UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For The Quarterly Period Ended: March 31, 2017

☐ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For The Transition Period From ___________ to _______________

Commission File Number:   000-29621

XSUNX, INC.
(Exact name of registrant as specified in its charter)

Colorado
 
84-1384159
(State of incorporation)
 
(I.R.S. Employer Identification No.)

65 Enterprise, Aliso Viejo, CA 92656
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number: (949) 330-8060

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐            Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)                     Smaller reporting company   ☒
Emerging growth company ☐

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

The number of shares of common stock issued and outstanding as of May 15, 2017 was 967,714,645.


TABLE OF CONTENTS

   
PAGE
 
PART I - FINANCIAL INFORMATION
       
 
 3
 
       
 
3
 
       
 
4
 
       
 
5
 
       
 
6
 
       
 
7
 
       
 
12
 
       
 
15
 
       
 
15
 
       
PART II - OTHER INFORMATION
       
 
16
 
       
 
16
 
       
 
16
 
       
 
16
 
       
 
16
 
       
 
16
 
       
 
17
 
       
 
18
 
 



PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements. 
XSUNX, INC.
CONDENSED BALANCE SHEETS

   
March 31, 2017
   
September 30, 2016
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS
           
   Cash
 
$
43,692
   
$
22,172
 
   Accounts receivable
   
52,955
     
30,800
 
   Cost in excess of billing
   
98,849
     
10,126
 
   Prepaid expenses
   
13,166
     
2,266
 
                 
                        Total Current Assets
   
208,662
     
65,364
 
                 
PROPERTY & EQUIPMENT
               
   Office & miscellaneous equipment
   
29,842
     
29,842
 
   Machinery & equipment
   
626
     
626
 
     
30,468
     
30,468
 
     Less accumulated depreciation
   
(29,993
)
   
(29,930
)
                 
                     Net Property & Equipment
   
475
     
538
 
                 
                        TOTAL ASSETS
 
$
209,137
   
$
65,902
 
                 
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
               
                 
CURRENT LIABILITIES
               
   Accounts payable
 
$
208,613
   
$
46,515
 
   Credit card payable
   
65,191
     
65,114
 
   Accrued interest on notes payable
   
35,290
     
28,849
 
   Billing in excess of cost
   
22,818
     
41,454
 
   Derivative liability
   
437,862
     
430,532
 
   Promissory note, related party
   
35,000
     
35,000
 
   Convertible promissory note, related party
   
12,000
     
12,000
 
   Convertible promissory notes, current portion net of debt discount of $0 and $11,148, respectively
   
18,033
     
131,886
 
                 
                        Total Current Liabilities
   
834,807
     
791,350
 
                 
LONG TERM LIABILITIES
               
  Convertible promissory notes, net of debt discount of $1,450 and $0, respectively
   
168,362
     
115,000
 
                 
                        Total Long Term Liabilities
   
168,362
     
115,000
 
                 
                       TOTAL LIABILITIES
   
1,003,169
     
906,350
 
                 
SHAREHOLDERS’ DEFICIT
               
   Preferred stock 50,000,000 shares authorized, shares issued and outstanding designated as follows:
      Preferred Stock Series A, $0.01 par value, 10,000 authorized
      5,000 and 5,000 shares issued and outstanding, respectively
   
50
     
50
 
   Common stock, no par value;
     2,000,000,000 authorized common shares
     927,562,458 and 783,080,479 shares issued and outstanding, respectively
   
32,689,795
     
32,640,840
 
   Additional paid in capital
   
5,335,398
     
5,335,398
 
   Paid in capital, common stock warrants
   
3,811,700
     
3,811,700
 
   Accumulated deficit
   
(42,630,975
)
   
(42,628,436
)
                 
                      TOTAL SHAREHOLDERS’ DEFICIT
   
(794,032
)
   
(840,448
)
                 
                      TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
$
209,137
   
$
65,902
 

The accompanying notes are an integral part of these unaudited condensed financial statements


XSUNX, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
March 31, 2017
   
March 31, 2016
   
March 31, 2017
   
March 31, 2016
 
                         
SALES
 
$
537,909
   
$
372,718
   
$
931,611
   
$
575,948
 
                                 
COST OF GOODS SOLD
   
363,551
     
204,974
     
662,605
     
363,695
 
                                 
GROSS PROFIT
   
174,358
     
167,744
     
269,006
     
212,253
 
                                 
                                 
OPERATING EXPENSES
                               
    Selling, general and administrative expenses
   
114,132
     
127,059
     
241,052
     
251,761
 
    Depreciation and amortization expense
   
32
     
736
     
63
     
1,541
 
                                 
              TOTAL OPERATING EXPENSES
   
114,164
     
127,795
     
241,115
     
253,302
 
                                 
INCOME (LOSS) FROM OPERATIONS BEFORE  OTHER INCOME/(EXPENSES)
   
60,194
     
39,949
     
27,891
     
(41,049
)
                                 
OTHER INCOME/(EXPENSES)
                               
    Penalties
   
-
     
(222
)
   
(200
)
   
(222
)
    Gain on sale of asset
   
-
     
11,249
     
-
     
12,249
 
    Gain (Loss) on conversion of debt and change in derivative liability
   
(15,976
)
   
140,227
     
(7,330
)
   
219,557
 
    Interest expense
   
(11,246
)
   
(30,740
)
   
(22,900
)
   
(61,493
)
                                 
              TOTAL OTHER INCOME/(EXPENSES)
   
(27,222
)
   
120,514
     
(30,430
)
   
170,091
 
                                 
         NET INCOME (LOSS)
 
$
32,972
   
$
160,463
   
$
(2,539
)
 
$
129,042
 
                                 
BASIC EARNING (LOSS) PER SHARE
 
$
0.00
   
$
0.00
   
$
(0.00
)
 
$
0.00
 
DILUTED EARNING (LOSS) PER SHARE
 
$
0.00
   
$
0.00
   
$
(0.00
)
 
$
0.00
 
                                 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
                               
      BASIC
   
895,278,221
     
711,892,631
     
869,114,613
     
708,386,589
 
      DILUTED
   
1,266,192,697
     
811,358,293
     
869,114,613
     
807,852,251
 

The accompanying notes are an integral part of these unaudited condensed financial statements


XSUNX, INC.
CONDENSED STATEMENT OF SHAREHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED MARCH 31, 2017
(Unaudited)

