Notes to Financial Statements – (Unaudited)
March 31, 2013
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 six months ended March 31, 2013 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 March 31, 2013. 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 six months ended March 31, 2013, and 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.
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 March 31, 2013, as the inclusion of any
potential shares would have had an anti-dilutive effect due to the Company generating a loss. 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.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
March 31, 2013
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Fair Value of Financial Instruments
Fair Value of Financial Instruments,
requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate
that value. As of March 31, 2013, the amounts reported for cash, inventory, prepaid expenses, accounts payable, and accrued expenses,
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 March
31,2013:
Fair Value of Financial Instruments
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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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590,427
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$
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—
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$
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—
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$
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590,427
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Convertible Promissory Notes, net of discount
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239,709
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—
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—
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239,709
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Total liabilities measured at fair value
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$
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830,136
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$
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—
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$
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—
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$
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830,136
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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.
Recently Adopted Accounting
Pronouncements
Management reviewed accounting pronouncements
issued during the three months ended March 31, 2013, and no pronouncements were adopted during the period.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
March 31, 2013
At March 31, 2013, 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 six months ended March
31, 2013, the Company issued 19,086,303 shares of common stock in response to the conversion by the holder of five Securities Purchase
Agreements (the "Purchase Agreements") each providing for the sale by the Company of an 8% unsecured Convertible Note
(“the Notes”). In the aggregate the Notes totaled at the time of conversion $174,800 in principal and accrued interest.
Also, during the six months ended March 31, 2013, the Company issued 500,000 shares of common stock at a price of $0.02 per share
as an extension fee for a promissory note that had become due at September 30, 2012, and issued another 9,351,407 shares of common
stock to the holder upon conversion by the holder of $79,738 of principal and accrued interest. The above shares were issued in
transactions exempt from registration pursuant to Section 4(2) of the Securities Act.
In accordance with a Stipulation
for Settlement of Claims (“Stipulation”), dated June 27, 2012, by and between Ironridge Global IV, Ltd (“Ironridge”)
and the Company as documented in Los Angeles County Superior Court Case No. BC484549, the Company delivered 27,500,000 shares (“Initial
Shares”) of the Company’s common stock, no par value (“Common Stock”) to Ironridge in settlement of approximately
$494,561 in accounts payable of the Company (the “Accounts Payable”) and $54,317 for agent and attorney fees associated
with the transaction. The transaction thereby substantially reduced the Company’s liabilities, including its outstanding
accounts payable balance associated with the assembly of the Company’s CIGSolar™ thermal evaporation technology.
The Stipulation provided for an
adjustment in the total number of shares, which may be issuable to Ironridge based on a calculation period and formula for the
transaction (“Adjustment Shares”). The calculation formula is defined as that number of consecutive trading days following
the date on which the Initial Shares were issued (the “Issuance Date”) required for the aggregate trading volume of
the Common Stock, as reported by Bloomberg LP, to exceed $2.5 million (the “Calculation Period”). Pursuant to the Stipulation,
Ironridge would retain 1,500,000 shares of the Company’s Common Stock, plus that number of shares (the “Final Amount”)
through the end of the Calculation Period with an aggregate value equal to (a) the sum of the Accounts Payable plus 8% agent fee
and reasonable attorney fees through the end of the Calculation Period, (b) divided by 80% of the following: the volume weighted
average price (“VWAP”) of the Common Stock over the length of the Calculation Period, as reported by Bloomberg, not
to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the Calculation Period. Subject
to the above Stipulation and formula during the six months ended March 31, 2013, subject to request by Ironridge, the Company has
issued 38,271,791 Adjustment Shares to Ironridge Global IV, Ltd. The issuance is exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 3(a)(10) thereof, as an issuance of securities in exchange for bona fide
outstanding claims, where the terms and conditions of such issuance are approved by a court after a hearing upon the fairness of
such terms and conditions.
