Notes to Financial Statements – (Unaudited)
December 31, 2012
1.
BASIS OF PRESENTATION
The accompanying unaudited 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 three months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2013. 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, 2012.
Going Concern
The accompanying financial statements
have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and
liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments
that might result if the Company is unable to continue as a going concern. The Company does not generate significant revenue, and
has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going
concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent
upon, among other things, additional cash infusion. The Company has obtained funds from its shareholders since its inception through
the period ended December 31, 2012. Management believes the existing shareholders and the prospective new investors will provide
the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core
of business.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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This summary of significant accounting
policies of XsunX, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements
and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently
applied in the preparation of the financial statements.
Development Stage Activities
and Operations
The Company has been in its initial
stages of formation and for the three months ended December 31, 2012, had no revenues. A development stage activity as one in which
all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues
are insignificant.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include
the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and
cash equivalents include cash in banks and money markets with an original maturity of three months or less.
Fair Value of Financial Instruments
The Company’s financial instruments,
including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which approximates their fair
value, due to the relatively short maturity of these instruments. As of December 31, 2012, and September 30, 2012, the Company’s
notes payable have stated borrowing rates that are consistent with those currently available to the Company and, accordingly, the
Company believes the carrying value of these debt instruments approximates their fair value.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
December 31, 2012
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss per Share Calculations
Loss per Share is the calculation
of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available
to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar
to basic earnings per share except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s
diluted loss per share is the same as the basic loss per share for the three months ended December 31, 2012, as the inclusion of
any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
Revenue Recognition
The Company recognizes revenue when
services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk
of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
To date the Company has had minimal revenue and is still in the development stage.
Stock-Based Compensation
Share-based Payment applies to
transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity
may incur for goods or services that are to follow a fair value of those equity instruments. We are required to follow a fair value
approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant.
The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of
the stock option. This has not had a material impact on our results of operations.
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 December 31, 2012, the balances reported for cash, prepaid expenses, accounts payable, accrued expenses, and
derivative liability approximate the fair value because of their short maturities.
We adopted ASC Topic 820 (originally
issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured as fair value
on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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·
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Level 1, defined as observable inputs such as quoted prices for identical
instruments in active markets;
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·
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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
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·
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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.
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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 December
31, 2012:
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
December 31, 2012
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value
of Financial Instruments
(Continued)
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Total
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(Level 1)
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(Level 2)
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(Level 3)
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Assets
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$
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—
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$
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—
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$
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—
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$
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—
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Total assets measured at fair value
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$
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—
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$
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—
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$
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—
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$
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—
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Liabilities
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Derivative Liability
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$
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531,930
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$
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—
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$
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—
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$
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531,930
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Convertible Debenture, net of discount
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251,202
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—
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—
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251,202
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Total liabilities measured at fair value
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$
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783,132
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$
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—
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$
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—
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$
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783,132
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Recently Adopted Accounting
Pronouncements
Management reviewed accounting pronouncements
issued during the three months ended December 30, 2012, and no pronouncements were adopted during the period.
At December 31, 2012, the Company’s
authorized stock consisted of 500,000,000 shares of common stock, with no par value. The Company is also authorized to issue 50,000,000
shares of preferred stock with a par value of $0.01 per share. The rights, preferences and privileges of the holders of the preferred
stock will be determined by the Board of Directors prior to issuance of such shares.
During the three months ended December
31, 2012, a holder of Securities Purchase Agreements (the "Purchase Agreements") each providing for the sale by the Company
of 8% unsecured Convertible Notes (“the Notes”) in the principal amounts of $37,500 of which $22,500 remained, $37,500,
and $32,500 converted the total remaining principal of $92,500 of principal and $4,300 in accrued interest retiring the notes.
Upon conversion, the Company issued an aggregate of 9,265,139 shares respectively of common voting stock to the holder. Also, 500,000
shares of common stock were issued at a price of $0.02 per share for an extension fee on a promissory note that had become due
at September 30, 2012.
