Form 10KSB/A for XSUNX INC
19-Jan-2006
Annual Report
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Form 10-KSB contains forward-looking statements. The presentation of future aspects of XsunX, Inc. ("XsunX," the "Company" or "issuer") found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," or "could" or the negative variations thereof or comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause XsunX's actual results to be materially different from any future results expressed or implied by XsunX in those statements. Important facts that could prevent XsunX from achieving any stated goals include, but are not limited to, the following:
Some of these risks might include, but are not limited to, the following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;
(e) failure to commercialize its technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside parties;
(h) insufficient revenues to cover operating costs.
There is no assurance that the Company will be profitable, the Company may not be able to successfully develop, manage or market its products and services, the Company may not be able to attract or retain qualified executives and technology personnel, the Company's products and services may become obsolete, government regulation may hinder the Company's business, additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in the Company's businesses.
The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-QSB and Annual 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, the Company had and continues to focus on the development and refinement of commercially appealing solar cell designs, proprietary manufacturing processes and facilities design that could be provided to its future licensees as turn-key solutions for the mass production of Power Glass(TM) thin films. A large part of the Company's 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
The Company intends to market its integrated manufacturing systems as turnkey solutions for the manufacture of its 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 the Company's thin film designs. Manufacturers would in turn agree to manufacture and distribute the Company's 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.
The Company intends to target customers who are developing their own technology platforms in which the manufacture of or the integration of its thin film solar cells could play an important role. The Company 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, the Company reduces operating expenses and saves capital in plant, property and equipment. As a result, should the Company realize earnings, it intends to reinvest its retained earnings in R&D in an effort to continuously develop related new technologies that will help achieve sustainable competitive advantages for the Company.
MARKETING STRATEGY
The Company intends to enhance, promote and support the idea that XsunX 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, the Company plans to undertake advertising and promotion efforts. These efforts may be outsourced and will require the services of an advertising relations firm. The Company plans to interview various firms and select those most capable of assisting us with comprehensive advertising and promotion plans. The Company intends to commence building and staffing its marketing department to accelerate these efforts in the first part of 2006. The Company has not yet finalized the potential costs of its marketing strategy.
The Company will invest in small test campaigns before committing to large promotions or marketing campaigns. The initial marketing strategy the Company will be to market to potential manufacturer partners in its target markets representing solar device manufactures, glass, and building materials manufacturers.
PLAN OF OPERATIONS
XsunX anticipates the 12-month capital operational requirements of the company to be $4,500,000 dollars. Since the reorganization of the Company on September 30, 2003 the Company has 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 the Company issued convertible debentures in the amount of $850,000, (see Item 5 "Market for Registrants Common Equity and Related Stockholder Matters - Sale of Shares and Debenture") and $5,000,000, (see Item 8B "Other Invormation - Funding Agreement") respectively to an accredited investor. The net proceeds from the placement of equity capital and the debentures will be applied to its 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 its 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.
The Company may change any or all of the budget categories in the execution of its business attempts. None of the items is to be considered fixed or unchangeable.
The Company will need substantial additional capital to support its budget. The Company has no revenues. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, the Company may not be able to carry out its business plan, may never achieve sales or royalty income, and could fail in business as a result of these uncertainties.
The Company will need to seek additional financing for this budget. (See "Risk Factors" at p. 14.
Management believes the summary data and audit presented herein is a fair presentation of the Company's results of operations for the periods presented. These historical results may not necessarily be indicative of results to be expected for any future period. As such, future results of the Company may differ significantly from previous periods.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005, COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2004
The Company generated no revenues in the period ended September 30, 2005 as well as for the same period in 2004.
The Company 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.
For the twelve months ended September 30, 2005, the Company's 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 interest 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 the Company's change in primary business focus in October 2003 and the developing nature of its 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 the Company has accumulated deficits totaling ($6,204,284) to September 30, 2005.
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, the Company 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 the Company's business plan.
For the twelve months ended, September 30, 2005, the Company's capital needs have primarily been met from the proceeds of (i) private placement of common stock made by the Company 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 the Company 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 the Company 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 by the Company.
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, the Company 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.
The Company had, at September 30, 2005, working capital of $255,853. The Company anticipates that there will not be sufficient cash generated from operations in the current year necessary to fund its current and anticipated cash requirements. The Company plans to obtain additional financing from equity and debt placements. The Company has been able to raise capital in a series of equity and debt offerings in the past. While there can be no assurances that it will be able to obtain such additional financing, on terms acceptable to us and at the times required, or at all, the Company believes that sufficient capital can be raised in the foreseeable future. On December 12, 2005 the Company sold a secured 10% convertible debenture in the amount of $5,000,000 (see "Item 8B "Other Information - Funding Agreement").
NET OPERATING LOSS
For federal income tax purposes, the Company 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.
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