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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. On March 21, 2013, the Company granted 1,000,000 stock options to each of the four non-affiliated members of its Board
of Directors for a total of 4,000,000 options for continued services and performance to the Company. Each option vested upon issuance
and provides for an exercise price of $0.014 per share (104% of the market price on the date of grant) and can be exercised at
any time over a three-year period.
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For the period ended
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3/31/2013
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Risk free interest rate
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0.38
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%
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Stock volatility factor
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138.33
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%
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Weighted average expected option life
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3 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)
March 31, 2013
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4.
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STOCK OPTIONS AND WARRANTS (Continued)
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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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3/31/2012
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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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5,000,000
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$
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0.110
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Granted
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4,000,000
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0.014
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Exercised
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—
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—
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Expired
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—
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—
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Outstanding, end of the period
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9,000,000
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$
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0.070
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Exercisable at the end of the period
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8,000,000
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$
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0.050
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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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0.014
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The weighted average remaining contractual life of options
outstanding issued under the plan as of March 31, 2013 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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1.00 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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2.55 years
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$
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0.014
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4,000,000
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4,000,000
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2.98 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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3.79 years
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9,000,000
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8,000,000
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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 March
31, 2013, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of March 31,
2013 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent
to March 31, 2013, 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 March 31, 2013 and 2012 was $43,140 and $45,000,
respectively.
Warrants
The Company had no warrants outstanding
as of March 31, 2013.
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5.
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CONVERTIBLE PROMISSORY NOTES
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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.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
March 31, 2013
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5.
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CONVERTIBLE PROMISSORY NOTES (Continued)
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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. The Promissory Note 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. The lender subsequently
advanced an additional $25,000 each on February 27, 2013 and March 27, 2013, 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 up to $150,000 and thereafter only with
consent by the Company. 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.
The Promissory Note matures one
year from its issuance. The Promissory Note 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.
During the six months ended March
31, 2013, the Company entered into Securities Purchase Agreements (the "Purchase Agreements") on November 7, 2012, January
18, 2013, and February 12, 2013. Each Purchase Agreement provided for the sale by the Company of 8% unsecured Convertible Notes
(“the Notes”) in the principal amounts of $37,500, $37,500, and $53,000 respectively for an aggregate total of $128,500.
After one hundred and eighty days from the date of issuance each Note 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 Notes each mature nine months after issuance. 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.
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 representing the
estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount
of $572,258 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 $269,126 in interest expense for the period ended March 31, 2013,
and the derivative liability is adjusted periodically according to stock price fluctuations.
XSUNX, INC.
(A Development Stage Company)
Notes to Financial Statements – (Unaudited)
March 31, 2013
At the time of conversion, any remaining
derivative liability will be charged to additional paid-in capital. For purpose of determining the fair market value of the derivative
liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation
of the derivative are as follows:
Stock price on the valuation dates
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$
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0.01
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Conversion price for the debt
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$0.005 - $0.0085
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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 months - 1 yr
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Risk free rate
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0.07% - 0.20%
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Expected volatility
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147.29% - 316.12%
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The value of the derivative liability
at March 31, 2013 was $590,427.
The following are items management
has evaluated as subsequent events pursuant to the requirement of ASC Topic 855.
On April 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 $37,500. After one hundred and eighty days the Note 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 nine months after issuance. 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
May 8, 2013, a holder of 10% unsecured convertible promissory note (the “Promissory Note”) for the principal sum of
up to $78,000 under which the lender had advanced the sum of $25,000 at the time of issuance converted the total principal and
accrued interest totaling $26,250. Upon conversion, the Company issued an aggregate of 4,375,000 shares respectively of common
voting stock to the holder.
Between May 8 and 10, 2013, a
holder of a Securities Purchase Agreement (the "Purchase Agreement") providing for the sale by the Company of an
8% unsecured Convertible Note (“the Note”) in the principal amount of $37,500 converted $27,000 of principal.
Upon conversion, the Company issued an aggregate of 3,544,699 shares of common voting stock to the holder.