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, 2020

 

☐ 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

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

 XSNX

 OTC Markets

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐  No ☐

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition 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 ☒

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

The number of shares of common stock issued and outstanding as of May 14, 2020 was 1,601,887,744

 

 

 

 

TABLE OF CONTENTS

 

 

 

PAGE

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1. Financial Statements (Unaudited)

 

 3

 

 

 

 

 

Condensed Balance Sheets

 

3

 

 

 

 

 

Condensed Statements of Operations

 

4

 

 

 

 

 

Condensed Statements of Shareholders Deficit

 

5

 

 

 

 

 

Condensed Statements of Cash Flows

 

6

 

 

 

 

 

Notes to Condensed Financial Statements

 

7

 

 

 

 

 

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

 

16

 

 

 

 

 

Item 3. Qualitative and Quantitative Disclosures About Market Risk

 

21

 

 

 

 

 

Item 4. Controls and Procedures

 

21

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1. Legal Proceedings

 

22

 

 

 

 

 

Item 1A. Risk Factors

 

22

 

 

 

 

 

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

 

22

 

 

 

 

 

Item 3. Defaults upon Senior Securities

 

22

 

 

 

 

 

Item 4. Mine Safety Disclosure

 

22

 

 

 

 

 

Item 5. Other Information

 

22

 

 

 

 

 

Item 6. Exhibits

 

23

 

 

 

 

 

Signatures

 

24

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements. 

XSUNX, INC.

CONDENSED BALANCE SHEETS

 

   

March 31, 2020

   

September 30, 2019

 
   

(Unaudited)

         

ASSETS

               
                 

CURRENT ASSETS

               

   Cash

  $ 112,894     $ 7,964  

   Contract receivables

    79,285       198,083  

   Contract asset

    11,570       -  

   Prepaid expenses

    2,770       6,575  
                 

                        Total Current Assets

    206,519       212,622  
                 

PROPERTY & EQUIPMENT

               

   Office & miscellaneous equipment

    1,638       1,638  

   Machinery & equipment

    2,045       2,045  
      3,683       3,683  

     Less accumulated depreciation

    (1,591 )     (1,113 )
                 

                     Net Property & Equipment

    2,092       2,570  
                 

                        TOTAL ASSETS

  $ 208,611     $ 215,192  
                 
                 

LIABILITIES AND SHAREHOLDERS' DEFICIT

               
                 

CURRENT LIABILITIES

               

   Accounts payable

  $ 88,204     $ 129,425  

   Credit card payable

    65,434       67,155  

   Accrued expenses and interest on notes payable

    50,482       54,478  

   Contract liabilities

    66,044       33,138  

   Derivative liability

    2,021,187       1,945,650  

   Promissory note, related party (Note 6)

    -       7,200  

   Convertible promissory note, related party (Note 5)

    12,000       12,000  

   Convertible promissory notes, current portion net of debt discount of $0 and $36,297, respectively (Note 4)

    38,452       36,217  
                 

                        Total Current Liabilities

    2,341,803       2,285,263  
                 

LONG TERM LIABILITIES

               

Convertible promissory notes, net of debt discount of $0 and $12, respectively

    165,880       165,880  
                 

                        Total Long Term Liabilities

    165,880       165,880  
                 

                       TOTAL LIABILITIES

    2,507,683       2,451,143  
                 

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

     1,601,887,744 and 1,601,887,744 shares issued and outstanding, respectively

    33,369,424       33,369,424  

   Additional paid in capital

    5,335,398       5,335,398  

   Paid in capital, common stock warrants

    3,811,700       3,811,700  

   Accumulated deficit

    (44,815,644 )     (44,752,523 )
                 

                      TOTAL SHAREHOLDERS' DEFICIT

    (2,299,072 )     (2,235,951 )
                 

                      TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT

  $ 208,611     $ 215,192  

 

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

 

 

XSUNX, INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

March 31, 2020

   

March 31, 2019

   

March 31, 2020

   

March 31, 2019

 
                                 

SALES

  $ 625,636     $ 476,493     $ 826,022     $ 863,229  
                                 

COST OF GOODS SOLD

    380,589       231,709       536,767       467,031  
                                 

GROSS PROFIT

    245,047       244,784       289,255       396,198  
                                 
                                 

OPERATING EXPENSES

                               

    Selling, general and administrative expenses

    139,203       111,845       260,809       285,583  

    Depreciation and amortization expense

    239       102       478       194  
                                 

              TOTAL OPERATING EXPENSES

    139,442       111,947       261,287       285,777  
                                 

LOSS FROM OPERATIONS BEFORE OTHER INCOME/(EXPENSES)

    105,605       132,837       27,968       110,421  
                                 

OTHER INCOME/(EXPENSES)

                               

    Loss on conversion of debt

    -       (20,678 )     -       (33,829 )

    Gain (Loss) on change in derivative liability

    (59,458 )     394,829       (75,537 )     1,867,886  

    Interest expense

    (7,604 )     (24,623 )     (15,552 )     (56,027 )
                                 

              TOTAL OTHER INCOME/(EXPENSES)

    (67,062 )     349,528       (91,089 )     1,778,030  
                                 

         NET INCOME (LOSS)

  $ 38,543     $ 482,365     $ (63,121 )   $ 1,888,451  
                                 

BASIC INCOME (LOSS) PER SHARE

  $ 0.00     $ 0.00     $ (0.00 )   $ 0.00  
                                 

DILUTED INCOME (LOSS) PER SHARE

  $ 0.00     $ 0.00     $ (0.00 )   $ 0.00  
                                 

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

                               

      BASIC

    1,601,887,744       1,540,761,262       1,601,887,744       1,516,844,424  

      DILUTED

    6,078,865,776       5,613,954,536       1,601,887,744       5,590,037,698  

 

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

 

 

XSUNX, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019

 

SIX MONTHS ENDED MARCH 31, 2019

 

                                   

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, 2018

    5,000       50       1,468,106,819       33,311,674       5,335,398       3,811,700       (47,096,505 )     (4,637,683 )
                                                                 

Common stock issued upon conversion of debt and accrued interest

    -       -       133,780,925       91,579       -       -       -       91,579  
                                                                 

Net Loss

    -       -       -       -       -       -       1,888,451       1,888,451  

Balance at March 31, 2019 (unaudited)

    5,000     $ 50       1,601,887,744     $ 33,403,253     $ 5,335,398     $ 3,811,700     $ (45,208,054 )   $ (2,657,653 )

 

 

SIX MONTHS ENDED MARCH 31, 2020

 

                                   

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, 2019

    5,000       50       1,601,887,744       33,369,424       5,335,398       3,811,700       (44,752,523 )     (2,235,951 )
                                                                 

Net Income

    -       -       -       -       -       -       (63,121 )     (63,121 )

Balance at March 31, 2020 (unaudited)

    5,000     $ 50       1,601,887,744     $ 33,369,424     $ 5,335,398     $ 3,811,700     $ (44,815,644 )   $ (2,299,072 )

 

 

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

 

 

XSUNX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

 

   

For the Six Months Ended

 
   

March 31, 2020

   

March 31, 2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

     Net Income (Loss)

  $ (63,121 )   $ 1,888,451  

    Adjustment to reconcile net income (loss) to net cash

      provided by (used in) operating activities

               

    Depreciation & amortization

    478       194  

    (Gain)/Loss on change in derivative liability

    75,537       (1,867,886 )

    Amortization of debt discount recorded as interest expense

    -       36,309  

    Loss on conversion of debt

    -       33,829  

   (Increase) Decrease in Change in Assets:

               