In accordance with the Stipulation
for Settlement of Claims (“Stipulation”), dated June 27, 2012, by and between Ironridge Global IV, Ltd and the Company
as documented in Los Angeles County Superior Court Case No. BC484549, the Company delivered 27,500,000 shares (“Shares”)
of the Company’s common stock, no par value (“Common Stock”) to Ironridge. The Stipulation provided for the subsequent
issuance by the Company to Ironridge of additional Shares of Common Stock thereunder, the (“Adjustment Shares”). In
accordance with the stipulation, on November 26, 2012, subject to a request by Ironridge, the Company issued 6,271,791 Adjustment
Shares to Ironridge Global IV, Ltd.
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4.
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STOCK OPTIONS AND WARRANTS
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The Company adopted a Stock Option
Plan for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and
sets aside for the granting of Options for Twenty Million (20,000,000) shares of Common Stock. Options granted under the Plan may
be either Incentive Options or Nonqualified Options and shall be administered by the Company's Board of Directors ("Board").
Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective Option agreements
may provide. Notwithstanding any other provision of the Plan or of any Option agreement, each Option shall expire on the date specified
in the Option agreement.
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For the period ended
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12/31/2012
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Risk free interest rate
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1.14% to 2.77%
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Stock volatility factor
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90.56% to 104.73%
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Weighted average expected option life
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5 years
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Expected dividend yield
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None
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XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
December 31, 2012
4. STOCK OPTIONS AND WARRANTS (Continued)
A summary of the Company’s
stock option activity and related information follows:
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For the period ended
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12/31/2012
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Weighted
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Number
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average
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of
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exercise
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Options
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price
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Outstanding, beginning of the period
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8,000,000
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$
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0.21
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Granted
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—
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—
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Exercised
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—
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—
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Expired
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(3,000,000
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)
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0.36
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Outstanding, end of the period
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5,000,000
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$
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0.11
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Exercisable at the end of the period
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4,000,000
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$
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0.14
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Weighted average fair value of
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options granted during the period
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$
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—
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The weighted average remaining contractual life of options
outstanding issued under the plan as of December 31, 2012 was as follows:
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Weighted
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Average
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Stock
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Stock
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Remaining
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Exercisable
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Options
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Options
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Contractual
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Prices
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Outstanding
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Exercisable
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Life (years)
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$
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0.160
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2,500,000
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2,500,000
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1.25 years
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$
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0.100
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1,000,000
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—
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2.80 years
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$
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0.045
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1,500,000
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1,500,000
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4.03 years
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5,000,000
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4,000,000
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Stock-based compensation expense
recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to
vest. Stock-based compensation expense recognized in the financial statements of operations during the three months ended December
31, 2012, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of December
31, 2012 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent
to December 31, 2012, based on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation
expense recognized in the statement of operations during the three months ended December 31, 2012 and 2011 was $0 and $84,835,
respectively.
Warrants
A summary of the Company’s warrants activity
and related information follows:
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For the period ended
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12/31/2012
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Weighted
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Number
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average
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of
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exercise
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Options
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price
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Outstanding, beginning of the period
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3,333,332
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$
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0.63
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Granted
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—
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$
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—
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Exercised
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—
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$
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—
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Expired
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(3,333,332
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)
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$
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0.63
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Outstanding, end of the period
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—
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$
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—
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Exercisable at the end of period
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—
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$
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—
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Weighted average fair value of
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warrants granted during the period
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$
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—
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XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
December 31, 2012
5. PROMISSORY NOTE
In exchange for a promissory note
(the “Note”) of $350,000 plus accrued interest of $35,863 that had become due at September 30, 2012, the Company issued
a new unsecured promissory exchange note (the “Exchange Note”) in the amount of $385,863 in November 2012. The Holder
and the Company exchanged the Note solely for (i) a 12% convertible promissory Exchange Note, (ii) and 500,000 shares of common
stock.
6. CONVERTIBLE PROMISSORY NOTES
In exchange for a promissory note
(the “Note”) of $350,000 plus accrued interest of $35,863 that had become due at September 30, 2012, the Company issued
a new unsecured promissory exchange note (the “Exchange Note”) for $385,863 in November 2012. The Holder and the Company
exchanged the Note solely for (i) a 12% promissory Exchange Note, (ii) and 500,000 shares of common stock. Interest on the Exchange
note accrued interest at the rate of 18% per annum commencing on September 30, 2012 through October 31, 2012 and thereafter at
the rate of 12%. The Exchange Note is convertible into securities of the Company by the Holder at the lesser of $0.025 or 70%
of the lowest volume weighted average (VWAP) occurring during the ten consecutive trading days immediately preceding the date
on which the Holder may elect to convert portions of the note. The Exchange Note matures on September 30, 2013 and the Company
can prepay any then remaining principal and accrued interest balance upon first providing the holder with a ten day prepayment
notice.
