Notes to Financial Statements
September 30, 2012 and 2011
-
ORGANIZATION AND LINE OF BUSINESS
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. Effective September 24, 2003, the Company
completed a Plan of Reorganization and Asset Purchase Agreement (the “Plan”).
Line of Business
In the year
ended September 30, 2011, XsunX modified its previous plans to directly establish product manufacturing infrastructure. We have
re-focused operations on the development of a cross-industry thin film solar manufacturing concept that we believed provides an
opportunity for XsunX to establish a competitive advantage within the industry. We have been developing and we have begun to market
a hybrid manufacturing solution to produce high performance Copper Indium Gallium (di) Selenide (CIGS) thin film solar cells. Our
patent pending system and processing technology, which we call CIGSolar®, focuses on the mass production of individual thin-film
CIGS solar cells that match silicon solar cell dimensions and can be offered as a non-toxic, high-efficiency and lowest-cost alternative
to the use of silicon solar cells. We intend to offer licenses for the use of the CIGSolar® process technology thereby generating
revenue streams through licensing fees and manufacturing royalties for the use of the technology.
Going Concern
The accompanying financial statements
have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and
liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments
that might result if the Company is unable to continue as a going concern. The Company does not generate significant revenue, and
has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going
concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent
upon, among other things, additional cash infusion. The Company has obtained funds from its shareholders since its inception through
the year ended September 30, 2012. Management believes the existing shareholders and the prospective new investors will provide
the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core
of business.
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of XsunX, Inc. is
presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations
of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform
to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation
of the financial statements.
Development
Stage Activities and Operations
The Company has been in its initial
stages of formation and for the year ended September 30, 2012, had no revenues. A development stage activity as one in which all
efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues
are insignificant.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include
the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options.
Actual results could differ from those estimates.
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.
Property
and Equipment
Property and equipment are stated
at cost, and are depreciated using straight line over its estimated useful lives:
Leasehold improvements
|
|
Length of the lease
|
Computer software and equipment
|
|
3 Years
|
Furniture & fixtures
|
|
5 Years
|
Machinery & equipment
|
|
5 Years
|
The Company capitalizes property and
equipment over $500. Property and equipment under $500 are expensed in the year purchased. The depreciation expense for the years
ended September 30, 2012, and 2011, were $41,706 and $38,472, respectively.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2012 and 2011
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value
of Financial Instruments
Fair Value of Financial Instruments,
requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate
that value. As of September 30, 2012, the balances reported for cash, prepaid expenses, accounts payable, accrued expenses, derivative
liability, and notes payable approximate the fair value because of their short maturities.
We adopted ASC Topic 820 (originally
issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured as fair value
on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical
instruments in active markets;
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices
for identical or similar instruments in markets that are not active; and
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market
data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques
in which one or more significant inputs or significant value drivers are unobservable.
|
We measure certain financial instruments
at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September
30, 2012:
Fair Value of Financial Instruments
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
150,926
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
150,926
|
|
Convertible Debenture, net of discount
|
|
|
63,465
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63,465
|
|
Total liabilities measured at fair value
|
|
$
|
214,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
214,391
|
|
Loss per Share Calculations
Loss per Share is the calculation
of basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to
basic earnings per share except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s
diluted loss per share is the same as the basic loss per share for the years ended September 30, 2012 and 2011 as the inclusion
of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
|
|
For the year ended
|
|
|
September 30,
|
|
|
2012
|
|
2011
|
|
|
|
|
|
(Loss) to common shareholders (Numerator)
|
|
$
|
(1,555,194
|
)
|
|
$
|
(1,117,654
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding (Denominator)
|
|
|
247,855,835
|
|
|
|
218,617,564
|
|
Revenue Recognition
The Company recognizes revenue when
services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk
of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
To date the Company has had minimal revenue and is still in the development stage.
Advertising
Advertising costs are expensed as incurred. Total advertising
costs were $7,565, and $6,622 for the years ended September 30, 2012 and
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2012 and 2011
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Research and development costs are expensed as incurred.
Total research and development costs were $122,673 and $282,492 for the years ended September 30, 2012, and 2011, respectively.
Stock-Based Compensation
Share-based Payment applies to transactions
in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for
goods or services that are to follow a fair value of those equity instruments. We are required to follow a fair value approach
using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred
compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option.
This has not had a material impact on our results of operations.
Income Taxes
Deferred income taxes are provided
using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and
tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment.