                           
Additional
   
Stock Options/
             
   
Preferred Stock
   
Common Stock
   
Paid-in
   
Warrants
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Paid-in-Capital
   
Deficit
   
Total
 
Balance at September 30, 2016
   
5,000
   
$
50
     
783,080,479
   
$
32,640,840
   
$
5,335,398
   
$
3,811,700
   
$
(42,628,436
)
  $
(840,448
)
                                                                 
Common stock issued upon conversion of debt and accrued interest
   
-
     
-
     
144,481,979
     
48,955
     
-
     
-
     
-
     
48,955
 
                                                                 
Net Loss for the six months ended March 31, 2017
   
-
     
-
     
-
     
-
     
-
     
-
     
(2,539
)
   
(2,539
)
Balance at March 31, 2017 (unaudited)
   
5,000
   
$
50
     
927,562,458
   
$
32,689,795
   
$
5,335,398
   
$
3,811,700
   
$
(42,630,975
)
  $
(794,032
)


The accompanying notes are an integral part of these unaudited condensed financial statements


XSUNX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended
 
   
March 31, 2017
   
March 31, 2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
    Net (loss) income
 
$
(2,539
)
 
$
129,042
 
    Adjustment to reconcile net (loss) income  to net cash
      provided (used) in operating activities
               
    Depreciation & amortization
   
63
     
1,541
 
    Gain on sale of asset
   
-
     
(12,249
)
    Loss on conversion of debt and change in derivative liability
   
7,330
     
(219,557
)
    Amortization of debt discount recorded as interest expense
   
9,697
     
44,170
 
   (Increase) Decrease in Change in Assets:
               
    Accounts receivable
   
(22,155
)
   
(91,578
)
    Cost in excess of billing
   
(88,723
)
   
6,661
 
    Prepaid expenses
   
(10,900
)
   
(9,399
)
    Increase (Decrease) in Change in Liabilities:
               
    Accounts payable
   
162,175
     
85,398
 
    Accrued expenses
   
10,208
     
15,724
 
    Billing in excess of cost
   
(18,636
)
   
(15,000
)
                 
NET CASH PROVIDED BY (USED IN)  OPERATING ACTIVITIES
   
46,520
     
(65,247
)
                 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
    Purchase of fixed asset
   
-
     
(626
)
    Proceeds from sale of assets
   
-
     
16,000
 
                 
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
-
     
15,374
 
                 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
   Proceeds from convertible promissory notes
   
-
     
50,000
 
   Payments on convertible promissory notes
   
(25,000
)
   
(50,000
)
   Proceeds from related party promissory notes
   
-
     
35,000
 
                 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
   
(25,000
)
   
35,000
 
                 
NET INCREASE/(DECREASE) IN CASH
   
21,520
     
(14,873
)
                 
CASH, BEGINNING OF PERIOD
   
22,172
     
78,770
 
                 
CASH, END OF PERIOD
 
$
43,692
   
$
63,897
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
   Interest paid
 
$
2,996
   
$
410
 
   Taxes paid
 
$
-
   
$
-
 
                 
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS
               
   Issuance of common stock upon conversion of debt and accrued interest
 
$
48,955
   
$
122,161
 
   Debt discount on new issuances
 
$
-
   
$
13,539
 
   Accrued interest capitalized into convertible notes
 
$
-
   
$
16,033
 

The accompanying notes are an integral part of these unaudited condensed financial statements 
.


XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
MARCH 31, 2017

1.    Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the six months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ended September 30, 2017.  For further information refer to the financial statements and footnotes thereto included in the Company’s Form 10-K and Form 10-K/A for the year ended September 30, 2016.

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 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 six months ended March 31, 2017. 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 business development efforts in the solar PV industry. 

2.    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.

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, revenue recognition, the deferred tax valuation allowance, the fair value of stock options, and derivative liabilities. 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.

Revenue Recognition
Revenue and related costs on construction contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC 605-35”). Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Revenue is recognized based on the percentage of cost incurred. Costs include all direct materials, subcontractor costs, direct labor and those indirect costs related to contract performance, such as indirect labor, supplies, project planning and preparation, tools and repairs. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.

Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts, which require the revision, become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to costs and income, and are recognized in the period in which the revisions are determined.

The Asset, “Costs in excess of billing” represents revenues recognized in excess of amounts billed on contracts in progress. The Liability, “Billing in excess of costs”, represents billings in excess of revenues recognized on contracts in progress. At March 31, 2017, the cost in excess of billing was $98,849 and the billing in excess of costs was $22,818.


XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
MARCH 31, 2017

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Contract Receivables
Contract receivables are recorded on contracts for amounts currently due based upon progress billings, as well as any retentions, which are collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.

Project Warranties
Customers in our target market of California who purchase solar energy systems are covered by a warranty of up to 10 years in duration for material defects and workmanship. In addition, we provide a pass-through of the major components such as module mounting, inverter and solar panel manufacturers’ warranties to our customers, which generally range from 10 to 25 years. The Company has a limited history of project installations and will access potential warranty costs, and other allowances, based on our experience in servicing warranty claims as they may arise in the future. During the six months ended March 31, 2017 the Company did not experience costs related to warranty claims.

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.
 
Net Earnings (Loss) per Share Calculations  
Net earnings (Loss) per share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are computed by dividing by the weighted average number of common shares outstanding during the year. Diluted net earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the effect of stock options and stock based awards (Note 4), plus the assumed conversion of convertible debt (Note 5).   
  
For the six months ended March 31, 2017, the Company calculated the dilutive impact of the convertible debt of $199,845, which is convertible into shares of common stock. The convertible debt was not included in the calculation of net loss per share, because their impact was anti-dilutive.  

For the six months ended March 31, 2016, the Company calculated the dilutive impact of the convertible debt of $265,033, which is convertible into shares of common stock. The convertible debt was included in the calculation of net earnings per share, because their impact was dilutive.  

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 March 31, 2017, the balances reported for cash, prepaid expenses, accounts payable, accrued expenses approximate the fair value because of their short maturities.

We adopted ASC Topic 820 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.


XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
MARCH 31, 2017

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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  March 31, 2017:

   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Liabilities
                       
                         
Derivative Liability
 
$
437,862
   
$
-
   
$
-
   
$
437,862
 
Total Liabilities measured at fair value
 
$
437,862
   
$
-
   
$
-
   
$
437,862
 

Fair Value of Financial Instruments
The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:
 
Balance as of October 1, 2016
 
$
430,532
 
Net Loss on change in derivative liability and conversion of debt
   
7,330
 
Ending balance as of December 31, 2016
 
$
437,862
 

Recent Accounting Pronouncements
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements.

