-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOYxhpkwFmd97XyKnDWa3kABrnk0+I8/spnlpN59UFnaPvm9NNtiLKp2kGLKLcQ7 ldGtkiYdo6u0vSAwRT8OCw== 0001072588-06-000012.txt : 20060111 0001072588-06-000012.hdr.sgml : 20060111 20060110192800 ACCESSION NUMBER: 0001072588-06-000012 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20060111 DATE AS OF CHANGE: 20060110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XSUNX INC CENTRAL INDEX KEY: 0001039466 STANDARD INDUSTRIAL CLASSIFICATION: UNSUPPORTED PLASTICS FILM & SHEET [3081] IRS NUMBER: 841384159 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-29621 FILM NUMBER: 06523408 BUSINESS ADDRESS: STREET 1: 65 ENTERPRISE CITY: ALISO VIEJO STATE: CA ZIP: 92656 BUSINESS PHONE: 949 330 8060 MAIL ADDRESS: STREET 1: 7609 RALSTON ROAD CITY: ARVADA STATE: CO ZIP: 80002 FORMER COMPANY: FORMER CONFORMED NAME: SUN RIVER MINING INC DATE OF NAME CHANGE: 20000218 10KSB 1 xsnx10k9-05.txt FORM 10-KSB SECURITIES EXCHANGE COMMISSION Washington, D.C. 20549 Annual Report Pursuant to the Securities Exchange Act of 1934 For the fiscal year ended September 30, 2005 Commission file number: 000-29621 XSUNX, INC. (Exact name of registrant as specified in its charter) Colorado 84-1384159 - ------------------------ -------------------- (State of incorporation) (I.R.S. Employer Identification No.) 65 Enterprise, Aliso Viejo, CA 92656 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (949) 330-8060 Securities registered pursuant to Section 12(b) of the Act: Title of each class: None Name of each exchange on which registered: N/A Securities registered pursuant to Section 12(g) of the Act: Title of each class: None 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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $0 Transitional Small Business Disclosure Format: Yes [_] No [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [_] No [X] Aggregate market value of the authorized voting stock held by non-affiliates of the registrant as of September 30, 2005: $36,816,026 based on the last sale price at year end of $.36 as reported by OTCBB. Number of authorized outstanding shares of the registrant's no par value common stock, as of January 9, 2005: 123,917,080
TABLE OF CONTENTS PART I PAGE Item 1. Description of Business 4 Item 2. Description of Property 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for Common Equity and Related Stockholder Matters 14 Item 6. Management's Discussion and Analysis or Plan of Operation 17 Item 7. Financial Statements F-1 - F-14 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 21 Item 8A. Controls and Procedures 21 Item 8B. Subsequent Events 21 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 22 Item 10. Executive Compensation 24 Item 11. Security Ownership of Certain Beneficial Owners and Management 27 Item 12. Certain Relationships and Related Transactions 28 PART IV Item 13. Exhibits and Reports on Form 8-K 30 Item 14. Principal Accountant Fees and Services 31 SIGNATURES 33 CERTIFICATES
2 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of 1933 that reflect its current expectations about its future results, performance, prospects and opportunities. These forward-looking statements are subject to significant risks, uncertainties, and other factors, including those identified in Risk Factors (see Item 1 "Description of Business - Risk Factors") below, which may cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements. The forward-looking statements within this Form 10-KSB may be identified by words such as "believes," "anticipates," "expects," "intends," "may," "would," "will" and other similar expressions. However, these words are not the exclusive means of identifying these statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances occurring subsequent to the filing of this Form 10-KSB with the SEC or for any other reason. You should carefully review and consider the various disclosures the Company make in this report and its other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect its business. For further information about these and other risks, uncertainties and factors, please review the disclosure included in this report under Item 1 "Description of Business - Risk Factors and Item 6 "Management's Discussion and Analysis or Plan of Operation - Cautionary and Forward Looking Statements." 3 PART I ITEM 1. DESCRIPTION OF BUSINESS. COMPANY HISTORY 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 Asset Purchase Agreement (the "Plan") with Xoptix, Inc., a California corporation. Pursuant to the Plan the Company acquired the following three patents for Seventy Million (70,000,000) shares (post reverse split one for twenty): No. 6,180,871 for Transparent Solar Cell and Method of Fabrication (Device), granted on January 30, 2001; No. 6,320,117 for Transparent Solar Cell and Method of Fabrication (Method of Fabrication), granted on November 20, 2001; and No. 6,509,204 for Transparent Solar Cell and Method of Fabrication (formed with a Schottky barrier diode and method of its manufacture), granted on January 21, 2003. Pursuant to the Plan, the Company authorized the issuance of 110,530,000 (post reverse split) common shares. Prior to the Plan the Company had no tangible assets and insignificant liabilities. Subsequent to the Plan the Company completed its name change from Sun River Mining, Inc. to XsunX, Inc. The transaction was completed on September 30, 2003. GENERAL OVERVIEW XsunX, Inc. is developing new and innovative thin film solar cell designs and manufacturing process with the intent to provide commercially viable solar cell designs that convert sun light into electrical energy. The process for producing electricity from sunlight is known as Photovoltaics. Photovoltaic ("PV") is the science of capturing and converting sun light into