When tax returns are filed, it is
highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management
believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or
litigation
processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized
tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing
authorities upon examination.
Recent Accounting
Pronouncements
Management reviewed accounting pronouncements
issued during the year ended September 30, 2012, and the following pronouncements were adopted during the period.
The Company adopted ASC 815 "Accounting
for Derivative Instruments and Hedging Activities". This pronouncement addresses the accounting for derivative instruments
including certain derivative instruments embedded in other contracts, and hedging activities. Derivative instruments that meet
the definition of assets and liabilities should be reported in the financial statements at fair value, and any gain or loss should
be recognized in current earnings. The adoption of this pronouncement did not have a material effect on the financial statements
of the Company.
-
CAPITAL STOCK
At September 30, 2012, the Company’s authorized
stock consisted of 500,000,000 shares of common stock, with no par value. The Company is also authorized to issue 50,000,000 shares
of preferred stock with a par value of $0.01 per share. The rights, preferences and privileges of the holders of the preferred
stock will be determined by the Board of Directors prior to issuance of such shares.
During the year ended September 30,
2012, the Company issued 7,000,000 restricted shares of common stock as payment for the reduction of $205,565 of principal and
accrued interest balance under a note originally issued by the Company in August 2009. As of the date of the transaction the fair
value of the shares issued for the debt reduction was $420,000 resulting in a loss on conversion of $214,435. During the year ended
September 30, 2012, the Company also accepted offers for the sale of 1,666,667 units composed of one share of restricted common
stock and a five year warrant exercisable to purchase two shares of Common Stock at $0.015 per share for cash of $25,000; and 1,515,152
units composed of one share of restricted common stock and a five year warrant exercisable to purchase two shares of Common Stock
at $0.0165 per share for cash of $25,000; a holder of a warrant in the amount of 3,333,334 exercised all available warrants utilizing
a cashless exercise provision resulting in the net issuance of 1,720,430 shares of the Company’s restricted common stock;
a holder of a warrant in the amount of 3,030,303 exercised all available warrants utilizing a cashless exercise provision resulting
in the net issuance of 1,559,715 shares of the Company’s restricted common stock; 400,000 shares of the Company’s restricted
common stock were issued for accounts payable of $17,000 with a fair value of $14,000 and recognized a gain of $3,000; 1,050,078
shares of the Company’s restricted common stock were issued for services at fair value of $34,000; 2,000,000 shares of the
Company’s restricted common stock were issued to a scientific consultant for $7,500 in services related to a special assembly
project and 12 months of consulting services valued at $60,000; 500,000 shares of common stock were issued for 12 months of prepaid
rent with a fair value for $25,000; the holder of unsecured 8% convertible notes issued by the Company on various dates
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2012 and 2011
-
CAPITAL STOCK (Continued)
during the year, converted
the total accrued principal and interest for the various notes in the amount of $148,120. Upon conversion the Company issued 8,741,825
shares of common voting stock to the holder. The above shares were issued in a transactions exempt from registration pursuant
to Section 4(2) of the Securities Act. Also, during the period certain employees forgave their salary, which has been reflected
as contributed services in the financial statements. Additional, during the year ended September 30, 2012, the Company issued
an aggregate of 27,500,000 shares of the Company’s common stock, no par value per share, to Ironridge Global IV, Ltd., of
which 26,000,000 shares were for settlement of accounts payable of $549,913 with a fair value of $780,000, and the Company recognized
a loss of $230,087. Also, 1,500,000 shares of common stock with a fair value of $45,000 were retained by Ironridge Global IV,
Ltd. The issuance is exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section
3(a)(10) thereof, as an issuance of securities in exchange for bona fide outstanding claims, where the terms and conditions of
such issuance are approved by a court after a hearing upon the fairness of such terms and conditions.
During the year ended September 30,
2011, pursuant to an S-1 Registration Statement declared effective by the SEC on June 30, 2010,
and
a Post-Effective Amendment No. 1 registration declared effective by the Securities and Exchange Commission on April 4, 2011
the
Company sold to Lincoln Park Capital Group, LLC (LPC) a total of approximately 7,013,096 shares for a total investment of $575,000.
