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| XSNX.OB > SEC Filings for XSNX.OB > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
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.
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 or license its technology ;
(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 or license its technology, and the Company may not be able to attract or retain qualified executives and technology personnel. Additionally, the Company's products and services may become obsolete, government regulation may hinder the Company's business, and 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. These and other risks are 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 Quarterly Reports on Form 10-Q , Annual Reports on Form 10-K 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 business development efforts and new technology 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.
Business Overview
In response to unprecedented changes within the capital finance markets, and resulting changes to the solar industry that have limited access to capital and slowed growth in demand for certain solar technologies, XsunX has been exploring opportunities to combine the Company's thin film expertise with advances in manufacturing technologies from related industries that we believe may work together to overcome current solar technology manufacturing limitations.
These efforts have resulted in the development of a new plan of operations that have modified the Company's plans to directly establish product manufacturing infrastructure. We have re-focused operations on the development of a cross-industry thin film solar manufacturing concept that we believed provides an opportunity for XsunX to combine proven thin film solar processes with state-of-the-art mature magnetic media thin film manufacturing technologies derived from the hard disc drive (HDD) industry to improve manufacturing output, increase cell efficiency and production yields, and lower the costs for the production of high efficiency Copper Indium Gallium (di) Selenide (CIGS) thin film solar cells. We plan to generate revenues through the licensing of this manufacturing technology and the establishment of joint venture manufacturing infrastructure with our licensees.
Under our new plan of operations, we are working to establish a complete process that delivers proprietary new high rate, high efficiency, and low cost front end thin film solar cell manufacturing systems coupled with customized backend solar module assembly and packaging systems to deliver low cost products based on the use of the CIGS solar thin film absorber. We anticipate that this system, when completed, will initially produce individual 125mm format (about 5" square) wafers or solar cells, eventually scaling to 156mm and 215mm formats (about 6" and 8" squares), at per hour production rates we believe will provide exceptional commercial opportunities. These wafers on flexible metallic foil are similar in size to silicon wafers used in nearly all solar modules manufactured today. We believe that system features and advantages for this new manufacturing method and resulting thin film CIGS solar cell include:
† Performance: System architecture is derived from proven hard disc drive deposition systems that account for the production of over 600 million disks per year - equivalent to nearly 3GWp per year if this output were solar cells.
† Factory Efficient and Flexible: Small system footprint allows for increased megawatt (MW) production of solar product per factory square foot. Modular production systems require as little as 2,500 sq. ft. and can be added in stages.
† Multi-Industry/Application Solution: Production system and technology can produce either just solar cells or complete solar modules offering opportunities for manufacturers:
† Seeking to provide a low cost per watt drop in replacement for Poly-Si or c-Si silicon wafers to a large group of solar module assemblers
† Of building integrated photovoltaic (BIPV) products that require the use of small flexible solar cells that can be adapted for use in a multitude of different shaped and sized solar BIPV products
† Existing Semi-Conductor and Hard Disc Drive companies seeking ways to put idle floor space or systems to work in the green economy
† Thin film solar module manufacturers looking to break the barriers to the production of large area, low cost, high efficiency thin film solar modules capable of delivering better value than silicon module solutions
It is our belief that by leveraging the manufacturing processes from the HDD industry and adapting them to thin-film solar technologies, we can reduce the cost per watt for solar to well below $1 per watt, thereby making solar a viable alternative in the energy field. Furthermore, it is our belief that our expertise, experience and proprietary technology in this area will allow us to seek joint ventures with larger companies thereby generating revenue streams through licensing fees and manufacturing royalties.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2009 COMPARED TO THE SAME PERIOD IN 2008
Revenue:
The Company generated no revenues in the three month periods ended June 30, 2009 and 2008. Additionally, there was no associated cost of sales.
Selling, General and Administrative Expenses:
Selling, General and Administrative Expenses for the three month period ended June 30, 2009 totaled $555,603. This represents a decrease of $153,522 as compared to the same period in 2008 which totaled $709,125. The decreased operating expenses between the periods is primarily attributable to decreased payroll expenses, legal and accounting fees and travel and entertainment fees, partially offset by increased rent and research and development expenses. A comparative analysis of the period to period performance is provided below.
Salaries and Wages:
Salaries and wages for the three month period ended June 30, 2009 were $184,544 as compared to $315,166 during the same period in 2008. The decrease of $130,622 was driven by reduced salaries and fewer employees on the payroll during the period to manage the expense burn rate of the Company. There were six full and part time employees at June 30, 2009. In March 2009, several employees were placed on furlough, were changed from an employee to contract status or were placed on part time in an effort to conserve capital.
Professional Services:
Public relations and marketing expense for the three month period ended June 30, 2009 totaled $23,910 as compared to $96,162 during this same period in 2008. The decrease of $72,252 represents decreased utilization of public relations during the period after several quarters of intensive public relations efforts working on building brand and market awareness.