In May, 2016, FASB issued accounting standards update ASU-2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same time Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). The Company is currently evaluating the impact of the adoption of ASU 2016-12 on the Company’s financial statements.

In August 2016, FASB issued accounting standards update ASU-2016-15, “Statement of Cash Flows” (Topic 230) – Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU are effective for public and nonpublic entities for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on the Company’s financial statements. 

3.   CAPITAL STOCK

At March 31, 2017, the Company’s authorized stock consisted of 2,000,000,000 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 of which 10,000 shares have been designated as Series A Preferred Stock.  The rights, preferences and privileges of the holders of the preferred stock are determined by the Board of Directors prior to issuance of such shares.

During the six months ended March 31, 2017, the Company issued 144,481,979 shares of common stock upon conversion of principal in the amount of $42,500, plus accrued interest of $6,455.


XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
MARCH 31, 2017

4.    STOCK OPTIONS

On May 20, 2014, the Company adopted the 2014 XSUNX, Inc. Stock Option and Award Plan (the “Plan”) to enable the Company to obtain and retain the services of the types of Employees, Consultants and Directors who will contribute to the Company’s long range success and to provide incentives which are linked directly to increases in share value which will inure to the benefit of all stockholders of the Company.  The 2007 Stock Option Plan is superseded by the newly adopted 2014 XSUNX, Inc. Stock Option and Award Plan. 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.

A summary of the Company’s stock option activity and related information follows:

   
3/31/2017
 
         
Weighted
 
   
Number
   
average
 
   
of
   
exercise
 
   
Options
   
price
 
Outstanding, beginning of the period
   
1,500,000
   
$
0.045
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Expired
   
(1,500,000
)
   
0.045
 
Outstanding, end of the period
   
-
   
$
-
 
Exercisable at the end of the period
   
-
   
$
-
 
Weighted average fair value of
  options granted during the period
         
$
-
 

We account for stock-based payment award forfeitures as they occur. The Company did not recognized stock-based compensation expense in the statement of operations during the six months ended March 31, 2017.

5.    CONVERTIBLE PROMISSORY NOTES

On October 20, 2015, the Company entered into a third extension of a Note originally issued September 30, 2013. The extension terms included mandatory payments of $10,000 per month beginning November 1, 2015 until the note in the amount of $143,033 is paid in full. The Note bears interest at 12% annum, and a conversion price of 60% of the lowest volume weighted average price (“VWAP”) occurring during the twenty trading days preceding any conversion date by Holder. The balance of the provisions of the Note remained substantially the same. During the period the Company paid $25,000 of the principal balance, leaving a remaining balance of $18,033. At March 31, 2017, the Note matured and the Company and the Holder entered into discussions for the repayment of the Note.
 
On November 20, 2014, the Company issued a 10% unsecured convertible promissory note (the “Note”) for the principal sum of up to $400,000 plus accrued interest on any advanced principal funds. The Note matures eighteen months from each advance. The Note may be converted by the lender into shares of common stock of the Company at the lesser of $.0125 per share or fifty percent (50%) of the lowest trade price on any trade day following issuance of the Note, or the lowest effective price per share granted to any person or entity to acquire common stock after the issuance date of the Note, with the exception of the price per share offered to officers and directors of the Company. The Company recorded debt discount of $201,066 related to the conversion feature of the notes, along with derivative liabilities at inception. On November 20, 2014, the lender advanced $50,000 to the Company under the Note at inception. On various dates from February 18, 2015 through September 30, 2016, the lender advanced an additional $350,000 under the Note. During the six months ended March 31, 2017, the Company issued 144,481,979 shares of common stock upon conversion of $42,500 in principal, plus accrued interest of $6,455. As of March 31, 2017, there remains an aggregate outstanding principal balance of $169,812. During the six months ended March 31, 2017, the Company recognized debt amortization as interest expense in the amount of $9,697.



XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
MARCH 31, 2017

5.      CONVERTIBLE PROMISSORY NOTES (Continued)

Issuance of Convertible Promissory Notes for Services to Related Party
As of March 31, 2016, the remaining unsecured Convertible Promissory Notes (the “Notes”) in the amount of $12,000 to a Board member (the “Holder”) in exchange for retention as a director during the fiscal year ending September 30, 2014. The Note can be converted into shares of common stock by the Holder for $0.0045 per share. The Note matured on October 1, 2015, and bore a one-time interest charge of $1,200 which was applied to the principal on October 1, 2014. So long as any shares issuable under a conversion are subject to transfer and sale restrictions imposed pursuant to SEC Rule 144 of the Rules promulgated under the Securities Act of 1933, the Company shall, upon written request by Holder, file Form S-8, if applicable, with the U.S. Securities and Exchange commission to register the issued.

For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:

Risk free interest rate
 
Between 0.51% and 2.03%
Stock volatility factor
 
Between 97.53% and 173.0%
Months to Maturity
 
 5 years
Expected dividend yield
 
None

At March 31, 2017, the fair value of the derivative liability was $437,862.

6.    NOTE PAYABLE-RELATED PARTY

On August 5, 2014 the Company issued a 10% unsecured promissory note (the “Note”) to a related party in the aggregate principal amount of up to $80,000, plus accrued interest on any advanced principal funds.  The principal use of the proceeds from any advance under the Note are intended to assist in the purchase of materials, and services for the solar PV systems that we sell and install. Consideration advanced under the Note matures twenty four (24) months from each advance. The balance as of March 31, 2017 was $35,000, plus accrued interest of $5,841.

7.    SUBSEQUENT EVENTS

Management has evaluated subsequent events as of the financial statement date according to the requirements of ASC TOPIC 855 and has the following subsequent events to report.

On April 21, 2017, the Company authorized the issuance of 40,152,187 shares of common stock upon the conversion of $17,411.51 of principal, and $2,664.58 of accrued interest to the holder of a 10% convertible note originally issued November 20, 2014. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a) 2 of the Securities Act since among other things the transactions did not involve a public offering.
 
On May 12, 2017 XsunX, Inc. (the “Company”) issued a 10% unsecured convertible promissory note (the “Note”) to an accredited investor (the “Lender”) for the principal sum of up to $150,000 plus accrued interest on any advanced principal sums. Upon delivery the Lender advanced $25,000 to the Company under the Note, and, subject to the Lender’s discretion, may advance additional sums to the Company up to the full principal sum of $150,000.