On November 7, 2012, the Company
consummated a securities purchase agreement providing for the sales of an 8% convertible promissory note note (the
“Note”)
in the amount of $37,500, which, after one hundred and eighty days, can be converted into shares of common stock at a conversion
price of 60% of the average lowest three (3) closing bid prices for the common stock, during the ten (10) trading day period ending
on the latest complete trading day prior to the conversion date. The Note matures on August 7, 2013. The Company has the right
to redeem a portion or all amounts outstanding under the Note prior to one hundred and eighty one days from issuance of the Note
under a variable redemption rate premium.
On November 7, 2012, the Company
issued a 10% unsecured convertible promissory note (the “Promissory Note”) for the principal sum of up to $78,000 plus
accrued interest on any advanced principal funds. Upon issuance of the Promissory Note the lender immediately advanced the sum
of $25,000 to the Company, and may elect to pay additional consideration to the Company in such amounts and at such times as the
Lender may choose in its sole discretion. The Promissory Note matures one year from its issuance and may be converted by the Lender
into shares of common stock of the Company at the lesser of $.0125 per share at fifty percent (50%) of the lowest trade price in
the twenty five (25) trading days prior to the conversion of any outstanding funded principal or accrued interest under the Promissory
Note.
On December 13, 2012, the Company
issued a 10% unsecured convertible promissory note (the “Promissory Note”) for the principal sum of up to $250,000
and accrued interest on any advanced principal funds. The consideration is $225,000 with an original issue discount of $25,000.
Upon issuance of the Promissory Note the lender immediately advanced the sum of $50,000 to the Company, and may elect to pay additional
consideration to the Company in such amounts and at such times as the Lender may choose in its sole discretion. The principal sum
due the Lender shall be prorated based on the actual total consideration paid to the Company by the Lender such that the Company
will only be required to repay the amount funded by the lender, nor shall any interest or other rights extend to any unfunded portion
of the Promissory Note. If the Company repays the Promissory Note on or before 90 days from the issuance date, the interest rate
shall be zero percent (0%). If the Company does not repay the Promissory Note on or before 90 days from the issuance date, a one-time
Interest charge of 10% shall be applied to any advanced principal. The Promissory Note matures one year from its issuance and may
be converted by the Lender into shares of common stock of the Company at the lesser of $.025 per share or sixty percent (60%) of
the lowest trade price in the twenty five (25) trading days prior to the conversion of any outstanding funded principal or accrued
interest under the Promissory Note.
ASC Topic 815 provides guidance
applicable to convertible debt issued by the Company in instances where the number into which the debt can be converted is not
fixed. For example, when a convertible debt converts at a discount to market based on the stock price on the date of conversion,
ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated from the host contract and recorded
at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability of $311,164 representing
the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount
of $303,842 representing the imputed interest associated with the embedded derivative. The discount is amortized over the life
of the convertible debt, which resulted in the recognition of $127,520 in interest expense for the period ended December 31, 2011,
and the
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
December 31, 2012
6. CONVERTIBLE PROMISSORY NOTES (Continued)
derivative liability is adjusted
periodically according to stock price fluctuations. At the time of conversion, any remaining derivative liability will be charged
to additional paid-in capital. For purpose of determining the fair market value of the derivative liability, the Company used Black
Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
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Stock price on the valuation dates
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$
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0.02
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Conversion price for the debt
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$
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0.0144
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Dividend yield
|
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0.00
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%
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Months to Maturity
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9
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Risk free rate
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0.12
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%
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Expected volatility
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85.15
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%
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The value of the derivative liability
at December 31, 2012 was $531,930.
7. SUBSEQUENT EVENTS
The following are items management
has evaluated as subsequent events pursuant to the requirement of ASC Topic 855.
