000 shares that may be
issuable upon conversion of convertible debentures representing a $5,000,000
debt obligation.
(3) All investment decisions of, and control of, Cornell Capital Partners are
held by its general partner, Yorkville Advisors, LLC. Mark Angelo, the managing
member of Yorkville Advisors, makes the investment decisions on behalf of and
controls Yorkville Advisors.
(4) Guy Amico, the President of Newbridge, makes the investment decisions on
behalf of Newbridge.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two years, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeded or exceeds $60,000 and in which
any director, executive officer, holder of more than 5% of our common stock or
any member of the immediate family of any of the foregoing persons had or will
have a direct or indirect material interest.
PLEDGE BY OFFICERS
In July 2005, Tom Djokovich, our Chief Executive Officer, deposited into escrow
925,000 shares of common stock owned by him. These shares are additional
security for our obligations under the $850,000 principal amount secured
convertible debentures that were issued to Cornell Capital Partners LP. Mr.
Djokovich received no compensation for this transaction.
ISSUANCE OF SHARES
On September 30, 2003, we issued 20,800,000 shares of common stock to Brian
Altounian immediately prior to becoming one our directors. These shares were
issued for corporate development services rendered to Xoptix, Inc. pursuant to a
Corporate Services Development Agreement dated May 1st, 2003 and were valued at
a price of $.004 per share for a total valuation of $83,200. As described under
Business--Company History, we entered into a Plan of Reorganization and Asset
Purchase Agreement with Xoptics, Inc. in September 2003.
27
DESCRIPTION OF SECURITIES
The following description of our capital stock and provisions of our articles of
incorporation and bylaws, each as amended, is only a summary. You should also
refer to the copies of our articles of incorporation and bylaws which are
included as exhibits to our Report on 10-KSB for the fiscal year ended September
30, 2004. Our authorized capital stock consists of 500,000,000 shares of common
stock, no par value, and 50,000,000 shares of preferred stock $0.01 par value
per share. As of January 9, 2006, there are 123,917,080 shares of common stock
issued and outstanding and no shares of preferred stock issued and outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on all
matters submitted to a vote of our stockholders. Holders of our common stock are
entitled to receive dividends ratably, if any, as may be declared by the board
of directors out of legally available funds, subject to any preferential
dividend rights of any outstanding preferred stock. Upon our liquidation,
dissolution or winding up, the holders of our common stock are entitled to
receive ratably our net assets available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of our common stock have no preemptive, subscription, redemption
or conversion rights. The outstanding shares of common stock are fully paid and
nonassessable. The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future without further stockholder approval.
PREFERRED STOCK
Our board of directors is authorized without further stockholder approval, to
issue from time to time up to a total of 50,000,000 shares of preferred stock in
one or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
term of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of these series without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of our
management without further action by the stockholders and may adversely affect
the voting and other rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. Currently, there are no shares of preferred stock outstanding
and we have no present plans to issue any shares of preferred stock.
WARRANTS
As of January 9, 2005, we had the following warrants outstanding:
Currently exercisable warrants to purchase 4,250,000 shares of common stock at
$0.20 that expire in July 2010. Shares issuable upon exercise of these warrants
are included in the registration statement of which this prospectus forms a
part.
Currently exercisable warrants to purchase 2,125,000 shares of common stock at
$0.15 that expire in July 2010. Shares issuable upon exercise of these warrants
are included in the registration statement of which this prospectus forms a
part;
Currently exercisable Warrants to purchase 6,000,000 shares of common stock at
$0.15 that expire in September 2009;
Warrants to purchase 1,000,000 shares of common stock at $0.15 that expire in
September 2009, of which 250,000 warrants are currently exercisable;
Warrants to purchase 1,000,000 shares of common stock at $0.15 that expire in
September 2007, of which 500,000 warrants are immediately exercisable;
Warrants to purchase 250,000 shares of common stock at $0.20 that expire in
February 2008, of which 100,000 warrants are immediately exercisable;;
Warrants to purchase 250,000 shares of common stock at $0.20 that expire in
February 2008, of which 100,000 warrants are immediately exercisable;
Warrants to purchase 250,000 shares of common stock at $0.20 that expire in
March 2008, of which 100,000 warrants are immediately exercisable;
As consideration for the grant of an Expanded Use License on October 12, 2005,
granting XsunX additional benefits for use of licensed technologies and patents,
XsunX granted MVS a warrant (the "Expanded Use License Stock Warrant") for the
purchase of up to Seven Million (7,000,000) shares of common stock of XsunX, the
warrant will expire five (5) years after the date of the grant and is subject to
the following vesting provisions:
28
1) The Expanded Use License Stock Warrant allowed for the vesting of one million
(1,000,000) warrants on the effective date of the agreements.
(2) Another one million (1,000,000) warrants will vest upon the satisfactory
completion of a Phase 4 development program for the development of technologies
licensed under the Expanded Use License.
(3) The balance of five million (5,000,000) warrants will vest upon the date the
technologies licensed within the Expanded Use License are licensed to a third
party in a bona fide arms-length commercial setting.
Currently exercisable warrants to purchase 3,125,000 shares of common stock at
$0.45 that expire in December 2010. Shares issuable upon exercise of these
warrants are included in the registration statement of which this prospectus
forms a part.
Currently exercisable warrants to purchase 1,250,000 shares of common stock at
$0.55 that expire in December 2010. Shares issuable upon exercise of these
warrants are included in the registration statement of which this prospectus
forms a part;
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mountain Share
Transfer, located at 1625 Abilene Drive, Broomfield, Colorado 80020.
PLAN OF DISTRIBUTION
The selling stockholder, or its pledgees, donees, transferees, or any of its
successors in interest selling shares received from the named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be a selling
stockholder) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. If the shares are transferred by a selling shareholder to any
successor in interest, we will file a prospectus supplement to name such
successor. The selling stockholder may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt to sell
the common stock as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling stockholder to its
partners, members or stockholders;
o By pledge to secure debts of other obligations;
o In connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions in
standardized or over-the-counter options;
o Purchases by a broker-dealer as principal and resale by the broker-dealer
for its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which the same
broker acts as an agent on both sides of the trade. The selling stockholders may
also transfer the common stock by gift. We do not know of any arrangements by
the selling stockholders for the sale of any of the common stock.
The selling stockholders may engage brokers and dealers, and any brokers or
dealers may arrange for other brokers or dealers to participate in effecting
sales of the common stock. These brokers or dealers may act as principals, or as
an agent of a selling stockholder. Broker-dealers may agree with a selling
stockholder to sell a specified number of the stocks at a stipulated price per
share. If the broker-dealer is unable to sell common stock acting as agent for a
selling stockholder, it may purchase as principal any unsold shares at the
stipulated price. Broker-dealers who acquire common stock as principals may
thereafter resell the shares from time to time in transactions in any stock
exchange or automated interdealer quotation system on which the common stock is
then listed, at prices and on terms then prevailing at the time of sale, at
prices related to the then-current market price or in negotiated transactions.
Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling stockholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
Sales made under Rule 144 are subject, among other things, to the volume
limitations under that rule. Specifically, the number shares sold in any 90-day
period may not exceed the greater of 1% of the number of shares outstanding or
the average weekly trading volume of the shares during the four weeks preceding
the date of sale. In order to comply with the securities laws of some states, if
applicable, the shares of common stock may be sold in these jurisdictions only
through registered or licensed brokers or dealers.
29
From time to time, one or more of the selling stockholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling stockholders. The number of a selling stockholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling stockholder's shares will otherwise remain
unchanged. In addition, a selling stockholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount of selling
stockholders' shares being offered and the terms of the offering, the names of
any agents, brokers, dealers or underwriters, any applicable commission and
other material facts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling stockholder and/or purchasers of
selling stockholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling stockholder can presently estimate the
amount of any such compensation.
The selling stockholders and any underwriters, brokers, dealers or agents that
participate in the distribution of the common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the securities sold by them may be deemed to be underwriting discounts and
commissions. If a selling stockholder is deemed to be an underwriter, the
selling stockholder may be subject to certain statutory liabilities including,
but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. Selling stockholders who are deemed underwriters within
the meaning of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The SEC staff is of a view that selling
stockholders who are registered broker-dealers or affiliates of registered
broker-dealers may be underwriters under the Securities Act. A selling
stockholder may enter into hedging transactions with broker-dealers and the
broker-dealers may engage in short sales of the common stock in the course of
hedging the positions they assume with that selling stockholder, including,
without limitation, in connection with distributions of the common stock by
those broker-dealers. A selling stockholder may enter into option or other
transactions with broker-dealers, who may then resell or otherwise transfer
those common stock. A selling stockholder may also loan or pledge the common
stock offered hereby to a broker-dealer and the broker-dealer may sell the
common stock offered by this prospectus so loaned or upon a default may sell or
otherwise transfer the pledged common stock offered by this prospectus.
The selling stockholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling stockholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling stockholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We have agreed to indemnify the selling stockholder and any brokers, dealers and
agents who may be deemed to be underwriters, if any, of the common stock offered
by this prospectus, against specified liabilities, including liabilities under
the Securities Act. The selling stockholder has agreed to indemnify us against
specified liabilities.
The issued and outstanding common stock, as well as the common stock to be
issued offered by this prospectus was originally, or will be, issued to the
selling stockholders pursuant to an exemption from the registration requirements
of the Securities Act, as amended. We agreed to register the common stock issued
or to be issued to the selling stockholders under the Securities Act, and to
keep the registration statement of which this prospectus is a part effective
until all of the securities registered under this registration statement have
been sold. We have agreed to pay all expenses incident to the registration of
the common stock held by the selling stockholders in connection with this
offering, but all selling expenses related to the securities registered shall be
borne by the individual holders of such securities pro rata on the basis of the
number of shares of securities so registered on their behalf.
30
We cannot assure you that the selling stockholders will sell all or any portion
of the common stock offered by this prospectus. In addition, we cannot assure
you that a selling stockholder will not transfer the shares of our common stock
by other means not described in this prospectus.
LEGAL MATTERS
The validity of the common stock has been passed upon by Sichenzia Ross Friedman
Ference LLP, New York, New York.
EXPERTS
The September 30, 2005 financial statements included in the Prospectus have been
audited by Jaspers & Hall, PC., a limited liability company of certified public
to the extent and for the periods set forth in their report appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting. The September 30, 2004
financial statements included in the Prospectus have been audited by Michael
Johnson & Co., LLC., a limited liability company of certified public accountants
to the extent and for the periods set forth in their report appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form SB-2 under the Securities
Act for the common stock to be sold in this offering. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedules that were filed with the registration statement. For further
information with respect to the common stock and us, we refer you to the
registration statement and the exhibits and schedules that were filed with the
registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies of all or
any part of the registration statement may be obtained from the SEC upon payment
of the prescribed fee. Information regarding the operation of the public
reference rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The address of the site is http://www.sec.gov.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Under Section 7-109-102 of the Colorado Business Corporations Act (the "Colorado
Act") a corporation may indemnify a person made a party to a proceeding because
the person is or was a director, against liability incurred in the proceeding.
Indemnification permitted under this section in connection with a proceeding by
or in the right of the corporation is limited to reasonable expenses incurred in
connection with the proceeding.
Indemnification is only possible under this section 7-109-102, however, if: (a)
the person conducted him/herself in good faith; and (b) the person reasonably
believed: (i) in the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's best interests;
and (ii) in all other cases, that his or her conduct was at least not opposed to
the corporation's best interests; and (c) in the case of any criminal
proceeding, the person had no reasonable cause to believe his or her conduct was
unlawful.
It should be noted, however, that under Section 7-109-102(4), a corporation may
not indemnify a director: (i) in connection with a proceeding by or in the right
of the corporation in which the director is adjudged liable to the corporation;
or (ii) in connection with any other proceeding in which a director is adjudged
liable on the basis that he or she derived improper personal benefit.
Under Section 7-109-103 a director is entitled to mandatory indemnification,
when he/she is wholly successful in the defense of any proceeding to which the
person was a party because the person is or was a director, against reasonable
expenses incurred in connection to the proceeding.
Under Section 7-109-105, unless restricted by a corporation's Articles of
Incorporation, a director who is or was a party to a proceeding may apply for
indemnification to a court of competent jurisdiction. The court, upon receipt of
the application, may order indemnification after giving any notice the court
considers necessary. The court, however, is limited to awarding the reasonable
expenses incurred in connection with the proceeding and reasonable expenses
incurred to obtain court-ordered indemnification.
31
Under Section 7-109-107, unless restricted by the corporation's Articles of
Incorporation, an officer of a corporation is also entitled to mandatory
indemnification and to apply for court-ordered indemnification to the same
extent as a director.
A corporation may also indemnify an officer, employee, fiduciary or agent of the
corporation to the same extent as a director.
Under Section 7-109-108 a corporation may purchase and maintain insurance on
behalf of a person who is or was a director, officer, employee, fiduciary or
agent of the corporation against liability asserted against or incurred by the
person in that capacity, whether or not the corporation would have the power to
indemnify such person against the same liability under other sections of the
Colorado Act.
Our officers and directors are accountable to our shareholders as fiduciaries,
which means such officers and directors are required to exercise good faith and
integrity in handling our affairs. A shareholder may be able to institute legal
action on behalf of himself and all other similarly situated shareholders to
recover damages where we have failed or refused to observe the law. Shareholders
may, subject to applicable rules of civil procedure, be able to bring a class
action or derivative suit to enforce their rights, including rights under
certain federal and state securities laws and regulations. Shareholders who have
suffered losses in connection with the purchase or sale of their interest in us
due to a breach of a fiduciary duty by one of our officers or directors in
connection with such sale or purchase including, but not limited to, the
misapplication by any such officer or director of the proceeds from the sale of
any securities, may be able to recover such losses from us. We and our
affiliates may not be liable to its shareholders for errors in judgment or other
acts or omissions not amounting to intentional acts.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense or any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We have no agreements with any of its directors or executive officers providing
for indemnification of any such persons with respect to liability arising out of
their capacity or status as officers and directors.