The Company is only required to repay the amounts advanced by the Lender, and not required to repay any unfunded portion of the Note. The Note matures twelve months from the date of issuance and, commencing on the date of any advance, bears interest at 10% per annum on the sums advanced by the Lender. Sums advanced by the Lender under the Note may be converted into shares of the Company’s common stock by the Lender at a conversion price of the lesser of $0.01 (subject to adjustment for stock splits, dividends, combinations and other similar transactions), or 50% of the lowest trade price on any trade day following issuance of the Note, or the lowest effective price per share granted to any person or entity to acquire common stock after the issuance date of the Note, with the exception of the price per share offered to officers and directors of the Company.

The Lender agreed that so long as the Note remains outstanding, the Lender will not enter into or effect “short sales” or hedging transactions of the common stock which would established a short position with respect to the common shares of the Company.

The foregoing is qualified in its entirety by the form of Note attached as Exhibit 10.5, which is incorporated herein by reference.

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY AND FORWARD LOOKING STATEMENTS

In addition to statements of historical fact, this Quarterly Report on Form 10-Q contains forward-looking statements. The presentation of future aspects of XsunX, Inc. (“XsunX”, the “Company” or “issuer”) found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “intend”, or “could” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Item 1A: Risk Factors” in the Company’s Annual Report on Form 10-K and Form 10-K/A.

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-Q and Annual Reports on Form 10-K and Form 10-K/A filed by the Company and any Current Reports on Form 8-K filed by the Company.

Management believes the summary data presented herein is a fair presentation of the Company’s results of operations for the periods presented. Due to the Company’s change in primary business focus and new business opportunities these historical results may not necessarily be indicative of results to be expected for any future period. As such, future results of the Company may differ significantly from previous periods.

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 name change to XsunX, Inc.
 

Business Overview/Summary
 
XsunX specializes in the sale, design, and installation of solar photovoltaic power generation (PV), and energy saving technologies to provide our clients long term savings, predictability, and control of their energy costs. Making solar energy a good investment for our clients is our mission.
 
We service the commercial and residential PV markets in California providing project assessment and installation services to our customers including technology selection, system engineering, procurement, permitting, construction, grid connection, warranty, system monitoring and maintenance. We offer a wide variety of energy production and management technologies, design our systems in-house to ensure that the performance of the systems we deliver match the financial projections, and our full time project management and licensed assembly crews ensure a seamless process, from start to finish.

The Company operates as licensed contractor in California, and our executive management provides over 30 years of extensive experience in all aspects of construction and project assembly to ensure the accuracy and quality of systems, the continued integrity of the improved building or site, and compliance with all construction codes.

We guide our performance by striving to deliver consistently on the following core objectives:

● Commitment –   to keeping the customer’s best interests at the forefront at all times; and,

● Value –   through a focus   on performance and follow through that meets or exceeds customer expectations.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THREE MONTHS ENDED MARCH 31, 2016.

  Revenue and Cost of Sale s:

The Company generated revenues in the three months ended March 31, 2017 and 2016 of $537,909 and $372,718 respectively. The increase in revenue during the three months ended March 31, 2017 was the result of our marketing efforts for the sale of our solar carport and canopy offerings, and establishing a cross marketing sales program to provide companies entering the program an opportunity to market our commercial and residential solar system offerings to their customer base. We believe that the development of these programs during prior periods improved our ability to market our products and services, and to generate revenues, in future periods. The costs of goods sold for the three months ended March 31, 2017 and 2016 was $363,551 and $204,974, respectively. The Company to date has had minimal revenue and cost of sales, and anticipates continuing to generate revenues while working to increase sales volumes as it matures the scope of the Company’s capabilities and brand awareness.

Selling, General and Administrative Expenses:

Selling, General and Administrative (SG&A) expenses decreased by $12,927 during the three months ended March 31, 2017 to $114,132 as compared to $127,059 for the three months ended March 31, 2016. The decrease in SG&A expenses was related primarily due to the Company experiencing a decrease in administrative costs. Management expects SG&A expenses to increase in future periods as the Company continues to expand its marketing, sales, and service efforts.

Other Income/(Expenses):

Other income and (expenses) decreased by $(147,736) to $(27,222) for the three months ended March 31, 2017, compared to $120,514 for the three months ended March 31, 2016. The decrease was the result of a decrease in interest expense of $19,494, which included a decrease in non-cash amortization of debt discount in the amount of $18,329, a decrease in non-cash gain on conversion of debt and change of fair value of the derivative instruments of $156,203, a decrease in gain on sale of asset of $11,249, with an decrease in penalties of $222.

Net Income (Loss):

For the three months ended March 31, 2017, our net income was $32,972 as compared to net income of $160,463 for the three months ended March 31, 2016. This decrease in net income primarily stems from the decrease in other income (expenses) associated with the derivative instruments, and an overall decrease in operating expenses, with an increase in gross profit due to an increase in revenue. While management is working to increase sales and revenues as it matures the scope of the Company’s capabilities and brand awareness for its commercial and residential solar PV systems, the Company anticipates there is no assurance that any continued trend in sales growth will continue.


RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2017 COMPARED TO SIX MONTHS ENDED MARCH 31, 2016.

Revenue and Cost of Sale s:

The Company generated revenues in the six months ended March 31, 2017 and 2016 of $931,611 and $575,948 respectively. The increase in revenue during the six months ended March 31, 2017 was the result of our marketing efforts for the sale of our solar carport and canopy offerings, and establishing a cross marketing sales program to provide companies entering the program an opportunity to market our commercial and residential solar system offerings to their customer base. We believe that the development of these programs during prior periods improved our ability to market our products and services, and to generate revenues, in future periods. The costs of goods sold for the three months ended March 31, 2017 and 2016 was $662,605 and $363,695, respectively. The Company to date has had minimal revenue and cost of sales, and anticipates continuing to generate revenues while working to increase sales volumes as it matures the scope of the Company’s capabilities and brand awareness.

Selling, General and Administrative Expenses:

Selling, General and Administrative (SG&A) expenses decreased by $10,709 during the six months ended March 31, 2017 to $241,052 as compared to $251,761 for the six months ended March 31, 2016. The decrease in SG&A expenses was related primarily due to the Company experiencing a decrease in the administrative costs. Management expects SG&A expenses to increase in future periods as the Company continues to expand its marketing, sales, and service efforts.