    Contract receivables

    118,798       (134,781 )

    Contract assets

    (11,570 )     6,919  

    Prepaid expenses

    3,805       2,634  

    Increase (Decrease) in Change in Liabilities:

               

    Accounts payable

    (42,942 )     11,979  

    Accrued expenses

    (1,761 )     16,023  

    Contract liabilities

    32,906       15,315  
                 

NET CASH PROVIDED BY OPERATING ACTIVITIES

    112,130       8,986  
                 
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

    Purchase of fixed asset

    -       (647 )
                 

NET CASH USED IN INVESTING ACTIVITIES

    -       (647 )
                 
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

   Payments on related party promissory notes

    (7,200 )     (5,000 )
                 

NET CASH USED IN FINANCING ACTIVITIES

    (7,200 )     (5,000 )
                 

NET INCREASE IN CASH

    104,930       3,339  
                 

CASH, BEGINNING OF PERIOD

    7,964       41,090  
                 

CASH, END OF PERIOD

  $ 112,894     $ 44,429  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

               

   Interest paid

  $ 4,840     $ 4,925  

   Taxes paid

  $ -     $ -  
                 

SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS

               

   Issuance of common stock upon conversion of debt and accrued interest

  $ -     $ 91,579  

   Accrued interest capitalized into convertible note

  $ 2,235     $ -  

 

 

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

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

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, 2020 are not necessarily indicative of the results that may be expected for the year ended September 30, 2020. For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended September 30, 2019.

 

Going Concern

The accompanying unaudited condensed 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 unaudited condensed financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the six months ended March 31, 2020, the Company did not generate significant revenue, incurred a net loss of $63,121, which included a non-cash change in derivative liability of $75,537 and cash provided in operations of $112,130. As of March 31, 2020, the Company had a working capital deficiency of $2,135,284, and a shareholders’ deficit of $2,299,072. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern.  

 

The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion.  The Company has obtained funds from its shareholders since its inception through the six months ended March 31, 2020. 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. 

 

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.

 

Property and Equipment

Property and equipment are stated at cost, and are depreciated using straight line over its estimated useful lives:

 

Leasehold improvements

Length of the lease

Computer software and equipment

3 Years

Furniture & fixtures

5 Years

Machinery & equipment

5 Years

 

The Company capitalizes property and equipment over $500. Property and equipment under $500 are expensed in the year purchased. The depreciation expense for the six months ended March 31, 2020, and 2019, were $478 and $194, respectively.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition

 

We recognize revenue when services are performed, and at the time of shipment of products, if evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

 

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). 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 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, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

 

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.

 

Contract Receivable

The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients’ financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers monthly. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The contract receivable balance was $79,285 and $198,083 at March 31, 2020 and September 30, 2019, respectively.

 

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, 2020, 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 Binomial lattice valuation model, at the date of a stock option grant. The Company has no outstanding warrants or options as of March 31, 2020.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share

 

(a)

Basic

Basic loss per share is calculated of basic earnings by dividing the net profit (loss) for the three months by the weighted average number of ordinary shares outstanding during the financial periods held by the Company.

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

3/31/2020

   

3/31/2019

   

3/31/2020

   

3/31/2019

 
                                 

Profit (Loss) to common shareholders (Numerator)

  $ 38,543     $ 482,365     $ (63,121 )   $ 1,888,451  
                                 

Weighted average number of common shares outstanding (Denominator)

    1,601,887,744       1,540,761,262       1,601,887,744       1,516,844,424  
                                 

Effect of convertible notes

    -       -       -       -  
                                 

Weighted average number of ordinary shares in issue

    1,601,887,744       1,540,761,262       1,601,887,744       1,516,844,424  
                                 

Basic earnings (loss) per share

  $ 0.00     $ 0.00     $ (0.00 )   $ 0.00  

 

(b)

Diluted

For the purpose of calculating diluted earnings per share, the profit attributable to equity holders and the weighted average number of ordinary shares outstanding during the financial period have been adjusted for the dilutive effects of all potential ordinary shares and shares issuable upon conversion of convertible notes. The dilutive earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of shares that would have been issued upon full conversion of the remaining convertible debt (Note 5), adjusted by the number of such shares that would have been issued at fair value as follows:

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

3/31/2020

   

3/31/2019

   

3/31/2020

   

3/31/2019

 
                                 

Profit (Loss) to common shareholders (Numerator)

  $ 38,543     $ 482,365     $ (63,121 )   $ 1,888,451  
                                 

Weighted average number of common shares outstanding (Denominator)

    1,601,887,744       1,540,761,262       1,601,887,744       1,516,844,424  
                                 

Effect of convertible notes

    4,476,978,032       4,073,193,274       -       4,073,193,274  
                                 

Weighted average number of ordinary shares in issue

    6,078,865,776       5,613,954,536       1,601,887,744       5,590,037,698  
                                 

Basic earnings (loss) per share

  $ 0.00     $ 0.00     $ (0.00 )   $ 0.00  

 

The Company has excluded shares issuable from convertible debt of $204,332 for the six months ended March 31, 2020, because their impact on the loss per share is anti-dilutive.

 

The Company has included shares issuable from convertible debt of $199,954 for the six months ended March 31, 2019, because their impact on the earnings per share is dilutive.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value of Financial Instruments

Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2020, 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.

 

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, 2020:

 

   

Total

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Liabilities

                               
                                 

Derivative Liability

  $ 2,021,187     $ -     $ -     $ 2,021,187  

Total Liabilities measured at fair value

  $ 2,021,187     $ -     $ -     $ 2,021,187  

 

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 September 30, 2019

  $ 1,945,650  

Net Loss on change in derivative liability

    75,537  

Ending balance as of March 31, 2020

  $ 2,021,187  

 

Recent Accounting Pronouncements

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 has evaluated the impact of the adoption of ASU 2016-15 on the Company’s financial statements, and there was no material impact on the financial statements. 

 

In August 2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in the same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company has evaluated the impact of the adoption of ASU 2017-12 on the Company’s financial statements, and there was no material impact on the financial statements.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company has evaluated the impact of the adoption of ASU 2018-07 on the Company’s financial statements, and there was no material impact on its financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has evaluated the impact of the adoption of ASU 2018-13 on the Company’s financial statements, and there was no material impact on the financial statements.

 

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.

 

3.

CAPITAL STOCK

 

At December 31, 2019, 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.

 

Preferred Stock

As of March 31, 2020, the Company had 5,000 shares of issued and outstanding Series A Preferred Stock issued to the Company’s Chief Executive Officer and Director, Tom M. Djokovich. The shares were issued in consideration for the contribution of services by Mr. Djokovich to the Company valued at fifty dollars, which the Board deemed full and fair consideration. Because of such issuance, Mr. Djokovich has the ability to influence and determine stockholder votes.

 

Common Stock

During the six months ended March 31, 2020, the Company had no issuance of shares of common stock.

 

During the period ended March 31, 2019, the Company issued 133,780,925 shares of common stock upon conversion of principal in the amount of $55,000, plus accrued interest of $2,750, with an aggregate fair value loss on settlement of debt of $33,829.

 

4.

CONVERTIBLE PROMISSORY NOTES

 

As of March 31, 2020, the outstanding convertible promissory notes are summarized as follows:

 

Convertible Promissory Notes

  $ 204,332  

Less current portion

    38,452  

Total long-term liabilities

  $ 165,880  

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

4.