electricity. The Company is focusing its research and product development efforts on thin film PV devices in an effort to capitalize on what it perceives as cost and application diversity advantages to current rigid multi-crystalline silicon wafer technologies. The Company's current thin film cell designs employ between ..2 microns to 1.5 microns of material thickness as opposed to an approximate 400 microns of material thickness for multi-crystalline cell designs. This significant reduction in cell thickness and flexibility of the completed cell structure leads to the use of "thin film" terminology in describing the solar cell design. The focus of the Company's development efforts is to deliver two aspects of technologies in the form of an integrated solution providing, a) commercially scalable manufactured processes and equipment designed for the specific manufacture of the Company's thin film solar technologies, and, b) proprietary thin film solar cell designs that address new application opportunities in the growing field of Building Integrated Photovoltaics. Building Integrated Photovoltaics ("BIPV"), in concept, allows photovoltaic material, in the form of photoelectric panels, to be incorporated into the design of building materials; thus, providing a way to integrate additional sources of power production into the operation of buildings. As the BIPV category of the photovoltaic industry is beginning its growth into the US and worldwide markets, XsunX intends to attpemt to achieve commercialization of BIPV through a combination of innovation and patented thin film designs and manufacturing techniques. 4 BIPV technology might eventually enable every building to be a virtual power plant by utilizing the power of the sun, through the skin of the building, in an aesthetically sound and structurally safe environment if its economics and productability can be proven. PRODUCT DEVELOPMENT The first of its product development efforts is Power Glass(TM) - an innovative thin film solar technology that is intended to allow windows to produce electricity from the power of the sun without significantly altering the appearance or use of the window or transparent surface. Using proprietary and patented solar cell designs and manufacturing processes, the Company is focused on the development of thin film solar cell designs for semi-transparent coatings on thin flexible plastics that create large area monolithic in appearance solar cell structures that you can see through. The design of the Power Glass solar cell provides for the manufacture of numerous small cells on thin transparent flexible plastics. As part of the manufacturing process numerous individual cells are produced simultaneously on rolls of thin plastic substrates and interconnected using minimally apparent segmentations. The result is a large area integrated solar cell device that is monolithic or uniform in appearance and simulates tinted solar control films used in window shading applications. The Company believes the advantages to the use of its films in solar glass designs, over current solar glass designs, lie in improved esthetic appearance, reduced manufacturing or assembly requirements, and lower finished product costs. These cells are single-junction amorphous silicon based (a-Si) solar cells that depending on the degree of light transmission, or transmisivity, are expected to operate at 4% + efficiencies. That is approximately 4 or more watts of direct current can be produced per square foot of Power Glass film. While lower in efficiency than opaque thin film multi-junction amorphous silicon at approximately 5-7%, and rigid silicon wafers at 12-15% efficiencies the Power Glass films benefit from cost reductions in the manufacturing process. The Company believes that the following combined attributes will provide Power Glass films a competitive advantage while at the same time addressing architectural glass facade applications that have been under utilized as a platform for the integration of photovoltaic technologies; o Low temperature processing techniques of (<150C) allow the use less expensive plastic or polyester substrates that will not be exposed to higher temperature manufacturing processes of multi-junction amorphous at (250C) and silicon wafer at (600-800C) o Significant reductions in the amount of silicon used with only .2 microns for Power Glass as compared to 1 micron for multi-junction amorphous, and 400 microns for silicon wafers. o Fully integrated large area solar modules as part of the manufacturing process on rolled substrate materials that can be integrated into glass assemblies. 5 As part of the Company's plan to develop new and innovative solar cell designs and use applications, the Company expanded its business focus in October 2005 to include the development of thin film opaque solar cell designs and manufacturing methods. The focus of this product development will be aimed at the commercialization of U.S. Provisional Patent Application serial number 60/536,151 - three terminal and four terminal solar cells, solar cell panels, and method of manufacture. The Company refers to the design of this solar cell as a 4 terminal solar cell and believes that it may provide a number of improvements over current multi-junction solar cell deigns. This unique 4 terminal solar cell design uses a combination of thin film transparent cell technology, derived from the Company's Power Glass initiative, with that of a thin film nano-crystalline solar cell structure. XsunX believes that the combination of these two technologies into a single device holds an opportunity to deliver low cost, high efficiency, flexible, and light weight solar cells providing performance characteristics commonly found only in various forms of expensive crystalline wafer technologies. Preliminary