Other Income/(Expenses):

Other income and (expenses) decreased by $(200,521) to $(30,430) for the six months ended March 31, 2017, compared to $170,091 for the six months ended March 31, 2016. The decrease was the result of a decrease in interest expense of $38,593, which included a decrease in non-cash amortization of debt discount in the amount of $34,474, a decrease in non-cash gain on conversion of debt and change of fair value of the derivative instruments of $226,887, a decrease in gain on sale of asset of $12,249, with an decrease in penalties of $22.

Net Income (Loss):

For the six months ended March 31, 2017, our net loss was $(2,539) as compared to net income of $129,042 for the six months ended March 31, 2016. This decrease in net income primarily stems from the decrease in other income (expenses) associated with the derivative instruments, and an overall decrease in operating expenses, with an increase in gross profit due to an increase in revenue. While management is working to increase sales and revenues as it matures the scope of the Company’s capabilities and brand awareness for its commercial and residential solar PV systems, the Company anticipates there is no assurance that any continued trend in sales growth will continue.

Liquidity and Capital Resources

We had a working capital deficit at March 31, 2017 of $626,145, as compared to a working capital deficit of $725,986 as of September 30, 2016. The decrease in working capital deficit of $99,841 was the result of an increase in cash, accounts receivable, cost in excess of billing, prepaid expenses, accounts payable and other payable, accrued expenses, an increase in derivative liability, with a decrease in billing in excess of cost, convertible notes.

Cash flow provided by operating activities was $46,520 for the six months ended March 31, 2017, as compared to cash flows used in operating activities of $(65,247) for the six months ended March 31, 2016. The increase in cash flow provided by operating activities was due to an increase in income, with a decrease in administrative expenses.

Cash flow provided by investing activities for the six months ended March 31, 2017 and 2016 were $0 and $15,374, respectively. The net change in investing activities was primarily due to proceeds received of $16,000 from the sale of certain assets and purchases of fixed assets in the prior period.

Cash used in financing activities for the six months ended March 31, 2017 was $25,000, as compared to $35,000 provided by financing activities for the six months ended March 31, 2016. Our capital needs have primarily been met from the proceeds of private placements, convertible notes, and initial revenues resulting from our change in business operations focused on the sale, design, and installation of Solar Photovoltaic (PV) Systems for commercial and industrial real-estate in in the period.


Our financial statements as of March 31, 2017 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued their report dated December 14, 2016, that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

For the three months ended March 31, 2017, the Company’s capital needs have been met from the use of working capital provided by the proceeds of (i) the Company’s working capital and (ii) revenues in the amount of $537,909.

Short Term
On a short-term basis, while our revenues have begun to develop under our new plan of operations we do not generate revenues sufficient to cover operations at this time.  Based on prior history, we may continue to have insufficient revenue to satisfy current and recurring expenses and liabilities.  For short term needs we may continue to be dependent on receipt, if any, of offering proceeds and the growth of our revenue.

Capital Resources

We have only common and preferred stock as our capital resources. We have no material commitments for capital expenditures within the next year, however as we work to market and make sales of our commercial solar PV system services, substantial capital may be needed to expand and pay for these activities.

Need for Additional Financing

We do not have capital sufficient to meet our cash needs.  We will have to seek loans or equity placements to cover such cash needs. No commitments to provide additional funds have been made by our management or other stockholders.  Accordingly, there can be no assurance that any additional funds will be available to us to allow it to cover our expenses as they may be incurred.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity or capital expenditures.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We do not have any market risk sensitive instruments. Since all operations are in U.S. dollar denominated accounts, we do not have foreign currency risk. Our operating costs are reported in U.S. dollars.

The Company does not invest in term financial products or instruments or derivatives involving risk other than money market accounts, which fluctuate with interest rates at market.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 

Changes in Internal Control over Financial Reporting

There was no change to our internal control over financial reporting that occurred during our second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



PART II - OTHER INFORMATION
Item 1.  Legal Proceedings.

None

Item 1A.  Risk Factors

There are no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K filed with the Securities and Exchange Commission dated December 14, 2016, and Form 10-K/A dated February 17, 2017. 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31, 2017, the Company issued 38,231,333 shares of common stock upon partial conversion of a convertible notes in principal in the amount of $18,200, plus the accrued interest of $2,827.

The Company relied on an exemption pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, in connection with the foregoing issuance.

Use of Proceeds from the Sale of Securities

The proceeds from the above sales of securities were and are being used primarily to fund efforts by the Company to expand operations to include the sale, design, and installation of solar electric PV systems, and in the day-to-day operations of the Company, and to pay the accrued liabilities associated with these operations.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mining and Safety Disclosures

None.

Item 5.  Other information
 
On March 17, 2017, the Company authorized the issuance of 38,231,333 shares of common stock upon the conversion of $18,200 of principal, and $2,827.23 of accrued interest, and on April 21, 2017 authorized the issuance of 40,152,187 shares of common stock upon the conversion of $17,411.51 of principal and $2,664.58 of accrued interest to the holder of a 10% convertible note originally issued November 20, 2014. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a) 2 of the Securities Act since among other things the transactions did not involve a public offering.

On May 12, 2017 XsunX, Inc. (the “Company”) issued a 10% unsecured convertible promissory note (the “Note”) to an accredited investor (the “Lender”) for the principal sum of up to $150,000 plus accrued interest on any advanced principal sums. Upon delivery the Lender advanced $25,000 to the Company under the Note, and, subject to the Lender’s discretion, may advance additional sums to the Company up to the full principal sum of $150,000.

The Company is only required to repay the amounts advanced by the Lender, and not required to repay any unfunded portion of the Note. The Note matures twelve months from the date of issuance and, commencing on the date of any advance, bears interest at 10% per annum on the sums advanced by the Lender. Sums advanced by the Lender under the Note may be converted into shares of the Company’s common stock by the Lender at a conversion price of the lesser of $0.01 (subject to adjustment for stock splits, dividends, combinations and other similar transactions), or 50% of the lowest trade price on any trade day following issuance of the Note, or the lowest effective price per share granted to any person or entity to acquire common stock after the issuance date of the Note, with the exception of the price per share offered to officers and directors of the Company.

The Lender agreed that so long as the Note remains outstanding, the Lender will not enter into or effect “short sales” or hedging transactions of the common stock which would established a short position with respect to the common shares of the Company.

The foregoing is qualified in its entirety by the form of Note attached as Exhibit 10.5, which is incorporated herein by reference.

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.