These shares were sold at various pricing between $0.08 and $0.0888 per share, and included 159,720 of the remaining pool of 1,236,112
commitment shares were issued on a pro rata basis to LPC as LPC has purchased additional shares pursuant to the effective S-1 Registration
Statement. Also, during the year ended September 30, 2011, the Company also issued 5,000,000 units composed of one share of restricted
common stock and a five year warrant exercisable to purchase two shares of Common Stock at $0.04 per share for cash of $200,000;
1,250,000 shares of restricted common stock at a price of $0.04 per share for cash of $50,000; a holder of warrants exercised all
available 5,000,000 warrants utilizing a cashless exercise provision resulting in the net issuance of 2,680,204 shares of the Company’s
restricted common stock. The above shares were issued in a transactions exempt from registration pursuant to Section 4(2) of the
Securities Act.
-
STOCK OPTIONS AND WARRANTS
The Company adopted a
Stock Option Plan for the purposes of granting stock options to its employees and others providing services to the Company, which
reserves and sets aside for the granting of Options for Twenty Million (20,000,000) shares of Common Stock. Options granted under
the Plan may be either Incentive Options or Nonqualified Options and shall be administered by the Company's Board of Directors
("Board"). Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective
Option agreements may provide. Notwithstanding any other provision of the Plan or of any Option agreement, each Option shall expire
on the date specified in the Option agreement. During the year ended September 30, 2012, the Company granted 1,500,000 incentive
stock options to board members for services and are fully vested. The stock options are exercisable for a period of five years
from the date of grant at an exercise price of $0.045 per share and expire on January 11, 2017.
Risk free interest rate
|
0.83%
|
Stock volatility factor
|
89.22%
|
Weighted average expected option life
|
5 years
|
Expected dividend yield
|
None
|
A summary of the Company’s stock
option activity and related information follows:
|
|
9/30/2012
|
|
9/30/2011
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Number
|
|
average
|
|
Number
|
|
average
|
|
|
of
|
|
exercise
|
|
of
|
|
exercise
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
Outstanding, beginning of the period
|
|
|
21,180,000
|
|
|
$
|
0.210
|
|
|
|
10,180,000
|
|
|
$
|
0.27
|
|
Granted
|
|
|
1,500,000
|
|
|
|
0.045
|
|
|
|
11,000,000
|
|
|
$
|
0.10
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Expired
|
|
|
(14,680,000
|
)
|
|
|
0.014
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding, end of the period
|
|
|
8,000,000
|
|
|
$
|
0.210
|
|
|
|
21,180,000
|
|
|
$
|
0.18
|
|
Exercisable at the end of the period
|
|
|
6,500,000
|
|
|
$
|
0.270
|
|
|
|
8,544,159
|
|
|
$
|
0.27
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted during the period
|
|
|
|
|
|
$
|
0.045
|
|
|
|
|
|
|
$
|
0.10
|
|
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2012 and 2011
-
STOCK OPTIONS AND WARRANTS (Continued)
The weighted average remaining contractual life of options
outstanding issued under the plan as of September 30, 2012 was as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Stock
|
|
Stock
|
|
Remaining
|
Exercisable
|
|
Options
|
|
Options
|
|
Contractual
|
Prices
|
|
Outstanding
|
|
Exercisable
|
|
Life (years)
|
$
|
0.360
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
0.06 years
|
$
|
0.360
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
0.06 years
|
$
|
0.360
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
0.12 years
|
$
|
0.360
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
0.16 years
|
$
|
0.160
|
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
1.50 years
|
$
|
0.100
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
3.05 years
|
$
|
0.045
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
4.28 years
|
|
|
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
|
|
Stock-based compensation expense recognized
during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based
compensation expense recognized in the financial statements of operations during the year ended September 30, 2012, included compensation
expense for the stock-based payment awards granted prior to, but not yet vested, as of September 30, 2012 based on the grant date
fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to September 30, 2012, based
on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation expense recognized
in the statement of operations during the years ended September 30, 2012 and 2011 was $129,834 and $186,016, respectively.