and rudimentary laboratory tests of this technology have produced conversion efficiencies of 9.9%. The Company believes that through the further refinement of the cell structure deposition processes and enhanced material, open circuit voltage, and band gap properties the 4 terminal thin film device may provide conversion efficiencies approaching 14-15% although this is not assured nor is it proven in lab tests. The design of the 4 terminal thin film solar cell provides several advantages to existing multi-junction solar cell designs. A primary benefit is that the 4 terminal cell does not require electrical current matching between each cell. This circumvents a common problem plaguing multi-junction devices that can cause reduced overall solar cell power output. Stability issues are also addressed through the use of low band gap nano-crystalline junction materials and ultra-thin amorphous silicon materials to create a stable and efficient solar cell stack. Low temperature processing capabilities of this design may further increase manufacturing efficiencies allowing the use of less expensive substrate materials. The decision to diversify the Company's product development efforts to include opaque solar cell designs was fueled by what the Company sees as opportunities for domestic and international demand in opaque solar cell products and applications. In countries such as China, Japan, Germany, and the U.S., there is a growing trend supporting the increased use of green building designs promoting the use of integrated solar technologies within building materials. XsunX believes that the development of a stable, high efficiency, thin film solar cell could provide building material manufacturers with a preferred alternative to the use of lower efficiency multi-junction thin films and the more costly multi-crystalline solutions. The process of integrating renewable power generating properties into building materials such as glass and onto buildings is known as Building Integrated Photovoltaics or "BIPV." If its research efforts produce a design that provides more efficiency of power production at economic costs, XsunX intends to be a leader in the design and delivery of BIPV thin film designs and manufacturing methods. The Company believes that its thin film design research may provide a solution for the wide scale integration of BIPV energy producing products into living and working environments. If the Company can achieve commercialization of its research designs, the Company anticipates the majority of revenues will be derived from the sale and licensure of its manufacturing process equipment and solar cell designs, rather than acting as a manufacturer of product. 6 COMPANY SPONSORED RESEARCH AND DEVELOPMENT Management has established a plan under which the Company is conducting research to commercialize its technologies and developing new technology through the contracting for research, development and planning for commercialization processes with certain qualified facilities that specialize in the Company's technology. Management believes this product development process provides the Company with the fastest path to marketable products, the maximization of corporate resources, and, the broadest access to capable device, optical and material engineering facilities, and technical expertise. In June 2004 XsunX established, and continues to maintain, a primary strategic relationship with Colorado based MVSystems, Inc. that designs, builds, and delivers state-of-the-art manufacturing tools designed specifically for the thin film semiconductor market. MVSystems, Inc. ("MVSystems") is equipped with both the technical staff and tools necessary for the development and commercialization of XsunX technologies. The terms of the working relationship provide XsunX with complete R&D facilities without mark-up for profit on the use of staff and equipment. In return MVSystems has received warrants for the purchase of common stock in XsunX. The objective of this ongoing plan is to provide the Company with technical expertise necessary for the development of manufacturing techniques and thin film solar cell designs. In September 2004 XsunX increased its patent and technology assets by acquiring an exclusive royalty free license from MVSystems to a suite of patents and technologies specific to the design and manufacture of its semi-transparent solar electric glazing initiative, "Power Glass." In October of 2005 the Company further expanded its licensing rights with MVSystems to include the design and manufacture of opaque solar cell designs which also expanded the Company's intended product design base to include both semi-transparent and non-transparent thin film solar cell designs, and manufacturing methods, (see Item 8B "Subsequent Events - Expanded License and Warrants"). The Company believes that the licensed technologies provide them with key aspects to facilitate development efforts, and which may enable designs for the commercial viability of future products. As part of the October 2005 license expansion with MVSystems the Company also received the benefit of equipment manufacturing services from MVSystems under an "at cost, without mark up for profit, plus ten percent" pricing structure. This provided the Company with access to equipment manufacturing facilities and the ability to market and deliver integrated manufacturing systems capable of producing its thin film solar cell designs. During its operating history MVSystems has designed, constructed, installed, and provided support for over 70 systems ranging from small research and development systems to multi-megawatt production systems. For the year ended September 30, 2005, the Company committed 36% or $501,423 of its operating budget towards product development and another $181,995 was