Item 6.  Exhibits

The following is a complete list of exhibits filed as part of this Form 10-Q.  Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
 
Exhibit
 
Description
10.1
 
Form of Third Extension Agreement to 12% Note used in connection with the exchange and 18 month extension to a promissory note that had become due September 30, 2015. (1)
10.2
 
Form of Promissory Note issued on August 5, 2014, used in connection with establishing access to interim financing requirements for solar system installations in the amount of up to $80,000. (2)
10.3
 
Form of Convertible 10% Promissory Note issued on November 20, 2014, used in connection with the sale of a convertible promissory note in an amount up to $400,000. (3)
10.4
 
Form 8-K related to the engagement of Liggett & Webb P.A. as the independent registered public accounting firm for XsunX, Inc. (4)
10.5
 
31.1
 
32.1
 
101.INS
 
XBRL Instance Document (5)
101.SCH
 
XBRL Taxonomy Extension Schema Document(5)
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (5)
101.DEF
 
XBRL Taxonomy Extension Label Linkbase Document (5)
101.LAB
 
XBRL Taxonomy Extension Presentation Linkbase Document (5)
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (5)
(1)
Incorporated by reference to exhibits included with the Company’s Report on Form 10-K filed with the Securities and Exchange Commission dated January 8, 2016.
 
(2)
Incorporated by reference to exhibits included with the Company’s Report on Form 10-Q filed with the Securities and Exchange Commission dated August 18, 2014.
 
(3)
Incorporated by reference to exhibits included with the Company’s Report on Form 8-K filed with the Securities and Exchange Commission dated November 26, 2014.
 
(4)
Incorporated by reference to exhibits included with the Company’s Report on Form 8-K filed with the Securities and Exchange Commission dated January 18, 2016.
 
(5)
Filed Herewith
 
 


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
XSUNX, INC.
     
Dated: May 15, 2017
By:
/s/ Tom M. Djokovich
   
Tom M. Djokovich,
Principal Executive and Accounting Officer

 
 
 
 
 
18
EXHIBIT 10.5

 
CONVERTIBLE PROMISSORY NOTE
$150,000

FOR VALUE RECEIVED, XsunX, Inc., a Colorado corporation, (the “Borrower”) with approximately 967,714,645 shares of common stock issued and outstanding, promises to pay to ________________ , a Nevada limited liability company , or its assignees (the “Lender”) the Principal Sum along with the Interest and any other fees according to the terms herein (this “Note”). This Note shall become effective on May 12, 2017 (the “Effective Date”).

The Principal Sum is One Hundred Fifty Thousand Dollars ( $150,000) plus accrued and unpaid interest. The total Consideration is One Hundred Fifty Thousand Dollars ( $150,000) payable by wire. The Lender shall pay Twenty-Five Thousand Dollars ( $25,000) of the Consideration upon execution of this Note (the “Initial Consideration”). The Lender may pay additional Consideration to the Borrower in such amounts as the Lender may choose in its sole discretion (the “Additional Consideration”). The Principal Sum due to the Lender, and as referenced hereinafter, shall be the Initial Consideration plus any Additional Consideration actually paid by the Lender such that the Borrower is only required to repay the amount funded and the Borrower is not required to repay any unfunded portion of this Note, nor shall any interest or other rights or remedies granted herein extend to any unfunded portion of this Note.

1. Maturity Date. The Maturity Date is twelve ( 12) months from the Effective Date (the “Maturity Date”) and is the date upon which the Principal Sum of this Note and unpaid interest and fees (the “Note Amount”) shall be due and payable. Within thirty (30) days prior to the Maturity Date, the Lender may provide the Borrower with a written notice to extend the Maturity Date and the Note Amount shall then be payable upon demand, but in no event later than sixty (60) months from the Effective Date (the ”Extended Maturity Date”). The Lender shall provide the Borrower with ten (10) days written notice to make a demand for payment (the “Demand Payment Date”), and the Demand Payment Date shall be considered to be the Extended Maturity Date.
2. Interest . This Note shall bear interest at the rate of Ten Percent ( 10% ) per year.
 
3. Conversion . The Lender has the right, at any time after the Effective Date, at its election, to convert all or part of the Note Amount into shares of fully paid and non-assessable shares of common stock of the Borrower (the “Common Stock”). The conversion price (the “Conversion Price”) shall be the lesser of (a) $0.01 per share of Common Stock or (b) Fifty Percent ( 50% ) of the lowest trade price of Common Stock recorded on any trade day after the Effective Date, or (c) the lowest effective price per share granted to any person or entity, including the Lender but excluding officers and directors of the Borrower, after the Effective Date to acquire Common Stock, or adjust, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating conversion or otherwise, any outstanding warrant, option or other right to acquire Common Stock or outstanding Common Stock equivalents (the “Conversion Price”). The conversion formula shall be as follows: Number of shares receivable upon conversion equals  the dollar  conversion amount  divided by  the Conversion  Price. A conversion notice  (the  “Conversion  Notice”)  may  be delivered  to  Borrower  by  method  of Lender’s choice (including but not limited to email, facsimile, mail, overnight courier, or personal delivery), and all conversions shall be cashless and not require further payment from the
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Lender. If no objection is delivered from the Borrower to the Lender, with respect to any variable or calculation reflected in the Conversion Notice within 24 hours of delivery of the Conversion Notice, the Borrower shall have been thereafter deemed to have irrevocably confirmed and irrevocably ratified such notice of conversion and waived any objection thereto. The Borrower shall deliver the shares of Common Stock from any conversion to the Lender (in any name directed by the Lender) within three (3) business days of Conversion Notice delivery. The Borrower shall pay any transfer agent fees for the issuance of shares. If the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, then upon request of the Lender and provided that the shares to be issued are eligible for transfer under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), or are effectively registered under the Securities Act, the Borrower shall cause its transfer agent to electronically issue the Common Stock issuable upon conversion to the Lender through the DTC Direct Registration System (“DRS”). If the Borrower is not participating in the DTC FAST program, then after receiving the Initial Consideration, the Borrower agrees to begin a good faith effort to apply and cause the approval for participation in the DTC FAST program. The Conversion Price shall be subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events.

