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: December 31, 2016

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

For The Transition Period From ___________ to _______________

Commission File Number: 000-29621

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

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

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

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

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

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

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

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒

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

The number of shares of common stock issued and outstanding as of February 21, 2017 was 889,331,125.



TABLE OF CONTENTS

   
PAGE
  
PART I - FINANCIAL INFORMATION
       
 
 3
  
       
 
3
  
       
 
4
  
       
 
5
  
       
 
6
  
       
 
7
  
       
 
11
  
       
 
14
  
       
 
14
  
       
PART II - OTHER INFORMATION
       
 
16
  
       
 
16
  
       
 
16
  
       
 
16
  
       
 
16
  
       
 
16
  
       
 
17
  
       
 
18
  

 
PART I – FINANCIAL INFORMATION

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

   
December 31, 2016
    
September 30, 2016
  
             
ASSETS
            
             
CURRENT ASSETS
            
   Cash
  
$
112,179
    
$
22,172
  
   Accounts receivable
    
-
      
30,800
  
   Cost in excess of billing
    
13,725
      
10,126
  
   Prepaid expenses
    
19,462
      
2,266
  
                 
                        Total Current Assets
    
145,366
      
65,364
  
                 
PROPERTY & EQUIPMENT
                
   Office & miscellaneous equipment
    
29,842
      
29,842
  
   Machinery & equipment
    
626
      
626
  
     
30,468
      
30,468
  
     Less accumulated depreciation
    
(29,961
)
    
(29,930
)
                 
                     Net Property & Equipment
    
507
      
538
  
                 
                        TOTAL ASSETS
  
$
145,873
    
$
65,902
  
                 
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
                
                 
CURRENT LIABILITIES
                
   Accounts payable
  
$
108,087
    
$
46,515
  
   Credit card payable
    
66,708
      
65,114
  
   Accrued interest on notes payable
    
31,912
      
28,849
  
   Billing in excess of cost
    
113,003
      
41,454
  
   Derivative liability
    
421,886
      
430,532
  
   Promissory note, related party
    
35,000
      
35,000
  
   Convertible promissory note, related party
    
12,000
      
12,000
  
   Convertible promissory notes, current portion net of $5,736 and $11,148 in discounts
    
170,309
      
131,886
  
                 
                        Total Current Liabilities
    
958,905
      
791,350
  
                 
LONG TERM LIABILITIES
                
  Convertible promissory notes
    
35,000
      
115,000
  
                 
                        Total Long Term Liabilities
    
35,000
      
115,000
  
                 
                       TOTAL LIABILITIES
    
993,905
      
906,350
  
                 
SHAREHOLDERS’ DEFICIT
                
Preferred stock 50,000,000 shares authorized, shares issued and outstanding designated as follows:
          
Preferred Stock Series A, $0.01 par value, 10,000 authorized
5,000 and 0 shares issued and outstanding, respectively
    
50
      
50
  
Common stock, no par value;
2,000,000,000 authorized common shares
889,331,125 and 783,080,479 shares issued and outstanding, respectively
    
32,668,767
      
32,640,840
  
Additional paid in capital
    
5,335,398
      
5,335,398
  
Paid in capital, common stock warrants
    
3,811,700
      
3,811,700
  
Accumulated deficit
    
(42,663,947
)
    
(42,628,436
)
                 
                      TOTAL SHAREHOLDERS’ DEFICIT
    
(848,032
)
    
(840,448
)
                 
                      TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  
$
145,873
    
$
65,902
  

The accompanying notes are an integral part of these financial statements
 
XSUNX, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
  
   
December 31, 2016
    
December 31, 2015
  
             
SALES
  
$
393,702
    
$
203,229
  
                 
COST OF GOODS SOLD
    
299,054
      
158,721
  
                 
GROSS PROFIT
    
94,648
      
44,508
  
                 
                 
OPERATING EXPENSES
                
    Selling, general and administrative expenses
    
126,920
      
124,702
  
    Depreciation and amortization expense
    
31
      
805
  
                 
              TOTAL OPERATING EXPENSES
    
126,951
      
125,507
  
                 
INCOME (LOSS) FROM OPERATIONS BEFORE  OTHER INCOME/(EXPENSES)
    