Consulting expenses for the three month period ended June 30, 2009 totaled $33,244 as compared to $115,703 during the same period in 2008, a decrease of $82,459. This decrease is due to lower utilization of consulting services associated with the planning and preparation for our manufacturing facility and for the payment of board of director fees. The Company terminated its contract HR manager to reduce costs. Payments to the Board of Directors and the scientific advisory committee continue to be suspended to conserve available cash.
Legal and accounting fees for the three month period ended June 30, 2009 totaled $52,884 as compared to $173,027 during the same period in 2008. This represents a decrease of $120,143 largely driven by decreased expenditures for legal services partially offset by higher accounting review fees.
Travel and Entertainment:
Expenses for travel and entertainment were $13,453 for the three month period ended June 30, 2009. This compared to $84,093 for the same period in 2008. This decrease of $70,639 was a cost containment move to conserve cash by limiting travel and entertainment expenses to high priority travel only.
Depreciation Expense:
Depreciation expense for the three months period ending June 30, 2009 has a non-cash impact of $40,337. $643,841 of total fixed assets placed in service is depreciated using the straight line method of depreciation over periods ranging from three to five years. Lease hold improvements are depreciated on a straight line basis over the life of the lease.
Impairment of Asset:
During the three months ended June 30, 2009, the Company wrote down Manufacturing Equipment in Process associated with portion of the manufacturing equipment related to the Company's efforts to establish amorphous silicon solar module manufacturing infrastructure that the Company does not anticipate utilizing under its new plan of operations. This impairment resulted in an expense of $5,240,000 and an elimination of associated accounts payable of $260,000 as a result of not continuing to purchase the equipment. This is a non-cash expense item for the quarter ended June 30, 2009.
Option and Warrant Expenses:
Option and Warrant expense for the three month period ending June 30, 2009 was $238,568 as compared to $168,322 during the same period in 2008. This increase of $70,246 was related primarily to the vesting of current options additional vesting from those issued in previous periods.
The net loss for the three months ended June 30, 2009 was $(6,079,354) as compared to a net loss of ($854,328) for the same period 2008. The increased net loss of $5,225,026 includes (i) The operating expense changes discussed above and (ii) the impairment of asset discussed above in the amount of $5,240,000.
The associated net loss per share was $(0.03) for the three month period ended June 30, 2009 and less than $(0.01) for the same period in 2008. The Company anticipates the trend of losses to continue in future quarters until the Company can recognize sales of significance of which there is no assurance.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 2009 COMPARED TO THE SAME PERIOD IN 2008
Revenue:
The Company generated no revenues in the nine-month periods ended June 30, 2009 and 2008. Additionally, there was no associated cost of sales.
Selling, General and Administrative Expenses:
Selling, General and Administrative Expenses for the nine month period ended June 30, 2009 totaled $2,541,722. This represents an increase of $519,885 as compared to the same period in 2008 which totaled $2,021,837. The increase in operating expenses between the periods is primarily attributable to increased rent, research and development, use taxes, utilities, payroll expenses and insurance, partially offset by reduced expenses on public relations, travel and entertainment, forgiveness of debt and option and warrant expenses. A comparative analysis of the period to period performance is provided below.
Salaries and Wages:
Salaries and wages for the nine month period ended June 30, 2009 were $878,985 as compared to $834,258 during the same period in 2008. The increase of $44,727 was driven by an increase to salaries related to retention of key employees and the addition of new employee's early in the period necessary for the launch of our plans to build and establish thin film solar module manufacturing infrastructure. Subsequently, the Company reduced salaries and reduced total full time employees as cost savings measures partially offsetting the increase early in the nine month period ending June 30, 2009. There were six full and part time employees at June 30, 2009. In March 2009, several employees were placed on furlough pending continued build out of the manufacturing facility, were changed from an employee to contract status or were placed on part time in an effort to conserve capital.
Professional Services:
Public relations and marketing expense for the nine month period ended June 30, 2009 totaled $161,652 as compared to $299,066 during this same period in 2008. The decrease of $137,414 represents decreased utilization of public relations during the period after several quarters of intensive public relations efforts working on building brand and market awareness.
Consulting expenses for the nine month period ended June 30, 2009 totaled $296,485 as compared to $255,492 during the same period in 2008, an increase of $40,993. This increase is largely due to higher utilization of consulting services associated with the planning and preparation for our manufacturing facility and for the payment of board of director fees as well as the hiring of a contract HR manager to facilitate hiring in Oregon. Payments to the Board of Directors and the scientific advisory committee have been suspended late in the period to conserve available cash.
Legal and accounting fees for the nine month period ended June 30, 2009 totaled $254,820 as compared to $230,536 during the same period in 2008. This represents an increase of $24,284 largely driven by increased expenditures for legal services related to equipment and materials contract review and the efforts to defend claims by a third party for payment of fees for claimed services and higher audit fees related to the re-audit of the September 30, 2006 and 2008 financial statements.