CONVERTIBLE PROMISSORY NOTES (Continued)

 

Maturities of long-term debt for the next four years are as follows:

 

Period Ended

 

 

 

 

March 31,

 

 

 

 

2021

 

$

38,452

 

2022

 

 

50,880

 

2023

 

 

75,000

 

2024

   

40,000

 

 

 

$

204,332

 

 

At March 31, 2020, the $204,332 in convertible promissory notes.

 

On October 20, 2015, the Company entered into a third extension of the 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. As of December 31, 2019, the remaining balance of the Note is $38,452, which includes capitalized interest of $25,419. As of March 31, 2020, the Note has matured, and the Company and the Holder have entered into discussions for the repayment of the Note.

 

On November 20, 2014, the Company issued a 10% unsecured convertible promissory note (the “November Note”) for the principal sum of up to $400,000 plus accrued interest on any advanced principal funds. The November Note matures eighteen months from each advance. The Note was extended for each tranche with maturity dates of June 30, 2021 and August 18, 2021. The November Note may be converted by the lender into shares of common stock of the Company at the lesser of $.0125 per share or (b) fifty percent (50%) of the lowest trade prices following issuance of the November Note or (c) the lowest effective price per share granted to any person or entity. On November 20, 2014, the lender advanced $50,000 to the Company under the November Note at inception. On various dates from February 18, 2015 through September 30, 2016, the lender advanced an additional $350,000 under the November Note. As of March 31, 2020, there remains an aggregate outstanding principal balance of $50,880.

 

On May 10, 2017, the Company issued a 10% unsecured convertible promissory note (the “May Note”) for the principal sum of up to $150,000 plus accrued interest on any advanced principal funds. The Lender may pay additional consideration at the Lenders discretion. The Company received a tranche in the amount of $25,000 upon execution of the May Note. On various dates, the Company received additional tranches in the aggregate sum of $90,000. The May Note matured twelve months from each tranche. Within thirty (30) days prior to the maturity date, the Lender may extend the maturity date to sixty (60) months. The May Note may be converted by the lender into shares of common stock of the Company at the lesser of $.01 per share 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. As of March 31, 2020, the balance remaining on the May Note was $115,000.

 

We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock price fluctuations based upon the Binomial lattice model calculation.

 

The convertible notes issued and described in Note 4 above, do not have fixed settlement provisions because their conversion prices are not fixed. The conversion feature has been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

4.

CONVERTIBLE PROMISSORY NOTES (Continued)

 

We record the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over the life of the Notes.

 

At March 31, 2020, the fair value of the derivative liability was $2,021,187.

 

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

 

Risk free interest rate

 

Between 0.05% and 0.29%

Stock volatility factor

 

Between 72.0% and 124.0%

Months to Maturity

 

0 - 5 years

Expected dividend yield

 

None

 

5.

CONVERTIBLE PROMISSORY NOTES – RELATED PARTY

 

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. The convertible note has a fixed settlement provision and does not qualify as a derivative.

 

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. During the six months ended March 31, 2020, the Company made a payment of principal in the amount of $5,000, plus accrued interest of $7,903. The balance as of March 31, 2020 was $0.

 

7.

REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). The cost of uninstalled materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of progress.

 

The following table represents a disaggregation of revenue by customer type from contracts with customers for the six months ended March 31, 2020 and 2019:

 

   

Six Months Ended March 31,

 
   

2020

   

2019

 

Commercial

  $ 780,062     $ 824,179  

Residential

    45,960       21,800  

Management fees

    -       17,250  
    $ 826,022     $ 863,229  

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

7.

REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)

 

Contract assets represents revenues recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in excess of revenues recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The contract asset for the six months ending March 31, 2020 and the year ended September 30, 2019 was $11,570 and $0, respectively. The contract liability for the six months ended March 31, 2020 and the year ended September 30, 2019 was $66,044 and $33,138, respectively.

 

8.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consisted of the following at March 31, 2020 and September 30, 2019:

 

   

3/31/2019

   

9/30/2019

 

Trade accounts payable

  $ 88,204     $ 129,425  

Credit cards payable

    65,434       67,155  

Accrued liabilities

    50,482       54,478  
    $ 204,120     $ 251,058  

 

9.

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 event to report.

 

On May 13, 2020, the Company filed an information statement pursuant to Section 14(f) of the Securities exchange Act of 1934 and Rule 14f-1 thereunder providing further information related to the below proposed transaction which the Company originally disclosed within its March 24, 2020 filing on Form 8K.

 

On March 18, 2020, XsunX, Inc. (the “Company”), Tom Djokovich, the President and Chief Executive Officer of the Company, and TN3, LLC, a Wyoming limited liability company owned by Daniel G. Martin (“TN3”) entered into a Stock Purchase Agreement (the “Agreement”). Pursuant to the Agreement, Mr. Djokovich agreed to sell his 5,000 shares of Series A Preferred Stock (“Stock”) of the Company to TN3 in a private sale for cash. The holder of the Series A Preferred Stock may cast votes equal to not less than 60% of the total outstanding voting power of the Company on all matters voted on by the shareholders of the Company. Completion of the sale of the Series A Preferred Stock is conditioned upon a number of events, including the filing by the Company of a Schedule 14F to disclose changes in the management of the Company that will occur in connection with the sale.

 

Daniel G. Martin is the sole owner and president of TN3 and the chairman of the board and chief executive officer of Innovest Global, Inc., a diversified industrial company. Upon the completion of the sale of the Series A Preferred Stock (the “Transaction”), the current board and officers will resign and be replaced by a new board and officers to be identified by Mr. Martin. The Company will issue each of the current resigning directors of the Company 500,000,000 common stock purchase warrants to purchase up to 500,000,000 shares of the Company common stock on a pre-Stock Split (as that term is below defined) basis. These warrants will be exercisable on a cashless basis for a period of ten years from the effective date of the Stock Split at an exercise price of $0.00001 per share on a pre-Stock Split basis. The parties intend for the Company to continue to market its current solar services while preparing to acquire biotechnology assets from Innovest Global, Inc. and transition into a new business plan focused in the biotechnology, medical and health & wellness markets, commercializing developmental healthcare solutions.

 

In connection with closing the Transaction and transition into a new business plan, the Company will enter into a transition services agreement (the “Services Agreement”) with Tom Djokovich, our current President and Chief Executive Officer, and Solar Energy Builders, Inc., a company controlled by Mr. Djokovich (“Solar Energy”). Pursuant to the Services Agreement, we will engage Solar Energy to service our solar business customers or refer those customers to Solar Energy on an exclusive basis. For referrals, Solar Energy will pay us a referral fee of 1% of the gross amount paid by the referred customer to Solar Energy. We intend to continue to market our solar services while preparing to transition into the new business plan.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2020

 

9.

SUBSEQUENT EVENTS (Continued)

 

Initially, the Company will focus on biotechnology developing a third-generation brain cancer vaccine the technology for which has been patent approved and is known as StemVax Glioblast (SVX-GB). StemVax is a biotechnology company developing novel therapies for brain tumor patients and holds a related exclusive patent license from Cedars-Sinai Medical Center in Los Angeles, California known as StemVax Glioblast (SVX-GB). In preparation for the issuance of additional shares for the acquisition of biotechnology assets, the Company plans to effectuate a 1-for-1,000 reverse stock split of issued and outstanding common stock (the “Stock Split”). There can be no guarantees that the sale will close as expected, that a new management team will be appointed, or that the Company will successfully refocus its business on biotechnology. 

 

As of March 31, 2020 through the date of this filing the Transaction has not closed.

 

  

 

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.

 

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), energy storage in the form of managed battery systems (ESS), and energy use management technologies to provide our clients long term savings, predictability, and control of their energy costs. Making solar and managed energy solutions a sound investment for our clients is our mission.