(32,303
)
    
(80,999
)
                 
OTHER INCOME/(EXPENSES)
                
    Penalties
    
(200
)
    
-
  
    Gain on sale of asset
    
-
      
1,000
  
    Gain/(Loss) on conversion of debt and change in derivative liability
    
8,646
      
79,330
  
    Interest expense
    
(11,654
)
    
(30,754
)
                 
              TOTAL OTHER INCOME/(EXPENSES)
    
(3,208
)
    
49,576
  
                 
         NET LOSS
  
$
(35,511
)
  
$
(31,423
)
                 
BASIC AND DILUTED LOSS PER SHARE
  
$
(0.00
)
  
$
(0.00
)
                 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
      BASIC AND DILUTED
    
843,519,778
      
704,918,657
  

The accompanying notes are an integral part of these financial statements


XSUNX, INC.
CONDENSED STATEMENT OF SHAREHOLDERS’ DEFICIT
(Unaudited)
 
                           
Additional
    
Stock Options/
              
   
Preferred Stock
    
Common Stock
    
Paid-in
    
Warrants
    
Accumulated
        
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Paid-in-Capital
    
Deficit
    
Total
  
Balance at September 30, 2016
    
5,000
    
$
50
      
783,080,479
    
$
32,640,840
    
$
5,335,398
    
$
3,811,700
    
$
(42,628,436
)
  
$
(840,448
)
                                                                 
Common stock issued upon conversion of debt and accrued interest
    
-
      
-
      
106,250,646
      
27,927
      
-
      
-
      
-
      
27,927
  
                                                                 
Net loss for the three months ended December 31, 2016
    
-
      
-
      
-
      
-
      
-
      
-
      
(35,511
)
    
(35,511
)
Balance at December 31, 2016 (unaudited)
    
5,000
    
$
50
      
889,331,125
    
$
32,668,767
    
$
5,335,398
    
$
3,811,700
    
$
(42,663,947
)
  
$
(848,032
)

The accompanying notes are an integral part of these financial statements

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

   
Three Months Ended
  
   
December 31, 2016
    
December 31, 2015
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
    Net loss
  
$
(35,511
)
  
$
(31,423
)
Adjustment to reconcile net income (loss) to net cash
      provided (used) in operating activities
                
    Depreciation & amortization
    
31
      
804
  
    Gain on sale of asset
    
-
      
(1,000
)
    Gain on conversion of debt and change in derivative liability
    
(8,646
)
    
(79,330
)
    Amortization of debt discount recorded as interest expense
    
5,412
      
21,557
  
    Reduction in convertible note principal
    
(2,688
)
    
-
  
   (Increase) Decrease in Change in Assets:
                
    Accounts receivable
    
30,800
      
(973
)
    Cost in excess of billing
    
(3,599
)
    
(2,143
)
    Prepaid expenses
    
(17,196
)
    
(15,108
)
    Increase (Decrease) in Change in Liabilities:
                
    Accounts payable
    
63,165
      
27,988
  
    Accrued expenses
    
6,690
      
9,988
  
    Billing in excess of cost
    
71,549
      
38,227
  
    Deferred revenue
    
-
      
(15,000
)
                 
NET CASH PROVIDED BY (USED IN)  OPERATING ACTIVITIES
    
110,007
      
(46,413
)
                 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
    Proceeds from sale of assets
    
-
      
1,000
  
                 
NET CASH PROVIDED BY INVESTING ACTIVITIES
    
-
      
1,000
  
                 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
   Proceeds from convertible promissory notes
    
-
      
50,000
  
   Payments on convertible promissory notes
    
(20,000
)
    
(20,000
)
   Proceeds from related party promissory notes
    
-
      
10,000
  
                 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
(20,000
)
    
40,000
  
                 
NET INCREASE/(DECREASE) IN CASH
    
90,007
      
(5,413
)
                 
CASH, BEGINNING OF YEAR
    
22,172
      
78,770
  
                 
CASH, END OF YEAR
  
$
112,179
    
$
73,357
  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                
   Interest paid
  
$
2,239
    
$
377
  
   Taxes paid
  
$
-
    
$
-
  
                 
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS
                
   Issuance of common stock upon conversion of debt and accrued interest
  
$
27,927
    
$
-
  

The accompanying notes are an integral part of these financial statements 

XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
DECEMBER 31, 2016

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, 2016 are not necessarily indicative of the results that may be expected for the year ended September 30, 2017.  For further information refer to the financial statements and footnotes thereto included in the Company’s Form 10-K, and Form 10-K/A for the year ended September 30, 2016.

Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern.  The 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 three months ended December 31, 2016. Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its business development efforts in the solar PV industry. 

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of XsunX, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements.  Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, 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.

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

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

The Asset, “Costs in excess of billing” represents revenues recognized in excess of amounts billed on contracts in progress. The Liability, “Billing in excess of costs”, represents billings in excess of revenues recognized on contracts in progress. At December 31, 2016, the cost in excess of billing was $13,725 and the billing in excess of costs was $113,003.

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

XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
DECEMBER 31, 2016

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 three months ended December 31, 2016 the Company did not experience costs related to warranty claims.

Stock-Based Compensation
Share-based Payment applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We are required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. This has not had a material impact on our results of operations.

Net Earnings (Loss) per Share Calculations 
Net earnings (Loss) per share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are computed by dividing by the weighted average number of common shares outstanding during the year. Diluted net earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the effect of stock options and stock based awards (Note 4), plus the assumed conversion of convertible debt (Note 5).   
  
For the three months ended December 31, 2016, the Company calculated the dilutive impact of the outstanding stock options of 1,500,000, and the convertible debt of $223,045, which is convertible into shares of common stock. The stock options and the convertible debt were not included in the calculation of net loss per share, because their impact was antidilutive.  

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, 2016, 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  December 31, 2016:
 
   
Total
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Derivative Liability
  
$
421,886
    
$
-
    
$
-
    
$
421,886
  
Total Liabilities measured at fair value
  
$
421,886
    
$
-
    
$
-
    
$
421,886
  
 
The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:
 
Balance as of October 1, 2016
  
$
430,532
  
Net Gain on change in derivative liability
    
(8,646
)
Ending balance as of December 31, 2016
  
$
421,886
  

XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
DECEMBER 31, 2016

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

3.     CAPITAL STOCK

At December 31, 2016, the Company’s authorized stock consisted of 2,000,000,000 shares of common stock, with no par value.  The Company is also authorized to issue 50,000,000 shares of preferred stock with a par value of $0.01 per share of which 10,000 shares have been designated as Series A Preferred Stock.  The rights, preferences and privileges of the holders of the preferred stock are determined by the Board of Directors prior to issuance of such shares.

During the three months ended December 31, 2016, the Company issued 106,250,646 shares of common stock upon conversion of principal in the amount of $24,300, plus accrued interest of $3,627.

4.     STOCK OPTIONS

On May 20, 2014, the Company adopted the 2014 XSUNX, Inc. Stock Option and Award Plan (the “Plan”) to enable the Company to obtain and retain the services of the types of Employees, Consultants and Directors who will contribute to the Company’s long range success and to provide incentives which are linked directly to increases in share value which will inure to the benefit of all stockholders of the Company.  The 2007 Stock Option Plan is superseded by the newly adopted 2014 XSUNX, Inc. Stock Option and Award Plan. Options granted under the Plan may be either Incentive Options or Nonqualified Options and shall be administered by the Company’s Board of Directors (“Board”).  Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective Option agreements may provide. Notwithstanding any other provision of the Plan or of any Option agreement, each Option shall expire on the date specified in the Option agreement.
 
A summary of the Company’s stock option activity and related information follows: 

 
12/31/2016
  
     
Weighted
  
 
Number
  
average
  
 
of
  
exercise
  
 
Options
  
price
  
Outstanding, beginning of the period
    
1,500,000
    
$
0.045
  
Granted
    
-
      
-
  
Exercised
    
-
      
-
  
Expired
    
-
      
-
  
Outstanding, end of the period
    
1,500,000
    
$
0.045
  
Exercisable at the end of the period
    
1,500,000
    
$
0.045
  
Weighted average fair value of
  options granted during the period
          
$
-
  

The weighted average remaining contractual life of options outstanding issued under the plan as of December 31, 2016 was as follows:

           
Weighted
           
Average
   
Stock
  
Stock
  
Remaining
Exercisable
  
Options
  
Options
  
Contractual
Prices
  
Outstanding
  
Exercisable
  
 Life (years)
 
$
0.045
      
1,500,000
      
1,500,000
  
 0.28 years
           
1,500,000
      
1,500,000
    

XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
DECEMBER 31, 2016


4.     STOCK OPTIONS (Continued)

We account for stock-based payment award forfeitures as they occur. The Company did not recognize stock-based compensation expense in the statement of operations during the three months ended December 31, 2016.