At present, there is no pending litigation or proceeding involving a director or
executive officers as to which indemnification is being sought.
32
INDEX TO XSUNX FINANCIAL STATEMENTS
Page
Financial Statements (Audited)
Reports of Independent Registered Public Accounting Firm F-2-F-3
XsunX Balance Sheets as of September 30, 2005 and 2004 F-4
XsunX Statements of Operations for the Years Ended
September 30, 2005 and 2004 and the period February 25,
1997 (Inception) to September 30, 2005 F-5
XsunX Statements of Cash Flows for the Years ended
September 30, 2005 and 2004 F-6
XsunX Statements of Stockholders' Equity (Deficit) for
the Year Ended September 30, 2005 F-7-F-8
Notes to XsunX Financial Statements F-9
F-1
INDEPENDENT AUDITOR'S REPORT
BOARD OF DIRECTORS
XSUNX, INC.
Aliso Viejo, CA
We have audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun
River Mining, Inc). (A Development Stage Company) as of September 30, 2004 and
2003, and the related statements of operations, cash flows, and stockholders'
equity for the years ended September 30, 2004 and 2003 and for the period from
February 25, 1997 (inception) to September 30, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits "in accordance with the standards of the Public Company
Accounting Oversight Board (United States)" as outlined in PCAOB Auditing
Standard No. 1. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XSUNX, INC., (formerly Sun
River Mining, Inc.) at September 30, 2004 and 2003 and the results of their
operations and their cash flows for the years ended September 30, 2004 and 2003
and for the period from February 25, 1997 (inception) to September 30, 2004 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, conditions exist which raise substantial doubt about the
Company's ability to continue as a going concern unless it is able to generate
sufficient cash flows to meet its obligations and sustain its operations.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Michael Johnson & Co., LLC
Michael Johnson & Co., LLC
Denver, Colorado
February 24, 2005
May 5, 2005
F-2
JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
9175 E. Kenyon Avenue, Suite 100
Denver, CO 80237
303-796-0099
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS
XSUNX, INC.
Aliso Viejo, CA
We have audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun
River Mining, Inc). (A Development Stage Company) as of September 30, 2005, and
the related statements of operations, cash flows, and stockholders' equity for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XSUNX, INC., (formerly Sun
River Mining, Inc.) at September 30, 2005 and the results of their operations
and their cash flows for the year ended September 30, 2005 in conformity with
accounting principles generally accepted in the United States.
The financial statements for the years ended September 30, 2004 and 2003 and
from the period February 25, 1997 (inception) to September 30, 2004, were
audited by other accountants, whose report dated May 5, 2005 expressed an
unqualified opinion on those statements. They have not performed any auditing
procedures since that date.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, conditions exist which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 4. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ JASPERS + HALL, PC
Denver, CO
December 28, 2005
F-3
XSUNX, INC.
(A Development Stage Company)
Balance Sheets
September 30,
2005 2004
----------- -----------
ASSETS:
Current assets:
Cash $ 175,869 $ 37,344
Prepaid Expense 79,984 20,000
----------- -----------
Total current assets 255,853 57,344
----------- -----------
Fixed Assets:
Office Equipment (Net) 165,831 2,270
----------- -----------
Total Fixed Assets 165,831 2,270
----------- -----------
Other Assets:
Patents 20,000 10,000
Deposits -- 2,500
----------- -----------
Total other assets 20,000 12,500
----------- -----------
TOTAL ASSETS $ 441,684 $ 72,114
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts Payable $ 78,377 $ 89,030
Accrued Interest 45,856 5,908
Note Payable 850,000 --
Note Payable - Stockholder -- 1,225
----------- -----------
Total current liabilities 974,233 96,163
----------- -----------
Stockholders' equity (deficit):
Preferred Stock, par value $0.01 per share; 50,000,000
shares authorized; no shares issued and outstanding -- --
Treasury Stock, no par value; 26,798,418 issued and outstanding -- --
Common Stock, no par value; 500,000,000 shares authorized;
123,876,633 shares issued and outstanding in 2005, and 114,036,102
shares issued and outstanding in 2004 3,996,735 3,104,396
Common Stock Warrants 1,200,000 1,200,000
Deficit accumulated during the development stage (5,729,284) (4,328,445)
----------- -----------
Total stockholders' deficit (532,549) (24,049)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 441,684 $ 72,114
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
XSUNX, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Year Ended February 25, 1997
September 30, (Inception) to
---------------------------------- September 30,
2005 2004 2005
--------------- --------------- ---------------
Revenue $ -- $ -- $ --
Expenses:
Abandoned Equipment -- -- 808
Advertising 3,979 -- 3,979
Bank Charges 500 401 2,613
Consulting 320,944 19,900 1,344,983
Depreciation 18,435 -- 21,613
Directors' Fees -- -- 11,983
Due Dilgence -- -- 45,832
Equipment Rental -- -- 1,733
Filing Fees 1,800 -- 1,800
Impairment loss -- -- 923,834
Insurance 758 -- 758
Legal and Accounting 107,249 27,203 295,609
Licenses & Fees 25 190 6,435
Loan Fees 115,000 -- 115,000
Meals & Entertainment -- -- 4,119
Miscellaneous Expenses 1,675 -- 1,675
Office Expenses 2,634 5,218 21,833
Patent Fees 663 -- 663
Salaries 155,236 119,336 655,322
Postage 2,161 -- 5,378
Printing 4,300 -- 9,880
Public Relations 116,413 6,640 227,379
Rent 9,000 8,905 25,963
Research & Development 501,423 129,493 630,916
Subscription Reports 860 -- 860
Taxes -- -- 4,657
Telephone 5,489 4,270 40,304
Transfer Agent Expense 3,628 2,997 19,954
Travel 11,234 3,640 74,167
Warrant Option Expense -- 1,200,000 1,675,000
--------------- --------------- ---------------
Total Expenses 1,383,406 1,528,193 6,175,050
--------------- --------------- ---------------
Other Income and Expense
Interest Expense 17,433 251 89,030
Interest Income -- -- (23)
Forgiveness of Debt -- (19,376) (59,773)
--------------- --------------- ---------------
Net Loss $ (1,400,839) $ (1,509,068) $ (6,204,284)
=============== =============== ===============
Per Share Information:
Weighted average number of
common shares outstanding 123,854,733 114,036,102
--------------- ---------------
Net Loss per Common Share $ (0.02) $ (0.01)
=============== ===============
* Less than $.01
The accompanying notes are an integral part of these financial statements.