 

We service the commercial self-generation energy market in California, and to a lesser extent the residential solar PV market marketplace. We provide project assessment and installation services to our customers including technology selection, system engineering, procurement, permitting, construction, grid connection, warranty service, 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.

 

Critical Accounting Policies

 

The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.

 

Revenue Recognition

 

We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

 

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). 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.

 

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 reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, valuation of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

  

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, 2020, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

 

 

Recently Issued 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.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THREE MONTHS ENDED MARCH 31, 2019.

 

Revenue and Cost of Sales:

 

The Company generated revenues in the three months ended March 31, 2020 and 2019 of $625,636 and $476,493 respectively. The increase in revenue of $149,143 during the three months ended March 31, 2020 was attributable to projects completed as well as work in progress completed during the period.

 

The costs of goods sold for the three months ended March 31, 2020 and 2019 was $380,589 and $231,709, respectively. The Company to date has had minimal revenue and cost of sales, and while we anticipate continuing to generate revenues through the sale our solar services we are preparing to transition into a new business plan stemming from a proposed transaction (outlined within Item 9 Subsequent Events above) focused in the biotechnology, medical and health & wellness markets, commercializing developmental healthcare solutions. There can be no guarantees that the proposed transaction will close or that that the Company will successfully refocus its business on biotechnology and continue to generate revenues in future periods. 

 

Selling, General and Administrative Expenses:

 

Selling, General and Administrative (SG&A) expenses increased by $27,358 during the three months ended March 31, 2020 to $139,203 as compared to $111,845 for the three months ended March 31, 2019. The increase in SG&A expenses was related primarily due to an increase in labor wages, and other administrative expenses. Management expects SG&A expenses may increase in future periods as the Company continues its marketing, sales, and service efforts.

 

Depreciation Expense:

 

Depreciation expense for the three months ended March 31, 2020 was $239, compared to $102 for the three months ended March 31, 2019.

 

Other Income/(Expenses):

 

Other income and (expenses) increased by $416,590 to $(67,062) for the three months ended March 31, 2020, compared to $349,528 for the three months ended March 31, 2019. The increase was the result of a decrease in non-cash gain on change of fair value of the derivative instruments of $454,287, a decrease in loss on conversion of debt in the amount of $20,678, and a decrease in interest expense of $17,019, which included a decrease in non-cash amortization of debt discount in the amount of $14,362.

 

Net Income (Loss):

 

For the three months ended March 31, 2020, our net income was $38,543 as compared to a net income of $482,365 for the three months ended March 31, 2019. The majority of the decrease in net income of was due primarily to a decrease in other (expenses) associated with the net change in derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements’ estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material. While management works to increase sales and revenues, there is no assurance that any continued trend in sales growth will continue.

 

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2020 COMPARED TO SIX MONTHS ENDED MARCH 31, 2019.

 

Revenue and Cost of Sales:

 

The Company generated revenues in the six months ended March 31, 2020 and 2019 of $826,022 and $863,229, respectively. The decrease in revenue during the six months ended March 31, 2020 was attributable to a decrease in sold commercial projects in the period.

 

 

The costs of goods sold for the six months ended March 31, 2020 and 2019 was $536,767 and $467,031, respectively. The Company to date has had minimal revenue and cost of sales, and while we anticipate continuing to generate revenues through the sale our solar services we are preparing to transition into a new business plan stemming from a proposed transaction (outlined within Item 9 Subsequent Events above) focused in the biotechnology, medical and health & wellness markets, commercializing developmental healthcare solutions. There can be no guarantees that the proposed transaction will close or that that the Company will successfully refocus its business on biotechnology and continue to generate revenues in future periods. 

 

Selling, General and Administrative Expenses:

 

Selling, General and Administrative (SG&A) expenses decreased by $24,774 during the six months ended March 31, 2020 to $260,809 as compared to $285,583 for the six months ended March 31, 2019. The decrease in SG&A expenses was related primarily due to a decrease in labor wages, and other administrative expenses. Management expects SG&A expenses to increase in future periods as the Company continues its marketing, sales, and service efforts.

 

Depreciation Expense:

 

Depreciation expense for the six months ended March 31, 2020 was $478, compared to $194 for the six months ended March 31, 2019.

 

Other Income/(Expenses):

 

Other income and (expenses) decreased by $1,869,119 to $(91,089) for the six months ended March 31, 2020, compared to $1,778,030 for the six months ended March 31, 2019. The decrease was the result of a decrease in non-cash gain on change of fair value of the derivative instruments of $1,943,423, a decrease in interest expense of $40,475, which included an decrease in non-cash amortization of debt discount in the amount of $36,309, with a decrease in non-cash loss on conversion of debt in the amount of $33,829.

 

Net Income (Loss):

 

For the six months ended March 31, 2020, our net loss was $(63,121) as compared to a net income of $1,888,451 for the six months ended March 31, 2019. The majority of the increase in net income of was due primarily to an increase in other (expenses) associated with the net change in derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements’ estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

 

Liquidity and Capital Resources

 

We had a working capital deficit at March 31, 2020 of $2,135,284, as compared to a working capital deficit of $2,072,641 as of September 30, 2019. The decrease in working capital deficit was the result of an increase in cash, contract assets, contract liabilities, derivative liability, with a decrease in contract receivables, prepaid expenses, accounts payable, accrued expenses, convertible notes payable.

 

Cash flow provided by operating activities was $112,130 for the six months ended March 31, 2020, as compared to cash flows provided by operating activities of $8,986 for the six months ended March 31, 2019. The increase in cash flow provided by operating activities was due to an inflow of cash from accounts receivable.

 

Cash flow used in investing activities for the six months ended March 31, 2020 and 2019 were $0 and $647. The Company purchased a tangible asset in the prior period of $647.

 

Cash used in financing activities for the six months ended March 31, 2020 and 2019 was $7,200 and $0, respectively. Our capital needs have primarily been met from the proceeds of private placements, convertible notes, and revenues resulting from our business operations focused on the sale, design, and installation of Solar Photovoltaic (PV), and managed Energy Storage Systems (ESS) for commercial and industrial real-estate in in the period.

 

Our financial statements as of March 31, 2020 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 20, 2019, 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 six months ended March 31, 2020, the Company’s capital needs have been met from the use of working capital provided by the proceeds from revenues in the amount of $826,022.

 

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 related to our business efforts within the solar services market, however as we work to market and make sales of our commercial solar PV system services we are preparing to transition into a new business plan stemming from a proposed transaction (outlined within Item 9 Subsequent Events above) focused in the biotechnology, medical and health & wellness markets, commercializing developmental healthcare solutions. Substantial capital may be needed to expand and pay for any of these continuing or new activities. There can be no guarantees that the proposed transaction will close or that that the Company will successfully refocus its business on biotechnology and continue to generate revenues in future periods

 

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 20, 2019. 

 

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

 

None

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mining and Safety Disclosures

 

None.

 

Item 5.  Other information

 

None.

 

 

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

 

 

 

31.1

 

Certification of Chief Financial Officer and Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (1)

32.1

 

Certification of Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (1)

10.1

 

Form of Stock Purchase Agreement, dated March 18, 2020 used in connection with the proposed change of management and business type transition (1)

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Label Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

(1)

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 14, 2020

By:

/s/ Tom M. Djokovich

 

 

Tom M. Djokovich,

Principal Executive and Accounting Officer

 

 

24

 

Exhibit 10.1

 

STOCK Purchase Agreement

 

This Stock Purchase Agreement (the “Agreement”) is made and entered into as of the March 18, 2020 by XsunX, Inc., a Colorado corporation (“XsunX”), which has a mailing address of 65 Enterprise, Aliso Viejo, California 92656, Tom Djokovich, an individual that owns 100% of XsunX’s outstanding Series A Preferred Stock (“Djokovich” or “Seller”), and TN3, LLC, a Wyoming limited liability company (the “Buyer” or “Company”), with respect to the following facts:

 

R E C I T A L S

 

 

A.