5.     CONVERTIBLE PROMISSORY NOTES

On September 30, 2014, the amended note dated September 30, 2013 expired. On October 1, 2014, the Company and the Holder of the note entered into an extension of the note on October 1, 2014. The remaining principal balance of $203,496, plus interest of $26,758 and a commitment fee of $22,081 was combined in the extended new note for a balance of $252,335 as of October 1, 2014. No additional cash consideration was provided or exchanged. The maturity date of the note was extended to September 30, 2015. On October 20, 2015, the Company entered into a third extension of the note with 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 remained substantially the same. During the period the Company paid $20,000 of the principal balance, leaving a remaining balance of $23,033.

On November 20, 2014, the Company issued a 10% unsecured convertible promissory note (the “Note”) for the principal sum of up to $400,000 plus accrued interest on any advanced principal funds. The Note matures eighteen months from each advance. The Note may be converted by the lender into shares of common stock of the Company at the lesser of $.0125 per share or fifty percent (50%) of the three lowest trade prices of three separate trading days recorded in the twenty five (25) trading days prior to the conversion of any outstanding funded principal or accrued interest under the Note. The Company recorded debt discount of $201,066 related to the conversion feature of the notes, along with derivative liabilities at inception. On November 20, 2014, the lender advanced $50,000 to the Company under the Note at inception. On various dates from February 18, 2015 through September 30, 2016, the lender advanced an additional $350,000 under the Note. During the period ended December 31, 2016, the Company issued 106,250,646 shares of common stock upon conversion of $24,300 in principal, plus accrued interest of $3,627. As of December 31, 2016, there remains an aggregate outstanding principal balance of $188,012. During the three months ended December 31, 2016, the Company recognized debt amortization as interest expense in the amount of $5,412.
 
Issuance of Convertible Promissory Notes for Services to Related Party
As of March 31, 2016, the remaining unsecured Convertible Promissory Notes (the “Notes”) in the amount of $12,000 to a Board member (the “Holder”) in exchange for retention as a director during the fiscal year ending September 30, 2014. The Note can be converted into shares of common stock by the Holder for $0.0045 per share. The Note matured on October 1, 2015, and bore a one-time interest charge of $1,200 which was applied to the principal on October 1, 2014. So long as any shares issuable under a conversion are subject to transfer and sale restrictions imposed pursuant to SEC Rule 144 of the Rules promulgated under the Securities Act of 1933, the Company shall, upon written request by Holder, file Form S-8, if applicable, with the U.S. Securities and Exchange commission to register the issued.

For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
 
Risk free interest rate
  
Between 0.51% and 1.20%
Stock volatility factor
  
Between 97.53% and 135.15%
Months to Maturity
  
3 months to 2 years
Expected dividend yield
  
None
 
At December 31, 2016, the fair value of the derivative liability was $421,886.

 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. During the three months ended December 31, 2016, the Company received advances in the aggregate of $35,000. The principal use of the proceeds from any advance under the Note are intended to assist in the purchase of materials, and services for the solar PV systems that we sell and install. Consideration advanced under the Note matures twenty four (24) months from each advance. The balance as of December 31, 2016 was $35,000, plus accrued interest of $4,978.

7.    SUBSEQUENT EVENTS

Management has evaluated subsequent events as of the financial statement date according to the requirements of ASC TOPIC 855 and has no subsequent events to be reported.


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

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


Organization

XsunX, Inc. (“XsunX,” the “Company” or the “issuer”) is a Colorado corporation formerly known as Sun River Mining Inc. “Sun River”). The Company was originally incorporated in Colorado on February 25, 1997. Effective September 24, 2003, the Company completed a plan of reorganization and name change to XsunX, Inc.
 