F-5
XSUNX
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Indirect Method)
Year Ended February 25, 1997
September 30, (Inception) to
---------------------------------- September 30,
2005 2004 2005
--------------- --------------- ---------------
Cash Flows from Operating Activities:
Net Loss $ (1,400,839) $ (1,509,068) $ (6,204,284)
Issuance of Common Stock for Services 50,827 -- 1,288,384
Issuance of Common Stock for Loan Inducement 310,117 310,117
Depreciation Expense 18,435 18,435
Adjustments to reconcile net loss to net cash used in operations
(Increase) Decrease in Deposits 2,500 (22,500) --
(Increase) in Prepaid Expenses (59,985) (79,985)
Increase (Decrease) in Accounts Payable (10,653) 89,030 78,377
Increase (Decrease) in Accrued Liabilities 39,948 5,908 45,856
--------------- --------------- ---------------
Net Cash Flows Used by Operations (1,049,650) (1,436,630) (4,543,100)
--------------- --------------- ---------------
Cash Flows from Investing Activities:
Purchase of Equipment (181,995) (2,270) (184,265)
Purchase of Intangible Assets (10,000) (9,997) (20,000)
--------------- --------------- ---------------
Net cash used by investing activities (191,995) (12,267) (204,265)
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Proceeds from Notes payable - Stockholder 3,775 1,225 --
Payment for Notes payable - Stockholder (5,000) -- --
Proceeds from Convertible Debt 850,000 -- 850,000
Issuance of Common Stock Warrants -- 1,200,000 1,675,000
Issuance of Common Stock for cash 531,395 282,670 2,398,234
--------------- --------------- ---------------
Net Cash Flows Provided by Financing Activities 1,380,170 1,483,895 4,923,234
--------------- --------------- ---------------
Increase in Cash 138,525 34,998 175,869
--------------- --------------- ---------------
Cash at Beginning of Period 37,344 2,346 --
--------------- --------------- ---------------
Cash at End of Period $ 175,869 $ 37,344 $ 175,869
=============== =============== ===============
Supplemental Disclosure of Cash Flow Information
Cash paid for Interest $ -- $ -- $ 71,346
=============== =============== ===============
Cash paid for income taxes $ -- $ -- $ --
=============== =============== ===============
NON-CASH TRANSACTIONS
Stock issued for services $ 50,827 $ -- $ 1,288,384
=============== =============== ===============
Stock issued for Loan Inducement $ 310,117 $ -- 310,117
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
F-6
XSUNX, INC.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit) September 30, 2005
Deficit
Treasury Stock Common Stock Accumulated
------------- ---------------------------- Common During
# of # of Stock Development
Shares Amount Shares Amount Warrants Stage Totals
----- ----- ------------ ------------ --------- ------------ ------------
Inception February 25, 1997 $ -- $ -- -- $ -- $ -- $ -- --
Issuance of stock for cash 3/97 -- -- 10,590 111,900 -- -- 111,900
Issuance of stock to Founders 3/97 -- -- 14,110 -- -- -- --
Issuance of stock for consolidation 4/97 -- -- 445,000 312,106 -- -- 312,106
Issuance of stock for cash 8/97 -- -- 2,900 58,000 -- -- 58,000
Issuance of stock for cash 9/97 -- -- 2,390 47,800 -- -- 47,800
Net Loss for Year -- -- -- -- -- (193,973) (193,973)
----- ----- ------------ ------------ --------- ------------ ------------
Balance - September 30, 1997 -- -- 474,990 529,806 -- (193,973) 335,833
----- ----- ------------ ------------ --------- ------------ ------------
Issuance of stock for services 11/97 -- -- 1,500 30,000 -- -- 30,000
Issuance of stock for cash 9/98 -- -- 50,200 204,000 -- -- 204,000
Consolidation stock cancelled 9/98 -- -- (60,000) (50,000) -- -- (50,000)
Net Loss for Year -- -- -- -- -- (799,451) (799,451)
----- ----- ------------ ------------ --------- ------------ ------------
Balance - September 30, 1998 -- -- 466,690 713,806 -- (993,424) (279,618)
----- ----- ------------ ------------ --------- ------------ ------------
Issuance of stock for cash 10/98 -- -- 21,233 159,367 -- -- 159,367
Issuance of stock for services 1/99 -- -- 65,000 316,500 -- -- 316,500
Issuance of stock for cash 1/99 -- -- 37,500 296,125 -- -- 296,125
Issuance of stock for cash 2/99 -- -- 7,500 70,313 -- -- 70,313
Issuance of stock for cash 4/99 -- -- 45,225 122,108 -- -- 122,108
Issuance of stock for services 6/99 -- -- 70,000 147,000 -- -- 147,000
Issuance of stock for cash 9/99 -- -- 40,000 69,200 -- -- 69,200
Net Loss for Year -- -- -- -- -- (1,482,017) (1,482,017)
----- ----- ------------ ------------ --------- ------------ ------------
Balance - September 30, 1999 -- -- 753,148 1,894,419 -- (2,475,441) (581,022)
----- ----- ------------ ------------ --------- ------------ ------------
Issuance of stock for cash 9/00 -- -- 15,000 27,000 -- -- 27,000
Net Loss for year -- -- -- -- -- (118,369) (118,369)
----- ----- ------------ ------------ --------- ------------ ------------
Balance - September 30, 2000 -- -- 768,148 1,921,419 -- (2,593,810) (672,391)
----- ----- ------------ ------------ --------- ------------ ------------
Extinquishment of debt -- -- -- 337,887 -- -- 337,887
Net Loss for year -- -- -- -- -- (32,402) (32,402)
----- ----- ------------ ------------ --------- ------------ ------------
Balance - September 30, 2001 -- -- 768,148 2,259,306 -- (2,626,212) (366,906)
----- ----- ------------ ------------ --------- ------------ ------------
Net Loss for year -- -- -- -- -- (47,297) (47,297)
----- ----- ------------ ------------ --------- ------------ ------------
Balance - September 30, 2002 -- -- 768,148 2,259,306 -- (2,673,509) (414,203)
----- ----- ------------ ------------ --------- ------------ ------------
Issuance of stock for Assets 7/03 -- -- 70,000,000 3 -- -- 3
Issuance of stock for Cash 8/03 -- -- 9,000,000 225,450 -- -- 225,450
Issuance of stock for Debt 9/03 -- -- 115,000 121,828 -- -- 121,828
Issuance of stock for Expenses 9/03 -- -- 115,000 89,939 -- -- 89,939
Issuance of stock for Services 9/03 -- -- 31,300,000 125,200 -- -- 125,200
Net Loss for year -- -- -- -- -- (145,868) (145,868)
----- ----- ------------ ------------ --------- ------------ ------------
Balance - September 30, 2003 -- -- 111,298,148 2,821,726 -- (2,819,377) 2,349
----- ----- ------------ ------------ --------- ------------ ------------
...Continued
F-7
...CONTINUED
XSUNX, INC.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit) September 30, 2005
Deficit
Accumulated
Treasury Stock Common Stock Common During
-------------------- ------------------------- Stock Development
# of Shares Amount # of Shares Amount Warrants Stage Totals
----------- ----- ----------- ----------- ----------- ----------- -----------
Issuance of stock for Cash -- -- 181,750 21,071 -- -- 21,071
Issuance of stock for Cash -- -- 217,450 22,598 -- -- 22,598
Issuance of stock for Cash -- -- 254,956 34,669 -- -- 34,669
Issuance of stock for Cash -- -- 694,649 96,306 -- -- 96,306
Issuance of stock for Cash -- -- 157,649 21,421 -- -- 21,421
Issuance of stock for Cash -- -- 57,000 5,133 -- -- 5,133
Issuance of stock for Cash -- -- 1,174,500 81,472 -- -- 81,472
Issuance of Common Stock Warrants -- -- -- -- 1,200,000 -- 1,200,000
Net Loss for year -- -- -- -- -- (1,509,068) (1,509,068)