4. Conversion Delays . If Borrower fails to deliver shares in accordance with the timeframe stated in Section 3 , the Lender, at any time prior to selling all of those shares, may rescind any portion, in whole or in part, of that particular conversion attributable to the unsold shares and have the rescinded conversion amount returned to the Principal Sum with the rescinded conversion shares returned to the Borrower (under the Lender’s and the Borrower’s expectations that any returned conversion amounts shall tack back to the original date of this Note). In addition, for each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day (inclusive of the day of the conversion) until share delivery is made; and such penalty shall be added to the Principal Sum of this Note (under the Lender’s and the Borrower’s expectations that any penalty amounts shall tack back to the original date of this Note consistent with applicable securities laws).

5. Limitation of Conversions . In no event shall the Lender be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Lender and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of this Note or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Lender and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso, provided, further, however, that the limitations on conversion may be waived by the Lender upon, at the election of the Lender, not less than 61 days prior notice to the Borrower, and the
 
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provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Lender, as may be specified in such notice of waiver).

6. Payment . The Borrower may not prepay this Note prior to the Maturity Date or the Extended Maturity Date, if extended by the Lender. Within six (6) days prior to the Maturity Date or Extended Maturity Date, the Borrower shall provide the Lender with a written notice to pay the Note Amount on the Maturity Date or Extended Maturity Date. Within three (3) days of receiving written notice, the Lender shall elect to either (a) accept payment of the Note Amount or (b) convert any part of the Note Amount into shares of Common Stock. If the Lender elects to convert part of the Note Amount into shares of Common Stock, then the Borrower shall pay the remaining balance of the Note Amount by the Maturity Date or Extended Maturity Date.

7. Piggyback Registration Rights . The Borrower shall include on the next registration statement the Borrower files with the SEC (or on the subsequent registration statement if such registration statement is withdrawn), excluding S-8 registration statements for employee stock grant and option plans, all shares of Common Stock issuable upon conversion of this Note unless such shares of Common Stock are eligible for resale under Rule 144. Failure to do so shall result in liquidated damages of Twenty Five Percent ( 25% ) of the outstanding principal balance of this Note being immediately due and payable to the Lender at its election in the form of cash payment or addition to the balance of this Note.

8. Lender’s Representations . The Lender hereby represents and warrants to the Borrower that (i) it is an “accredited investor” as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act, (ii) it understands that this Note and the shares of Common Stock underlying this Note (collectively, the “Securities”) have not been registered under the Securities Act by reason of a claimed exemption under the provisions of the Securities Act that depends, in part, upon the Lender’s investment intention; in this connection, the Lender hereby represents that it is purchasing the Securities for the Lender’s own account for investment and not with a view toward the resale or distribution to others; provided, that Lender may syndicate participations in the Securities among a limited number of participants who all meet the suitability standards of an “accredited investor” as defined in Rule 501(a) of Regulation D of the Securities Act and will share among themselves and the Lender an economic interest in the Securities on a pari passu, pass through basis with investment intent, such that the availability of the private placement exemption for the issuance of the Note under Rule 506 of Regulation D of the Securities Act is preserved, (iii) the Lender, if an entity, further represents that it was not formed for the purpose of purchasing the Securities, (iv) the Lender acknowledges that the issuance of this Note has not been reviewed by the United States Securities and Exchange Commission (the “SEC”) nor any state regulatory authority since the issuance of this Note is intended to be exempt from the registration requirements of Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D, and (v) the Lender acknowledges receipt and careful review of this Note, the Borrower’s filings with the SEC (including without limitation, any risk factors included in the Borrower’s most recent Annual Report on Form 10-K), and any documents which may have been made available upon request as reflected therein, and hereby represents that it has been furnished by the Borrower with all information regarding the Borrower, the terms and conditions of the purchase and any additional information that the Lender has requested or desired to know, and has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Borrower concerning the Borrower and the terms and conditions of the purchase.
 
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9. Borrower’s Representations . The Borrower hereby represents and warrants to the Lender that (i) the Borrower is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full power and authority to own, lease, license and use its properties and assets and to carry out the business in which it proposes to engage, and (ii) the Borrower has the requisite corporate power and authority to execute, deliver and perform its obligations under this Note and to issue and sell this Note, and (iii) all necessary proceedings of the Borrower have been duly taken to authorize the execution, delivery, and performance of this Note, and when this Note is executed and delivered by the Borrower, it will constitute the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their terms, except as such enforceability may be limited by general principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

10. Default . The following are events of default under this Note: (i) the Borrower shall fail to pay any principal under this Note when due and payable (or payable by conversion) thereunder; or (ii) the Borrower shall fail to pay any interest or any other amount under this Note when due and payable (or payable by conversion) thereunder; or (iii) a receiver, trustee or other similar official shall be appointed over the Borrower or a material part of its assets and such appointment shall remain uncontested for twenty (20) days or shall not be dismissed or discharged within sixty (60) days; or (iv) the Borrower shall become insolvent or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any; or (v) the Borrower shall make a general assignment for the benefit of creditors; or (vi) the Borrower shall file a petition for relief under any bankruptcy, insolvency or similar law (domestic or foreign); or (vii) an involuntary proceeding shall be commenced or filed against the Borrower; or (viii) the Borrower shall lose its status as “DTC Eligible” or the Borrower’s shareholders shall lose the ability to deposit (either electronically or by physical certificates, or otherwise) shares into the DTC System; or (ix) the Borrower shall become delinquent in its filing requirements as a fully-reporting issuer registered with the SEC; or (x) the Borrower shall commit a material breach of any of its covenants, representations or warranties in this Note.

11. Remedies . In the event of any default, the funded portion of the Note Amount shall become immediately due and payable at the Mandatory Default Amount. The Mandatory Default Amount shall be 150% of the funded portion of the Note Amount. Commencing five (5) days after the occurrence of any event of default that results in the eventual acceleration of this Note, the interest rate on the Mandatory Default Amount shall accrue at a default interest rate equal to the lesser of ten percent (10%) per annum or the maximum rate permitted under applicable law. In connection with such acceleration described herein, the Lender need not provide, and the Borrower hereby waives, any presentment, demand, protest or other notice of any kind, and the Lender may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. While the Mandatory Default Amount is outstanding and default interest is accruing, the Lender shall have all rights as a holder of this Note until such time as the Lender receives full payment pursuant to this paragraph, or has converted all the remaining Mandatory Default Amount and any other outstanding fees and interest into Common Stock under the terms of this Note. In the event of any default and at the request of the Lender, the Borrower shall file a registration statement with the SEC to register all shares of Common Stock issuable upon conversion of this
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Note that are otherwise eligible to have their restrictive transfer legend removed under Rule 144 of the Securities Act. Nothing herein shall limit Lender’s right to pursue any other remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Borrower’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof. The Borrower may only pay the full balance of the Mandatory Default Amount, and may not make partial payments unless agreed upon by the Lender. If the Borrower desires to pay the Mandatory Default Amount, then the Borrower shall provide the Lender with six (6) days prior written notice of payment. Within three (3) days of receiving written notice, the Lender shall elect to either (a) accept payment, or (b) convert any part of the payment into shares of Common Stock. If the Lender elects to convert part of the payment into shares of Common Stock, then the Borrower shall pay the remaining balance of the Mandatory Default Amount.