Seller owns 5,000 shares of XsunX’s outstanding Series A Preferred Stock, which represents 100% of the total issued and outstanding shares of Series A Preferred Stock of XsunX (the “XsunX Stock”).

 

 

B.

The XsunX Stock represents the number of votes equal to the number of voting common shares representing not less than 60% of the total outstanding vote, which may be applied toward approval or disapproval of any action that Colorado law provides is subject to the vote or consent of the holders of any other series of voting preferred shares, the holders of voting common shares, and the holders of other securities entitled to vote, if any.

 

 

C.

XsunX is engaged in the business of selling, designing, and installing solar photovoltaic power generation, energy storage in the form of managed battery systems, and energy use management technologies (“XsunX Business”). Under this Agreement, XsunX will acquire a new business owned by an affiliate of the Buyer known as Innovest Global, Inc. (“Innovest”), and thereafter will cease to conduct the XsunX Business. Seller will resign as an officer and director of XsunX upon the closing of the transactions contemplated by this Agreement.

 

 

D.

StemVax LLC, a subsidiary of Innovest and an affiliate of the Buyer, is a unique technology company in the biotechnology, medical and health & wellness markets, commercializing developmental healthcare solutions. It is currently developing a third-generation brain cancer vaccine the technology for which has been patent approved and is known as StemVax Glioblast (SVX-GB) (the “StemVax Business”). XsunX believes that the StemVax Business includes valuable proprietary technology that has the potential to enable XsunX shareholders to eventually earn substantial profits on their investment in XsunX, although no profit is guaranteed. XsunX believes that the profit potential from the StemVax Business is substantially greater than from the current XsunX Business.

 

 

E.

In order to facilitate the opportunity for XsunX to acquire the StemVax Business, the Buyer desires to acquire from Seller and Seller desires to sell to the Buyer 100% of the total issued and outstanding shares of Series A Preferred Stock of XsunX in exchange for $50,000 in cash, payable by the Buyer.

 

 

F.

At the Closing of this Agreement, as defined in Section 4 herein, XsunX will also issue to each of the current directors of XsunX 500,000,000 XsunX stock purchase warrants (the “Director Warrants”) on a pre-reverse Stock Split basis, as consideration for their past service to XsunX. A copy of the form of Director Warrant is attached to this Agreement as Exhibit B.

 

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties to this Agreement, and in light of the above recitals to this Agreement, the parties to this Agreement hereby agree as follows:

 

1.

Sale and Purchase.

 

1.1     Sale and Purchase of Stock. In consideration for the Purchase Price (as defined in Section 1.2 of this Agreement) and the other covenants of the Buyer in this Agreement, Seller agrees to sell to the Buyer, and the Buyer agrees to purchase from Seller, on the Closing Date (as defined in Section 4.1 of this Agreement), 5,000 shares of the Series A Preferred Stock of XsunX, representing 100% of the total issued and outstanding shares of Series A Preferred Stock of XsunX (the “XsunX Stock”). The XsunX Stock represents that number of votes equal to not less than 60% of

 

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the total outstanding vote, which may be applied toward approval or disapproval of any action that Colorado law provides may or must be subject to the vote or consent of the holders of any other series of voting preferred shares, the holders of voting common shares, and the holders of other securities entitled to vote, if any. The XsunX Stock is, and will be on the Closing Date, free and clear of all liens, encumbrances, charges and assessments of every nature.

 

1.2     Purchase Price. As consideration for the sale by Seller of the shares of XsunX Stock to the Buyer on the Closing Date, the Buyer will pay to Seller $50,000 in cash (the “Purchase Price”).

 

2.

Issue of Director Warrants.

 

As consideration to the current XsunX directors for their past services to XsunX and the XsunX Business, XsunX will, at the Closing, issue to each of the current resigning directors of XsunX 500,000,000 common stock purchase warrants (the “Director Warrants”) to purchase up to 500,000,000 shares of XsunX common stock on a pre-Stock Split (as defined in Section 4.4 of this Agreement) basis (500,000 shares post-Stock Split). The Director Warrants will be exercisable on a cashless basis for a period of ten years from the effective date of the Stock Split at an exercise price of $0.00001 per share on a pre-Stock Split basis ($0.01 per share post-Stock Split), and will substantially be in the Form of Warrant attached hereto as Exhibit B.

 

3.

Covenants.

 

3.1     XsunX Board of Directors. At or prior to the Closing, to be effective on the Closing Date, the parties will execute all documents, resolutions, resignations, appointments, and acceptances in order to cause the XsunX Board of Directors to consist of Dan Martin. The resigning directors will each receive the Director Warrants. Prior to the Closing, to be effective on or before the Closing, Seller will cause XsunX to file with the SEC a Schedule 14F to disclose the change of management, and Buyer will cooperate and assist XsunX with such Schedule 14F filing.

 

3.2     XsunX Officers. At or prior to the Closing, to be effective on the Closing Date, the parties will execute all documents, resolutions, resignations, appointments and acceptances in order to cause the executive officers of XsunX to be as designated in writing by the Buyer; provided, that Dan Martin will be a director and the Chief Executive Officer of XsunX.

 

3.3     Change of Business. On and promptly after the Closing, with the assistance of Seller under the terms of an Officer Transition Agreement with XsunX (the “Officer Transition Agreement”), Buyer and Seller will prepare XsunX for the cessation of the XsunX Business upon the acquisition of the StemVax Business. Thereafter, Buyer will cause XsunX to conduct the StemVax Business for profit in a high quality professional manner. In order to accomplish the acquisition of the StemVax Business, as soon as reasonably possible after the Closing Date, but in no event more than 90 days after the Closing Date, the Buyer covenants to cause XsunX and Innovest to enter into a legally binding acquisition agreement for that purpose in substantially the form membership interest purchase agreement attached as Exhibit D (the “StemVax Purchase Agreement”), to prepare and complete the Stock Split, as defined below, and complete a name change of XsunX to “NovAccess Inc.” (the “Name Change”).

 

4.

Closing and Further Acts.

 

4.1     Time and Place of Closing. Upon satisfaction or waiver of the conditions set forth in Section 7 of this Agreement, the closing of the transactions contemplated by this Agreement (the “Closing”) will take place at 65 Enterprise, Aliso Viejo, California 92656, or such other location as the parties agree, at 11:00 a.m. (local time) on the date the regulatory requirements of the SEC and FINRA, and otherwise for the actions referenced in Section 4.2 of this Agreement, are satisfied, but in no event later than May 29, 2020 (the “Closing Date”), unless extended by mutual written agreement of the parties.

 

4.2     Actions at Closing. At the Closing, the following actions will take place:

 

(a)     Buyer will pay to Seller the Purchase Price by delivery of a cashier’s check for the Purchase Price.

 

(b)     XsunX new Board of Directors will issue warrants to purchase XsunX common stock to the current directors of XsunX evidencing the Director Warrants.

 

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(c)     Seller will tender to the Buyer certificates and any other documents (including all historical records relating to the certificates up to the Closing Date) evidencing the XsunX Stock, duly endorsed for transfer to Buyer.