----------- ----- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 2004 -- -- 114,036,102 3,104,396 1,200,000 (4,328,445) (24,049)
----------- ----- ----------- ----------- ----------- ----------- -----------
Issuance of stock for cash -- -- 5,919,537 471,068 -- -- 471,068
Issuance of stock for cash -- -- 300,500 20,067 -- -- 20,067
Issuance of stock for services -- -- 10,000 3,000 -- -- 3,000
Issuance of stock for services -- -- 300,000 24,000 -- -- 24,000
Issuance of stock for cash -- -- 527,000 40,260 -- -- 40,260
Issuance of stock for services -- -- 125,000 10,000 -- -- 10,000
Issuance of stock for services -- -- 114,469 13,827 -- -- 13,827
Issuance of stock for Collateral 26,798,418 -- -- -- -- -- --
Issuance of stock for loan inducement -- -- 2,544,031 310,117 -- -- 310,117
Net Loss for year -- -- -- -- -- (1,400,839) (1,400,839)
----------- ----- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 2005 26,798,418 $ -- 123,876,639 $ 3,996,735 $ 1,200,000 $(5,729,284) $ (532,549)
=========== ===== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-8
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
NOTE 1 - ORGANIZATION:
XsunX, Inc. ("XsunX," the "Company" or the "issuer") is a Colorado corporation
formerly known as Sun River Mining Inc. "Sun River"). The Company was originally
incorporated in Colorado on February 25, 1997. In May 1999 management decided to
write-off the Sun River Bolivian subsidiaries and to take the subsequent loss,
of all investments associated with the subsidiaries. Effective September 24,
2003, The Company completed a Plan of Reorganization and Asset Purchase
Agreement with Xoptix, Inc., a California corporation.
Pursuant to the Plan the Company acquire the following three patents for Seventy
Million (70,000,000) shares (post reverse split one for twenty): No. 6,180,871
for Transparent Solar Cell and Method of Fabrication (Device), granted on
January 30, 2001; No. 6,320,117 for Transparent Solar Cell and Method of
Fabrication (Method of Fabrication), granted on November 20, 2001; and No.
6,509,204 for Transparent Solar Cell and Method of Fabrication (formed with a
Schottky barrier diode and method of its manufacture), granted on January 21,
2003.
Pursuant to the Plan, the Company authorized the issuance of 110,530,000 (post
reverse split) common shares. Prior to the Plan the Company had no tangible
assets and insignificant liabilities. Subsequent to the Plan the Company
completed its name change from Sun River Mining, Inc. to XsunX, Inc. The
transaction was completed on September 30, 2003.
XsunX, Inc. is developing solar cell designs and manufacturing process with the
intent to provide commercially viable solar cell design applications that
convert sun light into electrical energy. The process for producing electricity
from sun light is known as Photovoltaics. Photovoltaic ("PV") is the science of
capturing and converting solar energy into electricity.
The product of the Company's development efforts is intended to deliver two
aspects of deliverable technologies in the form of an integrated solution
providing, a) commercially scalable manufactured processes and equipment
designed for the specific manufacture of the Company's thin film solar
technologies, and b) proprietary thin film solar cell designs that address new
application opportunities.
NOTE 2 - GOING CONCERN
GOING CONCERN:
The financial statements of the Company have been presented on the basis that
they are a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
not generated any revenue and has an accumulated deficit at September 30, 2005
of $6,201,284.
The future success of the Company is likely dependent on its ability to attain
additional capital, or to find an acquisition to add value to its present
shareholders and ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be successful in
obtaining such financing, or that it will attain positive cash flow from
operations. Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for the
Company to continue as a going concern.
The Company has made substantial investments this last year in the development
of intellectual property assets as part of a business-restructuring plan. The
purpose of these investments was to acquire patented solar electric glass
technology. The Company believes that its patented solar electric glass
technology has a number of market opportunities in the multi-billion dollar
worldwide architectural glass markets.
F-9
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - DEVELOPMENT STAGE COMPANY:
The Company has not earned significant revenues from operations. Accordingly,
the Company's activities have been accounted for as those of a "Development
Stage Enterprise" as set forth in Financial Accounting Standards Board Statement
No. 7 ("SFAS 7"). Among the disclosures required by SFAS 7 are that the
Company's financial statements be identified as those of a development stage
company, and that the statements of operations, stockholders' equity (deficit)
and cash flows disclose activity since the date of the Company's inception.
BASIS OF ACCOUNTING:
The accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States.
CASH AND CASH EQUIVALENTS:
For purposes of the statements of cash flows, cash and cash equivalents include
cash in banks and money markets with an original maturity of three months or
less.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. Significant
estimates made in preparing these financial statements include the estimate for
the useful life of property and equipment, and the fair value of stock warrants.
Actual results could differ from those estimates
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
accounts payable and accrued liabilities are carried at cost, which approximates
their fair value, due to the relatively short maturity of these instruments. As
of September 30, 2005 and 2004, the Company's notes payable have stated
borrowing rates that are consistent with those currently available to the
Company and, accordingly, the Company believes the carrying value of these debt
instruments approximates their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and are depreciated or amortized
using the straight-line method over the following estimated useful lives:
Furniture, fixtures & equipment 7 Years
Computer equipment 5 Years
Commerce server 5 Years
Computer software 3-5 Years
Leasehold improvements Length of the lease
Net earning (loss) per share:
Basic loss per share is computed on the basis of the weighted average number of
common shares outstanding. For all periods, all of the Company's common stock
equivalents were excluded from the calculation of diluted loss per common share
because they were anti-dilutive, due to the Company's net losses.
ADVERTISING:
Advertising costs are expensed as incurred. Total advertising costs were $3,975
and $0.0 for the years ended September 30, 2005 and 2004, respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred. Total research and
development costs were $ 501,423 and $129,493 for the years ended September 30,
2005 and 2004, respectively.
F-10
OTHER COMPREHENSIVE INCOME:
The Company has no components of other comprehensive income (loss) and
accordingly, net loss is equal to comprehensive loss in all periods.