12. No Shorting . Lender agrees that so long as this Note from Borrower to Lender remains outstanding, the Lender shall not, Lender’s affiliates shall not, and Lender will not direct any third parties to, enter into or effect “short sales” of the Common Stock or hedging transaction which establishes a short position with respect to the Common Stock of the Borrower. The Borrower acknowledges and agrees that upon delivery of a Conversion Notice by the Lender, the Lender immediately owns the shares of Common Stock described in the Conversion Notice and any sale of those shares issuable under such Conversion Notice would not be considered short sales.

13. Assignability . The Borrower may not assign this Note. This Note shall be binding upon the Borrower and its successors and shall inure to the benefit of the Lender and its successors and assigns and may be assigned by the Lender, in whole or in part, to anyone of its choosing without Borrower’s approval subject to applicable securities laws. Lender covenants not to engage in any unregistered public distribution of the Note when making any assignments.

14. Governing Law . This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Nevada , without regard to the conflict of laws principles thereof. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of Nevada or in the federal courts located in Clark County , in the State of Nevada . Both parties and the individuals signing this Agreement agree to submit to the jurisdiction of such courts.

15. Delivery of Process by the Lender to the Borrower . In the event of any action or proceeding by the Lender against the Borrower, and only by the Lender against the Borrower, service of copies of summons and/or complaint and/or any other process which may be served in any such action or proceeding may be made by the Lender via U.S. Mail, overnight delivery service such as FedEx or UPS, email, fax, or process server, or by mailing or otherwise delivering a copy of such process to the Borrower at its last known attorney as set forth in its most recent SEC filing.

16. Attorney Fees . In the event any attorney is employed by either party to this Note with regard to any legal or equitable action, arbitration or other proceeding brought by such party for the enforcement of this Note or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Note, the prevailing party in such proceeding shall be entitled to recover from the other party reasonable attorneys’ fees and
 
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other costs and expenses incurred, including but not limited to post judgment costs, in addition to any other relief to which the prevailing party may be entitled.

17. Transfer Agent Instructions . In the event that an opinion of counsel, such as but not limited to a Rule 144 opinion, is needed for any matter related to this Note or the Common Stock the Lender has the right to have any such opinion provided by its counsel. If the Lender chooses to have its counsel provide such opinion, then the Lender shall provide the Borrower with written notice. Within three (3) business days of receiving written notice, the Borrower shall instruct its transfer agent to rely upon opinions from the Lender’s counsel. A penalty of $2,000 per day shall be assessed for each day after the third business day (inclusive of the day of request) until the reliance instruction is delivered to the transfer agent. If the Lender requests that the Borrower’s counsel issue an opinion, then the Borrower shall cause the issuance of the requested opinion within three (3) business days. A penalty of $2,000 per day shall be assessed for each day after the third business day (inclusive of the day of request) until the requested opinion is delivered. The Lender and the Borrower agree that all penalty amounts shall be added to the Principal Sum of this Note and shall tack back to the Effective Date of this Note, with respect to the holding period under Rule 144, so long as such treatment is not inconsistent with Rule 144’s applicable tacking provisions. The Borrower warrants that it will not direct its transfer agent not to transfer or delay, impair, and/or hinder its transfer agent in transferring (or issuing)(electronically or in certificated form) any certificate for the Securities to be issued to the Lender and it will not fail to remove (or direct its transfer agent not to remove or impair, delay, and/or hinder its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for the Securities when required by this Note. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Lender by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Note may be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of these provisions, that the Lender shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate transfer, without the necessity of showing economic loss and without any bond or other security being required.

18. Reservation of Shares . At all times during which this Note is convertible, the Borrower shall reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note.

19. Disclosure of Material Non-Public Information . The Borrower agrees not to disclose any material non-public information to the Lender after the Effective Date. If the Borrower inadvertently discloses any material non-public information to the Lender, then the Borrower shall promptly publicly disclose that information by filing a Form 8-K with the SEC and by any other means necessary to make that information known to the public.

20. Public Disclosure . The Lender and the Borrower agree not to issue any public statement with respect to the Lender’s investment or proposed investment in the Borrower or the terms of any agreement or covenant without the other party’s prior written consent, except such disclosures as may be required under applicable law or under any applicable order, rule or regulation. The Borrower agrees to reference Lender only as “an accredited investor” and attach only a form copy of this Note in any of the Borrower’s filings with the Securities and Exchange
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Commission or any other public filings, except such full disclosures as may be required under applicable law or under any applicable order, rule or regulation.

21. Notices . Any notice required or permitted hereunder (including Conversion Notices) must be in writing and either personally served, sent by facsimile or email transmission, or sent by overnight courier. Notices shall be deemed effectively delivered at the time of transmission if by facsimile or email, and if by overnight courier the business day after such notice is deposited with the courier service for delivery.

IN WITNESS WHEREOF, the authorized agents of the Borrower and the Lender have caused this Note to be duly executed as of the Effective Date.

XsunX, Inc. (the “Borrower”)
 
 

By                                                                         
     Tom Djokovich
     Chief Executive Officer

(the “Lender”)
 
 
 
By                                                                     
 
Its President
 
 
 
 
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EXHIBIT 31.1

OFFICER’S CERTIFICATE
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Tom M. Djokovich, certify that:

1.     I have reviewed this Form 10-Q for the period ended March 31, 2017 of XsunX, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2017

/s/  Tom M. Djokovich
 
Name: Tom M. Djokovich
Titles: Chief Executive Officer, Principal Financial and
Accounting Officer, and Director 

 
 
 
 

 
EXHIBIT 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of XsunX, Inc. (the “Company”) on Form 10-Q for the three months ended March 31, 2017 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1.     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date:     May 15, 2017

/s/  Tom M. Djokovich
 
Name: Tom M. Djokovich
Title: Chief Executive Officer, Principal Financial and
Accounting Officer, and Director 

A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.