Warrants
A summary of the Company’s warrants
activity and related information follows:
|
|
9/30/2012
|
|
9/30/2011
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Number
|
|
average
|
|
Number
|
|
average
|
|
|
of
|
|
exercise
|
|
of
|
|
exercise
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
Outstanding, beginning of the period
|
|
|
8,583,332
|
|
|
$
|
0.32
|
|
|
|
4,195,332
|
|
|
$
|
0.61
|
|
Granted
|
|
|
6,363,637
|
|
|
$
|
0.02
|
|
|
|
10,000,000
|
|
|
$
|
0.04
|
|
Exercised
|
|
|
(11,363,637
|
)
|
|
$
|
0.02
|
|
|
|
(5,000,000
|
)
|
|
$
|
(0.04
|
)
|
Expired
|
|
|
(250,000
|
)
|
|
$
|
0.20
|
|
|
|
(612,000
|
)
|
|
$
|
(0.73
|
)
|
Outstanding, end of the period
|
|
|
3,333,332
|
|
|
$
|
0.63
|
|
|
|
8,583,332
|
|
|
$
|
0.32
|
|
Exercisable at the end of period
|
|
|
3,333,332
|
|
|
$
|
0.63
|
|
|
|
8,583,332
|
|
|
$
|
0.32
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants granted during the period
|
|
|
|
|
|
$
|
0.02
|
|
|
|
|
|
|
$
|
0.04
|
|
At September 30, 2012, the weighted
average remaining contractual life of warrants outstanding:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
Exercisable
|
|
Warrants
|
|
Warrants
|
|
Contractual
|
Prices
|
|
Outstanding
|
|
Exercisable
|
|
Life (years)
|
$
|
0.50
|
|
|
|
1,666,666
|
|
|
|
1,666,666
|
|
|
0.08 years
|
$
|
0.75
|
|
|
|
1,666,666
|
|
|
|
1,666,666
|
|
|
0.08 years
|
|
|
|
|
|
3,333,332
|
|
|
|
3,333,332
|
|
|
|
-
INCOME TAXES
The Company files income tax returns
in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for years before 2009.
Included in the balance at September
30, 2012, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about
the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance
of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to
the taxing authority to an earlier period.
The Company's policy is to recognize
interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the period
ended September 30, 2012, the Company did not recognize interest and penalties.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2012 and 2011
-
DEFERRED TAX BENEFIT
At September 30, 2012, the
Company had net operating loss carry-forwards of approximately $20,003,900 that may be offset against future taxable income from
the year 2012 through 2030. No tax benefit has been reported in the September 30, 2012 financial statements since the potential
tax benefit is offset by a valuation allowance of the same amount.
The income tax provision differs
from the amount of income tax determined by applying the U.S. federal and state income tax rate of 40% to pretax income from continuing
operations for the years ended September 30, 2012 and 2011 due to the following:
|
|
9/30/2012
|
|
9/30/2011
|
Book Income
|
|
$
|
(622,078
|
)
|
|
$
|
(447,062
|
)
|
Nondeductible Stock Compensation
|
|
|
51,934
|
|
|
|
74,406
|
|
Contributed capital
|
|
|
38,814
|
|
|
|
—
|
|
Nondeductible other expenses
|
|
|
113,505
|
|
|
|
—
|
|
Nondeductible Penalties
|
|
|
10
|
|
|
|
238
|
|
Loss on settlement of debt
|
|
|
176,609
|
|
|
|
—
|
|
Meals & Entertainment
|
|
|
231
|
|
|
|
530
|
|
Depreciation
|
|
|
(2,516
|
)
|
|
|
11,339
|
|
Loss on disposal of assets
|
|
|
—
|
|
|
|
(6,494
|
)
|
Valuation Allowance
|
|
|
243,491
|
|
|
|
367,043
|
|
Income Tax Expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards
and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred
tax assets consist of the following components as of September 30, 2012 and 2011:
|
|
9/30/2012
|
|
9/30/2011
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
NOL Carryforward
|
|
$
|
7,996,118
|
|
|
$
|
7,755,958
|
|
Capital loss Carry-Forward
|
|
|
2,917,009
|
|
|
|
2,917,009
|
|
Contribution Carry-forward
|
|
|
40
|
|
|
|
40
|
|
Section 179 Expense Carry-forward
|
|
|
73,406
|
|
|
|
73,406
|
|
R&D Carry-forward
|
|
|
44,217
|
|
|
|
37,407
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
—
|
|
|
|
—
|
|
Depreciation
|
|
|
(17,796
|
)
|
|
|
(15,280
|
)
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(11,012,994
|
)
|
|
|
(10,768,540
|
)
|
Net Deferred Tax Asset
|
|
$
|
—
|
|
|
$
|
—
|
|
-
PROMISSORY NOTE
During the year ended
September 30, 2009, the Company converted an accounts payable to a promissory note (the “Note”) in the amount of $456,920.
On November 3, 2011, in exchange for the Note of $456,920 plus accrued interest of $98,645 that had become due at September 1,
2011, the Company issued 7,000,000 restricted shares of common stock with a fair value of $420,000 as payment for the reduction
of $205,565 of principal balance and accrued interest under the Note, and incurred a loss on the conversion of the debt in the
amount of $214,435.