NOTE 4 - FEDERAL INCOME TAX:
The Company accounts for income taxes under SFAS No. 109, which requires the
asset and liability approach to accounting for income taxes. Under this
approach, deferred income taxes are determined based upon differences between
the financial statement and tax bases of the Company's assets and liabilities
and operating loss carry forwards using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets are
recognized if it is more likely than not that the future tax benefit will be
realized.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
2005 2004
-------------- --------------
Deferred Tax Liability $ 6,204,284 $ 4,328,445
Deferred Tax Assets
Net Operating Loss Carry forwards
Book/Tax Differences in Bases of Assets 0 0
-------------- --------------
Valuation allowance $ 6,204,284 $ 4,328,445
-------------- --------------
Net Deferred tax assets $ 0 $ 0
============== ==============
At September 30, 2005, the Company had net operating loss carry forwards of
approximately, $6,204,284 for federal income tax purposes. These carry forwards
if not utilized to offset taxable income will begin to expire in 2010.
NOTE 5 - CAPITAL STOCK TRANSACTIONS:
The authorized capital stock of the Company was established at 500,000,000 with
no par value. On September 29, 2003 the Board of Directors authorized a reverse
split of 1 for 20 shares of stock. The stocks issued in 2003 were for accrued
directors fees and salaries and to pay off past debt to investors. 70,000,000
shares of stock were issued to obtain the patent rights from Xoptix, Inc. Also
shares of stock were issued in 2003 for consulting fees in arranging the
formation of the new Corporation. In 2004 2,737,954 shares of stock were issued
for cash and consulting fees. 9,840,537 shares of common stock were issued in
2005 for cash and consulting fees. In July 2005, 26,798,418 shares of common
stock were placed in XSUNX, Inc. Treasury Stocks as collateral for the long-term
note with Cornell Capital Partners.
In 2005, the Company issued 6,747,037 shares of common stock for $531,395 in
cash, 549,419 shares of common stock for consulting fees with estimated value of
$50,827, and 2,544,031 shares for a loan inducement with estimated value of
$310,117.
NOTE 6 - STOCK OPTIONS AND WARRANTS:
STOCK OPTION PLAN:
On July 15, 2004, the Board of Directors of XsunX resolved to establish the 2004
Stock Option Plan. The plan was adopted to provide equity incentives to
employees, consultants and suppliers of the Company. The adoption of the Plan
was subject to ratification by a majority of the Company's stockholders, which
approval was to be obtained within 12 months from the date the Plan was adopted
by the Board. The Plan was cancelled by the Board, due to non-approval by the
shareholders, in August 2005. No stocks or options were issued at September 30,
2005
F-11
WARRANT/OPTION EXPENSE
Warrant/Option Expense for the Company was computed by multiplying the value of
the difference between the warrant exercise price, if less than the market
price, and the market price of the stock at date of grant. This method resulted
in a $0.0 charge to expenses for the warrants granted in the year ended
September 30, 2005, as follows:
2005 WARRANT/OPTION EXPENSE CHART
Underlying In the Money
Share Value at Spread at Date
Holder # of Warrants Exercise Price Date of Grant of Grant Warrant Expense
------------------------ -------------- --------------- ----------------- ----------------- ---------------
Richard Rocheleau 250,000 $.20 $.15 $.0 $ .0
------------------------ -------------- --------------- ----------------- ----------------- ---------------
Arokia Nathan 250,000 $.20 $.15 $.0 $ .0
------------------------ -------------- --------------- ----------------- ----------------- ---------------
John Moore 250,000 $.20 $.12 $.0 $ .0
------------------------ -------------- --------------- ----------------- ----------------- ---------------
Cornell Capital, LP 4,250,000 $.15 $.15 $.0 $ .0
------------------------ -------------- --------------- ----------------- ----------------- ---------------
Cornell Capital, LP 2,125,000 $.20 $.15 $.0 $ .0
------------------------ -------------- --------------- ----------------- ----------------- ---------------
Totals $0.0
------------------------ -------------- --------------- ----------------- ----------------- ---------------
WARRANT GRANTS
License Stock Warrant MVSystems, Inc.- In September 2004 as consideration for
the grant of the License, XsunX granted MVS a warrant (the "License Stock
Warrant") for the purchase of up to Five Million (5,000,000) shares of common
stock of XsunX (the "License Stock Warrant Shares"), the warrant will expire
five (5) years after the date of the grant.
Technology Sharing Warrant MVSystems, Inc.- In September 2004 as consideration
for access to MVS know how and Service at Cost pursuant to the technology
sharing agreement between the parties, XsunX granted to MVS a warrant to
purchase up to One Million shares (1,000,000) of common stock of XsunX (the
"Technology Sharing Warrant Shares"). The Technology Sharing Warrant carries a
five (5) year exercise term and is subject to conditional vesting in accordance
with the following provisions:
(1) The Technology Sharing Warrant shall become exercisable in the amount of
250,000 shares upon the satisfactory completion of Phase 2 under the MVS Phase 2
Development Agreement.
(2) The Technology Sharing Warrant shall become exercisable in the amount of
250,000 shares upon the satisfactory completion, as reasonably determined by the
XsunX Board of Directors, of any subsequent phase of development as may be
defined under the MVS future development proposal.
(3) The Technology Sharing Warrant shall become exercisable in the amount of
500,000 shares upon the Commercialization of an XsunX process.
Consultancy Warrant Bentley - In September 2004 the Company granted James
Bentley a consultancy and advisory warrant in the amount of 1,000,000 shares
with an exercise price of $.15 per share. Mr. Bentley has worked with the
Company in its initial stage helping to establish a plan for the development of
working samples and the review and selection process for engaging qualified
research and development firms to initiate development efforts. Mr. Bentley had
also assisted the Company in continued efforts to expand research efforts and
business development opportunities. The warrant was issued for the conversion of
$15,000 in accrued consultancy fees, and as part of a Consultancy and Advisory
Agreement and carries a 3 year exercise term and is subject to the following
vesting provisions:
(1) 500,000 shares upon the effective date of the warrant. Thereafter, the
warrant shall become exercisable at the rate of 125,000 shares per calendar
quarter up to the full amount of the warrant.
F-12
Consultancy and Advisory Warrant Dr. Madan - In September 2004 as compensation
for Dr. Madan's advice and consultation efforts in the furtherance of XsunX
business initiatives as Chairman of the XsunX Scientific Advisory Board , XsunX
granted Dr. Madan the a warrant (the "Consultancy and Advisory Warrant") to
purchase up to One Million (1,000,000) shares of common stock of XsunX (the
"Consultancy and Advisory Stock Warrant Shares") The Warrant carries a five (5)
year exercise term and is subject to conditional vesting in accordance with the
following provisions:
(1) The Consultancy and Advisory Warrant shall become exercisable at the rate of
25,000 Shares per month during and up to the first twenty-four (24) months of
engagement by XsunX of Dr. Madan.
(2) The Consultancy and Advisory Warrant shall become exercisable in the amount
of 150,000 shares upon the satisfactory completion of Phase 2 under the MVS
Phase 2 Development Agreement.