Business Overview/Summary
 
XsunX specializes in the sale, design, and installation of solar photovoltaic power generation (PV), and energy saving technologies to provide our clients long term savings, predictability, and control of their energy costs. Making solar energy a good investment for our clients is our mission.
 
We service the commercial and residential PV markets in California providing project assessment and installation services to our customers including technology selection, system engineering, procurement, permitting, construction, grid connection, warranty, system monitoring and maintenance. We offer a wide variety of energy production and management technologies, design our systems in-house to ensure that the performance of the systems we deliver match the financial projections, and our full time project management and licensed assembly crews ensure a seamless process, from start to finish.

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

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

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

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


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2015.

 Revenue and Cost of Sales:

The Company generated revenues in the three months ended December 31, 2016 and 2015 of $393,702 and $203,229 respectively. The increase in revenue during the three months ended December 31, 2016 was the result of our marketing efforts for the sale of our solar carport and canopy offerings, and establishing a cross marketing sales program to provide companies entering the program an opportunity to market our commercial and residential solar system offerings to their customer base. We believe that the development of these programs during prior periods improved our ability to market our products and services, and to generate revenues, in future periods. The costs of goods sold for the three months ended December 31, 2016 and 2015 was $299,054 and $158,721, respectively. The Company to date has had minimal revenue and cost of sales. Management expects to continue to generate revenues, and is working to increase sales as it matures the scope of the Company’s capabilities and brand awareness.
 
Operating Expenses:

Operating  expenses increased by $1,444 during the three months ended December 31, 2016 to $126,951 as compared to $125,507 for the three months ended December 31, 2015. The increase in SG&A expenses was related primarily due to the Company experiencing an increase to sales and the administrative costs consistent with the increase to revenues in the period. Management expects SG&A expenses to increase in future periods as the Company continues to expand its marketing, sales, and service efforts.

Other Income/(Expenses):

Other income and (expenses) decreased by $(52,784) to $(3,208) for the three months ended December 31, 2016, compared to $49,576 for the three months ended December 31, 2015. The decrease was the result of a decrease in interest expense of $19,100, which included a decrease in non-cash amortization of debt discount in the amount of $16,145, a decrease in non-cash gain on conversion of debt and change of fair value of the derivative instruments of $70,684, a decrease in gain on sale of asset of $1,000, with an increase in penalties of $200.

Net Income (Loss):

For the three months ended December 31, 2016, our net loss was $(35,511) as compared to a net loss of $(31,423) for the three months ended December 31, 2015. This increase in net income primarily stems from the increase in other income (expenses) associated with the derivative instruments, and an overall decrease in operating expenses, with an increase in gross profit due to an increase in revenue. While management is working to increase sales and revenues as it matures the scope of the Company’s capabilities and brand awareness for its commercial and residential solar PV systems, the Company anticipates there is no assurance that any continued trend in sales growth will continue.

Liquidity and Capital Resources

We had a working capital deficit at December 31, 2016 of $813,539, as compared to a working capital deficit of $725,986 as of September 30, 2016. The increase in working capital deficit of $87,553 was the result of an increase in cash, cost in excess of billing, prepaid expenses, accounts payable and other payable, accrued expenses, customer retainer, an increase in convertible notes, with a decrease in accounts receivable, billing in excess of cost, billing in excess of cost, and derivative liability, with.

Cash flow provided by operating activities was $110,007 for the three months ended December 31, 2016, as compared to cash flow used by operating activities of $(46,413) for the three months ended December 31, 2015. The increase in cash flow provided by operating activities was due to an increase in liabilities, with a decrease in current assets.

Cash flow provided by investing activities for the three months ended December 31, 2016 and 2015 were $0 and $1,000, respectively. The net change in investing activities was primarily due to proceeds received of $1,000 from the sale of certain assets in the prior period.

Cash used by financing activities for the three months ended December 31, 2016 was $20,000, as compared to $40,000 provided for the three months ended December 31, 2015. Our capital needs have primarily been met from the proceeds of private placements, convertible notes, and initial revenues resulting from our change in business operations focused on the sale, design, and installation of Solar Photovoltaic (PV) Systems for commercial and industrial real-estate in in the period.