-
CONVERTIBLE PROMISSORY NOTES
During the year ended September 30,
2012, the Company entered into eight Securities Purchase Agreements (the "Purchase Agreements") each providing for the
sale by the Company of 8% unsecured Convertible Notes (“the Notes”) in the principal amounts of $53,000, $42,500,
$32,500, $37,500, $37,500, $32,500, $37,500 and $37,500 for an aggregate total of $310,500. During the year ended September 30,
2012 the holder converted the $53,000 Note plus $2,120 in accrued interest, the $42,500 Note plus $1,700 in accrued interest,
the $32,500 Note plus $1,300 in accrued interest, and $15,000 of the $37,500 Note. Upon conversion the Company issued an aggregate
of 8,741,825 shares of common voting stock to the holder. The remaining Notes mature on December 19, 2012, January 30, 2013, March
6, 2013, April 3, 2013 and May 30, 2013. The Company has the right to redeem a portion or all amounts outstanding under the any
Note prior to one hundred and eighty one days from issuance of the Note under a variable redemption rate premium. After one hundred
and eighty days the holder may convert into shares of common stock at a variable conversion price of 60% multiplied by the market
price of the average lowest three (3) and five (5) trading prices for the common stock during the ten (10) trading days prior
to the conversion date.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2012 and 2011
-
CONVERTIBLE PROMISSORY NOTES (Continued)
ASC Topic 815 provides
guidance applicable to convertible debt issued by the Company in instances where the number into which the debt can be converted
is not fixed. For example, when a convertible debt converts at a discount to market based on the stock price on the date of conversion,
ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated from the host contract and recorded
at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability of $150,926 representing
the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a
discount of $310,500 representing the imputed interest associated with the embedded derivative. The discount is amortized over
the life of the convertible debts, which resulted in the recognition of $206,465
in interest expense for the year ended September
30, 2012, and the derivative liability is adjusted periodically according to stock price fluctuations. At the time of conversion,
any remaining derivative liability will be charged to additional paid-in capital. For purpose of determining the fair market value
of the derivative liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black
Scholes valuation of the derivative are as follows:
Stock price on the valuation dates
|
|
0.03 - 0.04
|
Conversion price for the debt
|
|
0.014 - 0.0192
|
Dividend yield
|
|
0.00%
|
Months to Maturity
|
|
2 to 9
|
Risk free rate
|
|
Between 0.09% and 0.018%
|
Expected volatility
|
|
Between 106.82% and 157.79%
|
The value of the derivative liability at September
30, 2012 was $150,926.
-
COMMITMENTS AND CONTINGENCIES
The Company continues to lease a corporate office facility located
in Aliso Viejo and Irvine, CA. The lease is month to month at a monthly rate of $200 per month for the Aliso Viejo location and
$3,000 per month for the Irvine shop location.
-
SUBSEQUENT EVENTS
Management has evaluated subsequent events
as of the financial statement date according to the requirements of ASC TOPIC 855 and has reported the following:
Subsequent to the end
of the year ended September 30, 2012, a holder of Securities Purchase Agreements (the "Purchase Agreements") each providing
for the sale by the Company of 8% unsecured Convertible Notes (“the Notes”) in the principal amounts of $37,500 of
which $22,500 remained, $37,500, and $32,500 converted the total remaining principal of $92,500 of principal and $4,800 in accrued
interest retiring the notes. Upon conversion, the Company issued an aggregate of 9,265,139 shares respectively of common voting
stock to the holder.
In exchange for a promissory note (the “Note”) of $350,000 plus accrued interest of $35,863 that
had become due at September 30, 2012, the Company issued a new unsecured promissory exchange note (the “Exchange Note”)
in the amount of $385,863 in November 2012. The Holder and the Company exchanged the Note solely for (i) a 12% promissory Exchange
Note, (ii) and 500,000 shares of common stock. Interest on the Exchange note accrued interest at the rate of 18% per annum commencing
on September 30, 2012 through October 31, 2012 and thereafter at the rate of 12%. The Exchange Note is convertible into securities
of the Company by the Holder at the lesser of $0.025 or 70% of the lowest volume weighted average (VWAP) occurring during the ten
consecutive trading days immediately preceding the date on which the Holder may elect to convert portions of the note. The Exchange
Note matures on September 30, 2013 and the Company can prepay any then remaining principal and accrued interest balance upon first
providing the holder with a ten day prepayment notice.