 

(d)     XsunX will deliver to Buyer copies of necessary resolutions of the Board of Directors of XsunX authorizing the execution, delivery, and performance of this Agreement, and the other agreements contemplated by this Agreement, and confirming the continued validity and enforceability of the Series A Preferred Stock of XsunX in the name of its new holder after the Closing, which resolutions have been certified by an officer of XsunX as being valid and in full force and effect.

 

(e)     Buyer will deliver to Seller copies of resolutions of the Manager of Buyer authorizing the execution, delivery and performance this Agreement, and the other agreements contemplated by this Agreement, which resolutions have been certified by an officer of Buyer as being valid and in full force and effect. Buyer will deliver to Seller copies of resolutions of the board of directors of Innovest authorizing the execution, delivery and performance the StemVax Purchase Agreement, which resolutions have been certified by an officer of Innovest as being valid and in full force and effect.

 

(f)     XsunX will deliver to the Buyer true and complete copies of XsunX’s Articles of Incorporation and a Certificate of Good Standing from the appropriate official of XsunX’s jurisdiction of incorporation, which certificates and certificates of good standing are dated not more than 30 days prior to the Closing Date.

 

(g)     Delivery of appropriate resignations, appointments, acceptances and resolutions relating to the new and resigning members of the XsunX Board of Directors and XsunX officers as contemplated in Sections 3.1 and 3.2 of this Agreement.

 

(h)     XsunX new management and Seller will execute an Officer Transition Agreement.

 

(i)     XsunX new management and a wholly owned contracting services entity of Seller will execute the Transition Services Agreement.

 

(j)     Delivery of any additional documents or instruments as a party may reasonably request or as may be necessary to evidence and effect the sale, assignment, transfer and delivery of the issued and outstanding XsunX Stock to the Buyer.

 

4.3      Buyer’s Authority Post Closing. After the Closing the Buyer will have the following authority: (i) management of XsunX; (ii) all XsunX funding requirements; and (iii) receive all records and documents relating to XsunX for review and control by the Buyer.

 

4.4     Reverse Stock Split and Name Change. As soon as reasonably possible after the Closing Date, but in no event more than 90 days after the Closing Date, Buyer will cause XsunX to execute all documents and take all action which are necessary or appropriate in order to cause XsunX to amend its Articles of Incorporation in order to effect a 1-for-1,000 reverse stock split of XsunX’s issued and outstanding common stock (the “Stock Split”), including but not limited to executing and recording Articles of Amendment with the Colorado Secretary of State upon satisfaction by XsunX of all applicable filing and notification requirements of the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). Buyer will cause XsunX to prepare and file with the SEC or FINRA, as the case may be, the following documents to effect the transactions contemplated by this Agreement: (i) Schedule 14C covering Buyer’s actions to authorize and direct the Stock Split and Name Change; and (ii) required notice to FINRA. Buyer will effectuate the Stock Split and Name Change before XsunX acquires the StemVax Business as provided for in Section 3.3 above.

 

4.5     Business Transition. In order to facilitate XsunX ceasing the XsunX Business and transition to the StemVax Business, XsunX will enter into a Transition Services Agreement with Seller in which Seller may accept responsibility for new or current contracts offered or initially entered into by XsunX with Seller as the qualifying

 

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individual for the XsunX license, assume related current and future contract service commitments, retain the current and future contract revenue and related net profits, if any, from those contracts, and generally engage in the delivery of the contracts to ensure contract completion on a case by case basis (the “Transition Services Agreement”). At the completion of the acquisition of the StemVax Business Seller will withdraw his position as the qualifying individual for the XsunX contractor license for the XsunX Business, and upon completion of the withdrawal XsunX and Seller will terminate the Transition Services Agreement. Thereafter, Seller may accept contracts initially marketed by XsunX with Seller as the qualifying individual for the XsunX license, without obligation to XsunX for any cash flows therefrom. The timing and procedures for the transition of the XsunX Business is governed by that certain Transition Services Agreement attached to this Agreement as Exhibit C, by and between XsunX, Seller and a wholly owned contracting services entity of Seller. In the event of any contradiction or discrepancy between this Agreement and the Transition Services Agreement, the terms and provisions of the Transition Services Agreement will govern.

 

5.

Representations and Warranties of XsunX and Seller.

 

XsunX and Seller represent and warrant to Buyer as follows:

 

5.1     Power and Authority; Binding Nature of Agreement. XsunX and Seller have full power and authority to enter into this Agreement and to perform their obligations hereunder. The execution, delivery, and performance of this Agreement by XsunX have been duly authorized by all necessary action on its part. Assuming that this Agreement is a valid and binding obligation of each of the other parties hereto, this Agreement is a valid and binding obligation of XsunX and Seller. The transfer of the XsunX Stock by Seller to Buyer pursuant to this Agreement has been duly authorized and approved by the XsunX Board of Directors, and the XsunX Stock will remain outstanding and in full force and effect at the Closing with the Buyer as its owner.

 

5.2     Subsidiaries. There is no corporation, general partnership limited partnership, joint venture, association, trust or other entity or organization that XsunX directly or indirectly controls or in which XsunX directly or indirectly owns any equity or other interest.

 

5.3     Good Standing. XsunX (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, (ii) has all necessary power and authority to own its assets and to conduct its business as it is currently being conducted, and (iii) to its knowledge, is duly qualified or licensed to do business and is in good standing in every jurisdiction (both domestic and foreign) where such qualification or licensing is required.

 

5.4     Charter Documents and Corporate Records. XsunX has delivered to Buyer complete and correct copies or provided Buyer with the right to inspect true and complete copies of all (i) the articles of incorporation, bylaws and other charter or organizational documents of XsunX, including all amendments thereto, and (ii) the stock records of XsunX. XsunX is not in violation or breach of any of the provisions of its articles of incorporation, bylaws or other charter or organizational documents.

 

5.5     Financial Statements; SEC Filings.

 

(a)      XsunX has delivered to Buyer (by public filing with or furnishing to the SEC or otherwise) the following financial statements relating to XsunX prior to the Closing (the “XsunX Financial Statements”): (i) the audited balance sheet of XsunX as of September 30, 2019 and 2018, and (ii) the audited statements of income for the years ended September 30, 2019 and 2018. Except as stated therein or in the notes thereto, the XsunX Financial Statements: (a) present fairly the financial position of XsunX as of the respective dates thereof and the results of operations and changes in financial position of XsunX for the respective periods covered thereby; and (b) have been prepared in accordance with XsunX’s normal business practices applied on a consistent basis throughout the periods covered.

 

(b)      XsunX and Seller have made available to Buyer (by public filing with or furnishing to the SEC or otherwise) a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed or furnished by XsunX with the SEC since January 1, 2016 (the “XsunX SEC Documents”). As of their respective dates, the XsunX SEC Documents (other than preliminary materials) complied in all material respects with the requirements of the Securities Act of 1933 or the Securities Exchange

 

-4-

 

Act of 1934, as the case may be, and the rules and regulations of the SEC thereunder applicable to such XsunX SEC Documents and none of the XsunX SEC Documents, at the time of filing with the SEC or being furnished to the SEC (or effectiveness in the case of registration statements), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been modified or superseded by later XsunX SEC Documents filed or furnished and publicly available prior to the date of this Agreement. As of the date of this Agreement and except as previously made available to Buyer, XsunX does not have any outstanding and unresolved comments from the SEC with respect to the XsunX SEC Documents. No subsidiary of XsunX is required to file any form or report with the SEC.