(3) The Consultancy and Advisory Warrant shall become exercisable in the amount
of 250,000 shares upon the Commercialization of an XsunX process.
Consultancy and Advisory Warrant Nathan - A Consultancy and Advisory agreement
with Dr. Arokia Nathan for services to the Company as a member of the Scientific
Advisory Board was approved by the Board on February 1, 2005. The Board issued a
warrant agreement for the purchase of common stock to Dr. Arokia Nathan in
accordance with the provisions of the Consulting and Advisory Agreement totaling
two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The
Warrant carries a three (3) year exercise term and is subject to conditional
vesting in accordance with the following provisions:
(2) The Warrant will vest in the amount of 50,000 shares upon the effective date
of the Consultancy and Advisory Agreement which was February 1, 2005.
Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar
quarter, or any apportioned amount thereof, during the term of two (2) year
engagement by XsunX, Inc. of Dr. Arokia Nathan.
Consultancy and Advisory Warrant Agreement Rocheleau- A Consultancy and Advisory
agreement with Dr Richard E. Rocheleau for services to the Company as a member
of the Scientific Advisory Board was approved by the Board on February 1, 2005.
The Board issued a warrant agreement for the purchase of common stock to Dr.
Richard E. Rocheleau in accordance with the provisions of the Consulting and
Advisory Agreement totaling two hundred fifty thousand (250,000) warrants
exercisable at $.20 each. The Warrant carries a three (3) year exercise term and
is subject to conditional vesting in accordance with the following provisions:
(2) The Warrant will vest in the amount of 50,000 shares upon the effective date
of the Consultancy and Advisory Agreement which was February 1, 2005.
Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar
quarter, or any apportioned amount thereof, during the term of two (2) year
engagement by XsunX, Inc. of Dr. Richard Rocheleau.
Consultancy and Advisory Warrant Agreement Moore - A Consultancy and Advisory
agreement with Dr John J. Moore for services to the Company as a member of the
Scientific Advisory Board was approved by the Board on March 8, 2005. The Board
issued a warrant agreement for the purchase of common stock to Dr. John J. Moore
in accordance with the provisions of the Consulting and Advisory Agreement
totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each.
The Warrant carries a three (3) year exercise term and is subject to conditional
vesting in accordance with the following provisions:
(2) The Warrant will vest in the amount of 50,000 shares upon the effective date
of the Consultancy and Advisory Agreement which was March 8, 2005. Thereafter,
the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any
apportioned amount thereof, during the term of two (2) year engagement by XsunX,
Inc. of Dr. John Moore.
Warrant to Purchase Common Stock Cornell - On July 14, 2005, the Company
consummated a Securities Purchase Agreement (the "Purchase Agreement") with
Cornell providing for the sale by the Company to Cornell of its 12% secured
convertible debentures in the aggregate principal amount of $850,000. Under the
Purchase Agreement, the Company also issued to Cornell five-year warrants to
purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and $0.20,
respectively (collectively, the "Warrants").
During the years ended September 30, 2004, and September 30, 2005, the board of
directors approved the issuance of warrants to purchase an aggregate of
15,125,000 shares of the Company's common stock. Such warrants are exercisable
at prices ranging from $.15 to $.20 per share, vest over periods up to 60
months, and expire at various times through June 2010.
During the years ended September 30, 2004, and September 30, 20005, no warrant
holders exercised warrants to purchase the Company's common stock.
F-13
A summary of warrant activity for the year ended September 30, 2004 and 2005 is
as follows:
Weighted- Weighted-
Average Average
Number of Exercise Warrants Exercise
Warrants Price Exercisable Price
---------- ------- ----------- --------
Outstanding, September 30, 2003 0 $ 0.0 0 $ 0.0
Granted 2004 8,000,000 $ .15 6,700,000 $ .15
Exercised 2004 0 $ 0.0
---------- ------- ---------- -------
Outstanding, September 30, 2004 8,000,000 $ .15 6,700,000 $ .15
Granted 2005 7,125,000 $ .17 6,725,000 $ .17
Exercised 2005 0 $ 0.0
---------- ------- ---------- -------
Outstanding, September 30, 2005 15,125,000 $ .1595 14,450,000 $ .1595
==========
At September 30, 2005, the range of warrant prices for shares under warrants and
the weighted-average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable
-------------------------------------------------- ---------------------------------
Weighted-
Weighted- Average Weighted-
Range of Average Remaining Number Average
Warrant Number of Exercise Contractual Of Exercise
Exercise Price Warrants Price Life Warrants Price
-------------- ------------ -------------- ---------------- ---------------- -------------
$.15 8,000,000 $ .15 2 6,700,000 $ .15
.17 7,125,000 .17 2.8 6,725,000 .17
------------ ----------------
15,125.000 14,450,000
============ ================
NOTE 7 - NOTES, COMMITMENTS, AND CONTINGENCIES
NOTE PAYABLE
On July 14, 2005, XSUNX, Inc. entered into a Secured Convertible Debenture
agreement with Cornell Capital Partners, LP in the amount of $400,000. The
interest shall accrue on the outstanding principal balance hereof at an annual
rate equal to twelve percent (12%.) This Debenture shall be convertible into
shares of Common Stock at the option of the Holder, with a conversion price in
effect on any Conversion Date shall be equal to ten cents ($.10), which may be
adjusted pursuant to the other terms of this Debenture.
On August 16, 2005, XSUNX, Inc. received an additional $450,000 from Cornell
Capital Partners, LP with the same interest and conversion rights. The
Debentures are secured by the assets of the Company and mature on the first
anniversary of the date of issuance and bear interest at the annual rate of 12%
in cash.
TRADEMARK TRANSFER AGREEMENT:
On May 6, 2004 a Trademark transfer agreement was signed with Western Gas and
Electric Company of California. Western solely owns all rights and interest in
and to the registered trademark consisting of printed words styled as "POWER
GLASS' as more fully set forth herein ("Trademark") and desires to assign and
transfer, subject to the terms and conditions set forth herein, all rights and
interest in the Trademark to XsunX in exchange for the payment set forth in this
Agreement. The purchase price for the Trademark shall be: (1) the sum of $10,000
if paid within one (1) year from the effective date; (2) the sum of $20,000 if
paid after the conclusion of the first (1st) year but prior to the conclusion of
the second (2nd) year after the effective date of this Agreement; (3) the sum of
$35,000 if paid after the conclusion of the second (2nd) year but prior to the
conclusion of the third (3rd) year after the effective date of this Agreement;
or (4) the sum of $50,000 if paid after the conclusion of the third (3rd) year
but prior to the conclusion of three (3) years and six (6) months after the
effective date of this Agreement. If payment is not made prior to the conclusion
of three (3) years and six (6) months after the effective date of this
Agreement, XsunX shall re-assign the Trademark back to Western as set forth
herein. At September 2005 the balance of $20,000 is included in Accounts Payable
F-14
FUNDING AGREEMENT
On July 14, 2005, the Company entered into a Standby Equity Distribution
Agreement (the "Distribution Agreement") with Cornell Capital Partners LP
("Cornell") providing for the sale and issuance to Cornell of up to $10,000,000
of Common Stock over a period of up to 24 months after the signing of the
Distribution Agreement. Under the Distribution Agreement, the Company may sell
to Cornell up to $250,000 in shares of its common stock (the "Common Stock")
once every five trading days at a price of 96% of the lowest closing bid price
(as reported by Bloomberg L.P.), of the Common Stock on the principal market
where the Common Stock is traded for the five consecutive trading days following
a notice by the Company to Cornell of its intention to sell shares. The Company
will also pay a 5% commitment fee upon each sale of shares under the
Distribution Agreement. Cornell has agreed not to short any of the shares of
Common Stock
In connection with the Distribution Agreement, the Company has issued to Cornell
2,544,031 shares of Common Stock as a commitment fee. It also issued to
Newbridge Securities Corporation, a registered broker dealer, 65,232 shares of
Common Stock as compensation for its services as the exclusive placement agent
for the sale of the Common Stock under the Distribution Agreement.