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

For the three months ended December 31, 2016, the Company’s capital needs have been met from the use of working capital provided by the proceeds of (i) the Company’s working capital and (ii) revenues in the amount of $393,702.

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

Capital Resources

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

Need for Additional Financing

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

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

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

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

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed 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, and that such information is accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal operating officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based upon the evaluation of the disclosure controls and procedures at the end of the period covered by this report, the Company’s CEO/CFO concluded that the Company’s disclosure controls and procedures were effective. See also “Internal Control Over Financial Reporting” below in Item 4 of this report.

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control structure and procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. The SEC rule making for the Sarbanes-Oxley Act of 2002 Section 404 requires that a company’s internal controls over financial reporting be based upon a recognized internal control framework. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) that has been modified to more appropriately reflect the current limited operational scope of the Company as a Development Stage company. The Company used the COSO guide - The Internal Control over Financial Reporting - Guidance for Smaller Public Companies to implement the Company’s internal control framework. Additionally, the limited scope of operations of the Company means that traditional separation of duties controls are not used by the Company as a result of the limited staffing within the Company. The Company relies on alternative procedures that include the addition of an outside professional accounting services firm to expand the separation of duties and oversight, and to assist in the monthly closing process and reconciliation of accounts to overcome this non-material control weakness.

During the Company’s three months ended December 31, 2016, management continued to assess the Company’s internal and controls procedure documents basing any need for revision upon additional guidance for implementing the model framework created by COSO as is appropriate to our operations and operations of smaller public entities. This framework is entitled Internal Control-Integrated Framework. The COSO Framework, which is the common shortened title, was published in 2013, and we believe will satisfy the SEC requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Based on that evaluation, our Chief Executive Officer/Principal Accounting Officer concluded that our internal control over financial reporting as of December 31, 2016 was effective.  Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 

Changes in Internal Control over Financial Reporting
 
Except as noted above, 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 our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended December 31, 2016.
 



PART II - OTHER INFORMATION
Item 1.  Legal Proceedings.

None

Item 1A.  Risk Factors

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

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

During the three months ended December 31, 2016, the Company issued 106,250,646 shares of common stock upon partial conversion of a convertible notes in principal in the amount of $24,300, plus the accrued interest of $3,627.

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

Use of Proceeds from the Sale of Securities

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

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mining and Safety Disclosures

None.

Item 5.  Other information

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
10.1
  
Form of Third Extension Agreement to 12% Note used in connection with the exchange and 18 month extension to a promissory note that had become due September 30, 2015. (1)
10.2
  
Form of Promissory Note issued on August 5, 2014, used in connection with establishing access to interim financing requirements for solar system installations in the amount of up to $80,000. (2)
10.3
  
Form of Convertible 10% Promissory Note issued on November 20, 2014, used in connection with the sale of a convertible promissory note in an amount up to $400,000. (3)
10.4
  
Form 8-K related to the engagement of Liggett & Webb P.A. as the independent registered public accounting firm for XsunX, Inc. (4)
31.1
  
32.1
  
101.INS
  
XBRL Instance Document (5)
101.SCH
  
XBRL Taxonomy Extension Schema Document(5)
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document (5)
101.DEF
  
XBRL Taxonomy Extension Label Linkbase Document (5)
101.LAB
  
XBRL Taxonomy Extension Presentation Linkbase Document (5)
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document (5)
(1)
Incorporated by reference to exhibits included with the Company’s Report on Form 10-K filed with the Securities and Exchange Commission dated January 8, 2016.
  
(2)
Incorporated by reference to exhibits included with the Company’s Report on Form 10-Q filed with the Securities and Exchange Commission dated August 18, 2014.
  
(3)
Incorporated by reference to exhibits included with the Company’s Report on Form 8-K filed with the Securities and Exchange Commission dated November 26, 2014.
  
(4)
Incorporated by reference to exhibits included with the Company’s Report on Form 8-K filed with the Securities and Exchange Commission dated January 30, 2017.
  
(5)
Filed Herewith
  
 


SIGNATURES

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

 
XSUNX, INC.
     
Dated: February 21, 2017
By:
/s/ Tom M. Djokovich
   
Tom M. Djokovich,
Principal Executive and Accounting Officer



 
18