Travel and Entertainment:
Expenses for travel and entertainment were $64,362 for the nine month period ended June 30, 2009. This compared to $178,432 for the same period in 2008. This decrease of $114,070 was a cost containment move to conserve cash by limiting travel and entertainment expenses to high priority travel only.
Depreciation Expense:
Depreciation expense for the nine months period ending June 30, 2009 has a non-cash impact of $117,726. $643,841 of total fixed assets placed in service is depreciated using the straight line method of depreciation over periods ranging from three to five years. Lease hold improvements are depreciated on a straight line basis over the life of the lease.
Impairment of Asset:
During the three months ended June 30, 2009, the Company wrote down Manufacturing Equipment in Process associated with portion of the manufacturing equipment related to the Company's efforts to establish amorphous silicon solar module manufacturing infrastructure that the Company does not anticipate utilizing under its new plan of operations. This impairment resulted in an expense of $5,240,000 and an elimination of associated accounts payable of $260,000as a result of not continuing to purchase the equipment. This is a non-cash expense item for the quarter ended June 30, 2009.
Forgiveness of Debt:
During the nine months ended March 31, 2008, the Company wrote off the remainder of the accounts payable associated with the settlement agreement with MVSystems for a non-cash total of $287,381. This represents potential liabilities that were eliminated as a result of the settlement agreement.
Option and Warrant Expenses:
Option and Warrant expense for the nine month period ending June 30, 2009 was $393,069 as compared to $504,966 during the same period in 2008. This reduction of $111,897 was related primarily to the vesting of current options and the cancellation of options that had vesting expenses in previous periods.
The net loss for the nine months ended June 30, 2009 was $(7,997,992) as compared to a net loss of ($2,414,186) for the same period 2008. The increased net loss of $5,583,806 includes (i) The operating expense changes discussed above, (ii) a decrease in interest income of $109,605 relating to the repayment of the Sencera note and associated interest income, (iii) a further write off of accounts payable associated with the settlement agreement with MVS of $287,381 which is no longer payable and (iv) the impairment of asset discussed above of $5,240,000.
The associated net loss per share was $(0.04) for the nine month period ended June 30, 2009 and $(0.01) for the same period in 2008. The Company anticipates the trend of losses to continue in future quarters until the Company can recognize sales of significance of which there is no assurance.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at June 30, 2009 of $603,354, a as compared to cash of $2,389,218 as of September 30, 2008. The Company had net working capital of $476,131 as compared to a net working capital of $3,321,294 at September 30, 2008. Cash flow used in operating activities during the nine-month period ended June 30, 2009 was $1,176,898 as compared to a use of cash of $1,896,206 for the same period 2008.
For the nine months ended June 30, 2009, the Company's capital needs have been met from the use of working capital provided by the proceeds of (i) the Company's working capital and (ii) an additional $600,000 in cash from the issuance of common stock to Fusion Capital.
DEVELOPMENT STAGE COMPANY
The Company is currently working to transition from the development stage to the implementation phase and as of the period ended June 30, 2009, did not have any significant revenues. The transition to revenue recognition may exceed cash generated from operations in the current and future periods. We have in the past experienced substantial losses and negative cash flow from operations and have required financing, including equity and debt financing, in order to pursue the commercialization of products based on our technologies. We expect that we will continue to need significant financing to operate our business. Although the Company entered into a financing arrangement with Fusion Capital Fund II, LLC pursuant to which the Company has the right over a 25-month period to receive $80,000 every two business days under such financing arrangement unless our stock price equals or exceeds $0.30, in which case we can sell greater amounts to Fusion Capital as the price of our common stock increases, Fusion Capital shall not have the right or the obligation to purchase any shares of our common stock on any business day that the market price of our common stock is less than $0.20. As of August 6, 2009, the Company's stock was trading at approximately $0.12 and therefore, the Company is not presently able to draw down on this financing arrangement. In addition, until the registration statement underlying the Fusion transaction is amended, the Company will not be able to draw down on the Fusion Capital financing agreement. Furthermore, there can be no assurance that additional financing will be available or that the terms of such additional financing, if available, will be acceptable to us. If additional financing is not available or not available on terms acceptable to us, our ability to fund our operations, expand our sales network, maintain our research and development efforts or otherwise respond to competitive pressures may be significantly impaired. We could also be forced to curtail our business operations, reduce our investments, decrease or eliminate capital expenditures and delay the execution of its business plan, which would have a material adverse affect on our business.
While we have been able to raise capital in a series of equity and debt offerings in the past there can be no assurances that we will be able to obtain such additional financing, on terms acceptable to us and at the times required, or at all.
Irrespective of whether the Company's cash assets prove to be inadequate to meet the Company's operational needs, the Company might seek to compensate providers of services by issuances of stock in lieu of cash.
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
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures and internal controls to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. The evaluation included certain control areas in which we have made, and are continuing to make, changes to improve and enhance controls. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective, and we have discovered no material weakness.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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