In August 2005 the Company filed a registration statement with the Securities
and Exchange Commission pertaining to the Common Stock issuable upon sales under
the Distribution Agreement. In December 2005 the Company withdrew the
registration statement and terminated the Distribution Agreement with Cornell in
lieu of obtaining alternate financing.
NOTE 8 - SUBSEQUENT EVENTS
EXPANDED LICENSE AND WARRANTS
Expanded Use License stock warrant MVSystems, Inc.- As consideration for the
grant of an Expanded Use License on October 12, 2005, granting XsunX additional
benefits for use of licensed technologies and patents, XsunX granted MVS a
warrant (the "Expanded Use License Stock Warrant") for the purchase of up to
Seven Million (7,000,000) shares of common stock of XsunX, the warrant will
expire five (5) years after the date of the grant and is subject to the
following vesting provisions:
(7) The Expanded Use License Stock Warrant allowed for the vesting of one
million (1,000,000) warrants on the effective date of the agreements.
(8) Another one million (1,000,000) warrants will vest upon the satisfactory
completion of a Phase 4 development program for the development of technologies
licensed under the Expanded Use License.
(9) The balance of five million (5,000,000) warrants will vest upon the date the
technologies licensed within the Expanded Use License are licensed to a third
party in a bona fide arms-length commercial setting.
FUNDING AGREEMENT
On December 12, 2005, XsunX, Inc. consummated a Securities Purchase Agreement
dated December 12, 2005 with Cornell Capital Partners L.P. providing for the
sale by the Company to Cornell of 10% secured convertible debentures in the
aggregate principal amount of $5,000,000 (the "Debentures") of which $2,000,000
was advanced immediately. The second installment of $2,000,000 will be advanced
immediately prior to the filing by the Company, with the Securities and Exchange
Commission, of a Registration Statement. The last installment of $1,000,000 will
be advanced three days prior to the date the Registration Statement is declared
effective by the Commission. The Debenture is convertible into shares of Common
Stock at the option of the Holder at a conversion price per share equal to the
lesser of $0.38 or 95% of the lowest daily volume weighted average price of the
Common Stock, as quoted by Bloomberg, LP, for the 30 trading days immediately
preceding the date of conversion (the "Variable Market Price"). Unless waived by
the Company, the Holders may not, together with their affiliates, convert more
than an aggregate of $350,000 in any 30-day period of principal amount of the
Debentures at the Variable Market Price. Cornell has agreed not to short any of
the shares of Common Stock
NOTE 9 - FINANCIAL ACCOUNTING DEVELOPMENTS:
Recently issued Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity". The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
are effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatory redeemable financial instruments of nonpublic
entities. The Company has not issued any financial instruments with such
characteristics.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" (FIN No. 46R), which
addresses how a business enterprise should evaluate , whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB
Interpretation No. 46, "Consolidation of
F-15
Variable Interest Entities", which was issued in January 2003. Companies are
required to apply FIN 46R to variable interests in variable interest entities
("VIE") created after December 31, 2003. For variable interest in VIEs created
before January 1, 2004 the interpretation is applied beginning January 1, 2005.
For any VIEs that must be consolidated under FIN No. 46R that were created
before January 1, 2004, the assets, liabilities and non-controlling interests of
the VIE initially are measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If
determining the carrying value is not practicable, fair value at the date FIN
No. 46R first applies may be used measure the assets, liabilities and
non-controlling interest of the VIE. The Company does not have any interest in
VIEs.
In December 2004, the FASB issued SFAS No. 123R (revised 2004) "Share-Based
Payment" which amends FASB Statement No. 123 and will be effective for public
companies for interim or annual periods beginning June 15, 2005. The new
statement will require entities to expense employee stock options and other
share-based payments. The new standard may be adopted in one of three ways - the
modified prospective transition method, a variation of the modified transition
method or the modified retrospective transition method. The Company is to
evaluate how it will adopt the standard and the evaluation the effect that the
adoption of SFAS 123R will have on the financial position and results of
operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." The statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4 previously stated that "under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight and rehandling costs may be so abnormal as to require treatment as
current period charges". SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal". In addition, this statement requires that allocation of fixed
production overhead to the costs of conversion be based on the prospectively and
are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005, with earlier application permitted for inventory costs incurred
during fiscal years beginning after the date this Statement is issued. The
adoption of SFAS No. 151 does not have an impact on the Company's financial
position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB opinion No. 29,
Accounting for Non-monetary Transactions, is based on the principle that
exchange of non-monetary assets should be measured on the fair value of the
assets exchanges. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for non-monetary exchanges of similar productive assets that do not
have commercial substance. A non-monetary has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for non-monetary exchanges occurring in
fiscal periods beginning June 15, 2005. The adoption of SFAS No. 153 is not
expected to have an impact on the Company's financial position and results of
operations.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liability's fair value can be reasonably estimated. FIN 47
also defines when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The provision is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006
and does not believe the adoption will have a material impact on its
consolidated financial position or results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and a correction of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by the Company in the
first quarter of 2006. The Company is currently evaluating the effect that the
adoption of SFAS 154 will have on its results of operations and financial
condition but does not expect it to have a material impact.
In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on
Issue 05-6, Determining the Amortization Period for Leasehold Improvements,
which requires that leasehold improvements acquired in a business combination
purchased subsequent to the inception of a lease be amortized over the lesser of
the useful life of the assets or a term that includes renewals that are
reasonably assured at the date of the business combination or purchase. EITF
05-6 is effective for periods beginning after July 1, 2005. We do not expect the
provisions of this consensus to have a material impact on the financial
position, results of operations or cash flows.
F-16
72,879,263 Shares
Common Stock
PROSPECTUS
February 9, 2006
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is set forth in this prospectus. We are offering to sell shares of our
common stock and seeking offers to buy shares of our common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of these securities. Our
business, financial condition, results of operation and prospects may have
changed after the date of this prospectus.