 

(c)     XsunX has made available to Buyer true, complete and correct copies of all written correspondence between the SEC on the one hand, and XsunX, on the other hand, since January 1, 2016. At all applicable times, XsunX has to its knowledge complied in all material respects with the applicable provisions of the Sarbanes-Oxley Act of 2002 and any applicable rules and regulations thereunder, as amended from time to time, and the applicable listing and corporate governance rules of the principal securities market on which the Common Stock of XsunX is traded as of the date hereof.

 

5.6     Capitalization. The authorized capital stock of XsunX consists of 2,000,000,000 shares of common stock, par value $0.01 per share, of which approximately 1,601,887,744 shares are issued and outstanding as of December 31, 2019, and 50,000,000 shares of preferred stock, par value $0.01 per share, of which 10,000 shares have been designated as Series A Preferred Stock, 5,000 of which are issued and outstanding. All of the outstanding shares of the capital stock of XsunX are validly issued, fully paid and nonassessable, and have been issued in full compliance with all applicable federal, state, local and foreign securities laws and other laws.

 

5.7     Absence of Changes. Except as otherwise set forth on Schedule 5.7 hereto, since September 30, 2019, there has not been any material adverse change in the business, condition, assets, operations or prospects of XsunX and no event has occurred or, to XsunX’s knowledge, is expected to occur after the Closing that might have a material adverse effect on the business, condition, assets, operations or prospects of XsunX, other than the transfer to Seller by XsunX of all contractual obligations and related rights for the delivery of services, materials, warranty obligations, and delivery costs pertaining to contracts that are, as of the date of this Agreement, a work in progress or in the process of fulfillment or delivery, or that have been completed at the time of the Closing, or which have been entered into after the date of this Agreement, including without limitation the right to cash flow from those contracts.

 

5.8     Absence of Undisclosed Liabilities. XsunX has no debt, liability or other obligation of any nature (whether due or to become due and whether absolute, accrued, contingent or otherwise) that is not reflected or reserved against in the XsunX Financial Statements as of September 30, 2019, except for obligations incurred since September 30, 2019 in the ordinary and usual course of business consistent with past practice.

 

5.9     Corporation Status. XsunX is identified as a “C” corporation prior to Closing.

 

5.10     Conflict of Interest Transactions. Except as may be disclosed in the XsunX SEC Documents, no past or present shareholder, director, officer or employee of XsunX or any of their affiliates (i) is indebted to, or has any outside financial, business or contractual relationship or arrangement with XsunX, or (ii) has any direct or indirect interest in any property, asset or right which is owned or used by XsunX or pertains to the of XsunX Business.

 

5.11     Litigation. Except as may be disclosed in the XsunX SEC Documents, there is no actual action, suit, proceeding, dispute, litigation, claim, complaint or investigation by or before any court, tribunal, governmental body, governmental agency or arbitrator pending or, to XsunX’s knowledge, threatened against or with respect to XsunX which (i) if adversely determined would have a material adverse effect on the business, condition, assets, operations or prospects of XsunX, or (ii) challenges or would challenge any of the actions required to be taken by XsunX under this Agreement. To XsunX’s knowledge, there exists no basis for any such action, suit, proceeding, dispute, litigation, claim, complaint or investigation.

 

5.12     Approvals. XsunX has provided Buyer with a complete and accurate list of all jurisdictions in which XsunX is authorized to do business, including any required authorization, consent or approval of, or registration or

 

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filing with, any governmental authority that is required to be obtained or made by XsunX in connection with the execution, delivery or performance of this Agreement, including the conveyance to Buyer of the XsunX Stock.

 

5.13     Brokers. XsunX has not agreed to pay any brokerage fees, finder’s fees or other fees or commissions with respect to the transactions contemplated by this Agreement, and, to XsunX’s knowledge, no person is entitled, or intends to claim that it is entitled, to receive any such fees or commissions in connection with such transaction.

 

5.14     Representations True on Closing Date. The representations and warranties of XsunX set forth in this Agreement are true and correct on the date hereof, and will be true and correct on the Closing Date as though such representations and warranties were made as of the Closing Date. Buyer’s knowledge will not act as a waiver of any breach of the representations and warranties contained herein by XsunX or Seller.

 

5.15     Tax Advice. XsunX and Seller hereby represent and warrant that they have sought their own independent tax advice regarding the transactions contemplated by this Agreement and neither XsunX nor Seller have relied on any representation or statement made by Buyer or its representatives regarding the tax implications of such transactions.

 

5.16     Non-Contravention. To the Seller’s knowledge, neither the execution nor delivery of this Agreement, nor the performance of this Agreement will contravene or result in a material violation of any of the provisions of any other agreement or obligation of the Seller or XsunX.

 

6.

Representations and Warranties of Buyer.

 

Buyer represents and warrants to XsunX and Seller as follows:

 

6.1     Power and Authority; Binding Nature of Agreement. Buyer has full power and authority to enter into this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement by Buyer have been duly authorized by all necessary action on its part. Assuming that this Agreement is a valid and binding obligation of the other party hereto, this Agreement is a valid and binding obligation of Buyer.

 

6.2     Approvals. To Buyer’s knowledge, no authorization, consent or approval of, or registration or filing with, any governmental authority or any other person is required to be obtained or made by Buyer in connection with the execution, delivery or performance of this Agreement.

 

6.3     Representations True on Closing Date. To the Buyer’s knowledge, the representations and warranties of Buyer set forth in this Agreement are true and correct on the date hereof, and will be true and correct on the Closing Date as though such representations and warranties were made as of the Closing Date.

 

6.4     Non-Distributive Intent. The shares of XsunX Stock being purchased by the Buyer pursuant to this Agreement are not being acquired by the Buyer with a view to the public distribution or sale of them.

 

6.5     Non-Contravention. To the Buyer’s knowledge, neither the execution nor delivery of this Agreement, nor the performance of this Agreement will contravene or result in a material violation of any of the provisions of any other agreement or obligation of the Buyer.

 

6.6     Buyer is an Accredited Investor. The Buyer is (i) an "accredited investor" as that term is defined in Rule 501 of the Act, and (ii) experienced in making investments of the kind described in this Agreement and the related documents, and (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors (who are not affiliated with or compensated in any way by the Seller or any of its affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement and the related documents.

 

6.7     Certificate of Designation. The Buyer has reviewed the Certificate of Designation of XsunX for the Series A Preferred Stock, which is attached hereto as Exhibit A, and is satisfied with it.

 

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7.

Conditions to Closing.

 

7.1     Conditions Precedent to Buyer’s Obligation to Close. Buyer’s obligation to close the stock purchase as contemplated in this Agreement is conditioned upon the occurrence or waiver by Buyer of the following:

 

(a)     Seller shall have delivered to the Buyer all certificates evidencing the XsunX Stock and ownership of 100% of the issued and outstanding Series A Preferred Stock of XsunX.

 

(b)     All representations and warranties of XsunX and Seller made in this Agreement or in any exhibit or schedule hereto delivered by XsunX and Seller must be true and correct as of the Closing Date with the same force and effect as if made on and as of that date.

 

(c)     XsunX must have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by XsunX prior to or at the Closing Date.

 

7.2     Conditions Precedent to Seller’s and XsunX’s Obligation to Close. Seller’s and XsunX’s obligation to close the stock purchase as contemplated in this Agreement is conditioned upon the occurrence or waiver by Seller and XsunX of the following:

 

(a)     Buyer shall have delivered to Seller or his designees the Purchase Price.

 

(b)     XsunX shall have delivered the Director Warrants to the resigning directors of XsunX.

 

(c)     All representations and warranties of Buyer made in this Agreement or in any exhibit hereto delivered by Buyer must be true and correct on and as of the Closing Date with the same force and effect as if made on and as of that date.