On November 7, 2012, the Company consummated
a securities purchase agreement providing for the sales of an 8% convertible promissory note in the amount of $37,500, which, after
one hundred and eighty days, can be converted into shares of common stock at a conversion price of 60% of the average lowest five
(3) trading prices for the common stock, during the ten (10) trading day period ending on the latest complete trading day prior
to the conversion date. The note matures on August 7, 2013.
On November 7, 2012, the Company issued
a 10% unsecured convertible promissory note (the “Promissory Note”) for the principal sum of up to $78,000 plus accrued
interest on any advanced principal funds. Upon issuance of the Promissory Note the lender may immediately advance the sum of $25,000
to the Company, and may elect to pay additional consideration to the Company in such amounts and at such times as the Lender may
choose in its sole discretion. The Promissory Note matures one year from its issuance and may be converted by the Lender into shares
of common stock of the Company at the lesser of $.0125 per share at fifty percent of the lowest trade price in the twenty five
(25) trading days prior to the conversion of any outstanding funded principal or accrued interest under the Promissory Note.
In accordance with the Stipulation
for Settlement of Claims (“Stipulation”), dated June 27, 2012, by and between Ironridge Global IV, Ltd and the Company
as documented in Los Angeles County Superior Court Case No. BC484549, pursuant to which the Company delivered 27,500,000 shares
(“Shares”) of the Company’s common stock, no par value (“Common Stock”) to Ironridge. The Stipulation
provided for the subsequent issuance by the Company to Ironridge of additional Shares of Common Stock thereunder, the (“Adjustment
Shares”). In accordance with the stipulation on November 26, 2012 subject to a request by Ironridge the Company issued 6,271,791
Adjustment Shares to Ironridge Global IV, Ltd.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2012 and 2011
-
SUBSEQUENT EVENTS (Continued)
On December 13, 2012, the Company issued a
10% unsecured convertible promissory note (the “Promissory Note”) for the principal sum of up to $250,000 and accrued
interest on any advanced principal funds. Upon issuance of the Promissory Note the lender immediately advance the sum of $50,000
to the Company, and may elect to pay additional consideration to the Company in such amounts and at such times as the Lender may
choose in its sole discretion. The principal sum due the Lender shall be prorated based on the actual total consideration paid
to the Company by the Lender such that the Company will only be required to repay the amount funded by the lender, nor shall any
interest or other rights extend to any unfunded portion of the Promissory Note. If the Company repays the Promissory Note on or
before 90 days from the issuance date, the interest rate shall be zero percent (0%). If the Company does not repay the Promissory
Note on or before 90 days from the issuance date, a one-time Interest charge of 10% shall be applied to the any then advanced
principal sum. The Promissory Note matures one year from its issuance and may be converted by the Lender into shares of common
stock of the Company at the lesser of $.025 per share of at a sixty percent of the lowest trade price in the twenty five trading
days prior to the conversion of any outstanding funded principal or accrued interest under the Promissory Note.
Effective January 9, 2013, as part
of a continued effort that began in January 2012 to maximize the use of capital resources necessary to complete the assembly and
marketing of the Company’s CIGSolar technology through reductions to operating costs and functions that are redundant, the
Company elected to consolidate its executive management operations which has eliminated the need to have multiple officers performing
similar functions. In furtherance of these efforts the Company’s Board of Directors accepted the resignation of Joseph Grimes
as the Company’s President and Chief Operating Officer, effective immediately, and approved by unanimous consent the reorganization
and appointment of executive management as follows;
In connection with the resignation
of Mr. Grimes, the Board appointed Mr. Tom Djokovich to the position of President. Mr. Djokovich will continue to also serve as
the Company’s Chief Executive Officer (CEO), a Director, and Secretary duties which he has performed since October 2003.
Mr. Djokovich will focus on the strategic oversight of the day-to-day operations and securities compliance. Mr. Djokovich did not
enter into, or receive any grant or award under, any material plan, contract or arrangement in connection with his assumption of
duties as the Company’s President. Mr. Djokovich is 55 years old.
Mr. Grimes will continue to serve
as a member of the Board of Directors and will assume the position of Executive Sales Manager. As Executive Sales Manager, Mr.
Grimes will manage the marketing efforts associated with the Company’s commercialization efforts of its CIGSolar thin film
manufacturing technology. Mr. Grimes previously held the position of President and Chief Operating Officer. Mr. Grimes did not
enter into, or receive any grant or award under, any material plan, contract or arrangement in connection with his assumption of
duties as the Company’s executive sales manager. Mr. Grimes is 55 years old.