Effective January 9, 2013, as part
of a continued effort that began in January 2012 to maximize the use of capital resources necessary to complete the assembly and
marketing of the Company’s CIGSolar technology through reductions to operating costs and functions that are redundant, the
Company elected to consolidate its executive management operations which eliminated the need to have multiple officers performing
similar functions. In furtherance of these efforts the Company’s Board of Directors accepted the resignation of Joseph Grimes
as the Company’s President and Chief Operating Officer, effective immediately, and approved by unanimous consent the reorganization
and appointment of executive management as follows:
In connection with the resignation
of Mr. Grimes, the Board appointed Mr. Tom Djokovich to the position of President. Mr. Djokovich will continue to also serve as
the Company’s Chief Executive Officer (CEO), a Director, and Secretary duties which he has performed since October 2003.
Mr. Djokovich will focus on the strategic oversight of the day-to-day operations and securities compliance. Mr. Djokovich did not
enter into, or receive, any grant or award under any material plan, contract or arrangement in connection with his assumption of
duties as the Company’s President. Mr. Djokovich is 55 years old.
Mr. Grimes will continue to serve
as a member of the Board of Directors and will assume the position of Executive Sales Manager. As Executive Sales Manager, Mr.
Grimes will manage the marketing efforts associated with the Company’s commercialization efforts of its CIGSolar thin film
manufacturing technology. Mr. Grimes previously held the position of President and Chief Operating Officer. Mr. Grimes did not
enter into, or receive, any grant or award under any material plan, contract or arrangement in connection with his assumption of
duties as the Company’s executive sales manager. Mr. Grimes is 55 years old.
On
January 14, 2013 , the Company consummated a securities purchase agreement providing for the sales of an 8% convertible promissory
note (the “Note”) in the amount of $37,500, which, after one hundred and eighty days, can be converted into shares
of common stock at a conversion price of 60% of the average lowest five (5) closing bid prices for the common stock, during the
ten (10) trading day period ending on the latest complete trading day prior to the conversion date. The Note matures on October
17, 2013. The Company has the right to redeem a portion or all amounts outstanding under the Note prior to one hundred and eighty
one days from issuance of the Note under a variable redemption rate premium.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
December 31, 2012
7. SUBSEQUENT EVENTS (continued)
In accordance with the Stipulation
for Settlement of Claims (“Stipulation”), dated June 27, 2012, by and between Ironridge Global IV, Ltd and the Company
as documented in Los Angeles County Superior Court Case No. BC484549, the Company delivered 27,500,000 shares (“Shares”)
of the Company’s common stock, no par value (“Common Stock”) to Ironridge. The Stipulation provided for the subsequent
issuance by the Company to Ironridge of additional Shares of Common Stock thereunder, the (“Adjustment Shares”). In
accordance with the stipulation, on January 17, 2013, subject to a request by Ironridge, the Company issued 32,000,000 Adjustment
Shares to Ironridge Global IV, Ltd.
In January 2013, a holder of Securities
Purchase Agreement (the "Purchase Agreement") providing for the sale by the Company of an 8% unsecured Convertible Note
(“the Note”) in the principal amounts of $37,500 converted the total principal of $37,500 of principal and $1,500 in
accrued interest retiring the note. Upon conversion, the Company issued an aggregate of 5,739,370 shares, respectively, of common
voting stock to the holder.
In January 2013, a holder of an
Exchange Note (the "Exchange Note") issued by the Company in November 2013 in the principal amount of $385,863 converted
$25,000 of principal and $1,064 in accrued interest. Upon conversion, the Company issued an aggregate of 3,066,398 shares of common
voting stock to the holder.
O
n
February 12, 2013, the Company issued a securities purchase agreement providing for the sales of an 8% convertible promissory
note (the “Note”)in the amount of $53,000, which amount was not immediately advanced at the time of sale and receipt
of funding was pending at the time of this filing. After one hundred and eighty days from the date of funding, the Note can be
converted into shares of common stock at a conversion price of 60% of the average lowest five (5) closing bid prices for the common
stock, during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date. The Note
matures on October 17, 2013. The Company has the right to redeem a portion or all amounts outstanding under the Note prior to
one hundred and eighty one days from issuance of the Note under a variable redemption rate premium.