 

(d)     Buyer must have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by Buyer prior to or at the Closing Date.

 

(e)     Execution and delivery of a Transition Services Agreement between XsunX and the wholly owned contracting services entity of Seller.

 

(f)     Execution and delivery of an Officer Transition Agreement between XsunX and Seller.

 

(g)     Execution and delivery of the StemVax acquisition Agreement by and between XsunX and Innovest with resolutions of the Board of Directors of the Manager of Buyer and of Innovest authorizing the execution.

 

(h)      Buyer shall have advanced payment in cash to Seller and XsunX for any remaining Pre and authorized Post Agreement Transaction costs, as described for in Section 12 below, at least five (5) business days prior to the Closing.

 

8.

Survival of Representations and Warranties.

 

All representations and warranties made by each of the parties hereto will survive the Closing for a period after the Closing Date equal to the applicable statute of limitations for such matters under applicable state law.

 

9.

Indemnification.

 

(a)      Buyer agrees to indemnify, defend and hold harmless Seller against any and all claims, demands, losses, costs, expenses, obligations, liabilities and damages, including interest, penalties and attorneys’ fees and costs incurred by Seller, arising, resulting from or relating to any breach of, or failure by Buyer to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any exhibit or other document furnished or to be furnished by Buyer under this Agreement.

 

-7-

 

(b)      XsunX agrees to indemnify, defend and hold harmless Buyer against any and all claims, demands, losses, costs, expenses, obligations, liabilities and damages, including interest, penalties and attorneys’ fees and costs incurred by Buyer, arising, resulting from or relating to any breach of, or failure by XsunX or Seller to perform, any of their representations, warranties, covenants or agreements in this Agreement or in any exhibit or other document furnished or to be furnished by Buyer under this Agreement.

 

(c)      Seller agrees to indemnify, defend and hold harmless Buyer against any and all claims, demands, losses, costs, expenses, obligations, liabilities and damages, including interest, penalties and attorneys’ fees and costs incurred by Buyer, arising, resulting from or relating to any failure by Seller to convey the XsunX Stock to Buyer free and clear of all liens, encumbrances and charges.

 

10.

Injunctive Relief.

 

10.1     Damages Inadequate. Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law.

 

10.2     Injunctive Relief. It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, will be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law.

 

11.

Further Assurances.

 

Following the Closing, Seller shall furnish to Buyer such instruments and other documents as Buyer may reasonably request for the purpose of carrying out or evidencing the transactions contemplated hereby.

 

12.

Fees and Expenses.

 

Transaction costs shall include, without limitation, the reimbursement by Buyer to XsunX of audit fees associated with XsunX’s 2019 annual audit and first period quarterly report up to $33,521, and all fees, costs and expenses of XsunX’s counsel incurred by the Seller or XsunX in connection with the negotiation and preparation of this Agreement up to $20,000 (collectively, “Pre-Agreement Execution Transaction Costs”, and upon execution of this Agreement in carrying out the transactions contemplated hereby all applicable filing and notification requirements of the SEC and FINRA, including required quarterly reporting costs (collectively, “Post-Agreement Execution Transaction Costs”). All Post-Agreement Execution Transaction Costs will be borne by the Buyer, and Innovest, as appropriate, provided, however, that in no event shall Buyer or Innovest be responsible for Seller’s or XsunX’s Post-Agreement Execution Transaction Costs in excess of $5,000 without having first approved such Transaction Costs in writing (the “Transaction Cost Cap”). Subject to the Transaction Cost Cap, all Transaction Costs incurred by XsunX will be paid by Buyer or Innovest within five (5) business days of receipt of invoice by Buyer from XsunX, provided, however, that XsunX shall present to Buyer costs related to the preparation and filing of the documents related to, and necessary for, the Closing to occur, and Buyer and Innovest may elect to pay for those costs directly, select, other than XsunX council, their own vendor for the provisioning of the services, or approve the proposed XsunX vendor and costs and forward such approved expenses to XsunX for payment. Upon the execution of this Agreement by all parties hereto, the Buyer will deposit $20,000 in cash with XsunX to be used toward payment of Pre-Agreement Execution Transaction Costs.

 

13.

Waivers.

 

If any party at any time waives any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein will not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise.

 

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14.

Successors and Assigns.

 

Each covenant and representation of this Agreement will inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest.

 

15.

Entire and Sole Agreement.

 

This Agreement constitutes the entire agreement between the parties and supersedes all other agreements, representations, warranties, statements, promises and undertakings, whether oral or written, with respect to the subject matter of this Agreement. This Agreement may be modified or amended only by a written agreement signed by the parties against whom the amendment is sought to be enforced. The parties acknowledge that as of the date of the execution of this Agreement, that any and all other agreements either written or verbal will be terminated and be of no further force or effect.

 

16.

Governing Law.

 

This Agreement will be governed by the laws of Colorado without giving effect to applicable conflict of law provisions. With respect to any litigation arising out of or relating to this Agreement, each party agrees that it will be filed in and heard by the state or federal courts with jurisdiction to hear such suits located in Orange County, California.

 

17.

Counterparts.

 

This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts will be deemed to be an original, and such counterparts will constitute but one and the same instrument.

 

18.

Assignment.

 

Except in the case of an affiliate of the Buyer, this Agreement may not be assignable by any party without prior written consent of the other parties.

 

19.

Remedies.

 

Except as otherwise expressly provided herein, none of the remedies set forth in this Agreement are intended to be exclusive, and each party will have all other remedies now or hereafter existing at law, in equity, by statute or otherwise. The election of any one or more remedies will not constitute a waiver of the right to pursue other available remedies.

 

20.

Section Headings.

 

The section headings in this Agreement are included for convenience only, are not a part of this Agreement and will not be used in construing it.

 

21.

Severability.

 

In the event that any provision or any part of this Agreement is held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability will not affect the validity or enforceability of any other provision or part of this Agreement.

 

22.

Notices.

 

Each notice or other communication hereunder must be in writing and will be deemed to have been duly given on the earlier of (i) the date on which such notice or other communication is actually received by the intended recipient thereof, or (ii) the date five (5) days after the date such notice or other communication is mailed by registered or certified mail (postage prepaid) to the intended recipient at the following address (or at such other address as the intended recipient will have specified in a written notice given to the other parties hereto):

 

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If to XsunX and Seller

 

XsunX, Inc.

65 Enterprise

Aliso Viejo, California 92656

Attn: Tom Djokovich, Chief Executive Officer

 

Telephone:

Email:

 

If to Buyer:

 

TN3 LLC

8834 Mayfield Road

Chesterland, Ohio 44026

Attention: Dan Martin, Managing Member

Telephone:

Email:

 

23.

Publicity.

 

Except as may be required in order for a party to comply with applicable laws, rules, or regulations or to enable a party to comply with this Agreement, or necessary for the Buyer to prepare and disseminate any private or public placements of its securities or to communicate with its shareholders, no press release, notice to any third party or other publicity concerning the transactions contemplated by this Agreement will be issued, given or otherwise disseminated without the prior approval of each of the parties hereto; provided, however, that such approval will not be unreasonably withheld.

 

 

IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written.

 

 

XsunX:

XsunX, Inc., a Colorado corporation

   
   
  By:                                                                             
  Tom Djokovich, Chief Executive Officer
   
   
Seller:  
                                                                                     
  Tom Djokovich
   
   
Company/Buyer: TN3 LLC, a Wyoming limited liability company
   
   
  By:                                                                             
  Dan Martin, Managing Member

 

 

 

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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, 2020 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 14, 2020

 

/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 six months ended March 31, 2020 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 14, 2020

 

/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.