used for the addition of development equipment. The Company intends to continue to focus on the development and refinement of solar cell designs, proprietary manufacturing processes, and facilities design that could be provided to its future licensees as turnkey solutions for the core requirements necessary for the mass production of the Company's thin film designs. A large part of the Company's capital is used for on going product design development efforts. At present the Company continues to develop the XsunX Power Glass(TM) process for future commercial applications. Areas of current process development include: (a) Process development on thin-film sheet and rolled polymers, plastics, and metals (b) Qualify deposition processes and enhance material, open circuit voltage, and band gap properties (c) Complete the integration of reel-to-reel processing systems into the manufacturing process; and (d) Refine and integrate cell segmentation process into manufacturing process 7 The Company has and continues to make investments in the development of intellectual property assets as part of its business plan. For the year ending September 30, 2006 the Company has developed a plan of operations that commits 34% of its budget or $1,535,000 to research and development, and another 37% of its budget or $1,700,000 to the manufacture of its first production line system for eventual re-sale to future licensees. The purpose of these investments is to develop and market patented and proprietary solar electric thin film designs and manufacturing processes for sale and licensure to target markets. PRODUCT DESIGN STRATEGY The Company's development effort is intended to deliver two aspects of marketable technologies in the form of an integrated solution providing, a) commercially scalable manufactured processes and equipment designed for the specific manufacture of the Company's thin film solar technologies, and b) proprietary thin film solar cell designs that address new application opportunities. The manufacture and sale of these items as a system provide the Company with the ability to deliver its thin films technologies as an integrated licensable design. The Company's manufacturing systems design is based upon its licenses from MVSystems to combine the industry standards of in-line roll-to-roll processing techniques with the exact processing capabilities of vacuum deposition cluster tool systems. While in-line roll-to-roll processing systems are widely used in the manufacture of thin film solar cells, their ability to provide higher unit volumes comes at the cost of reduced solar cell efficiency due to cross contamination of materials, the inefficient use of materials, and a manufacturing design that is rigid and not easily adaptable to increased scale and the introduction of new technologies. Conversely, multi-chamber based cluster tool systems are modular in design allowing for expandability, the introduction of new technologies, provide the extreme control and exacting standards necessary to produce such high value items as thin film transistors, and rigid crystalline solar cells, but cluster tool systems sacrifice throughput resulting in lower unit volumes and yield. The Company believes that the selective integration of the better attributes of each of these separate system types provides a hybrid type of system for use in the fabrication of an array of new thin film devices on flexible substrates. It is this design that the Company has an exclusive license for from MVSystems, among other technology. The Company believes that these patented manufacturing designs may offer economies of increased throughput resulting in yield advantages, while providing expandability of manufacturing capabilities and the introduction of new technologies at reduced cost from present models. An additional benefit to the hybrid system is the ability to employ the use of a smaller initial foot print, or facilities area, requiring less initial capital expenditure. As production requirements increase, the efficiencies of replicating only portions of the systems design to move from single to multi-megawatt capabilities may provide, in theory, improved cost-competitiveness. Ultimately, multi-megawatt factories producing thin film solar cells may be an enabling factor in achieving the necessary price thresholds required for solar to compete with traditional power generation choices. 8 TRADEMARK, PROPRIETARY TECHNOLOGY AND PATENTS The Company entered into an agreement for the purchase of the U.S. registered trademark "Power Glass(TM)" and Internet domain name PowerGlass.com in May 2004 from Western Gas and Electric Company, a California corporation. The Company has not been issued registered trademarks for its "XsunX" trade name. The Company may file trademark and trade name applications with the United States Office of Patents and Trademarks for its proposed trade names and trademarks. In September 2003 the Company was assigned the rights to three patents as part of an Asset Purchase Agreement with Xoptix Inc., a California corporation. The patents acquired were No. 6,180,871 for Transparent Solar Cell and Method of Fabrication (Device), granted on January 30, 2001; No. 6,320,117 for Transparent Solar Cell and Method of Fabrication (Method of Fabrication), granted on November 20, 2001; and No. 6,509,204 for Transparent Solar Cell and Method of Fabrication (formed with a Schottky barrier diode and method of its manufacture), granted on January 21, 2003. In addition, XsunX licensed the patent and technology portfolio of MVSystems, Inc., a Colorado corporation ("MVSystems") in September 2004. The license granted XsunX the royalty free exclusive rights for use by XsunX in its attempt to establish a commercially viable process for the manufacture of semi-transparent solar cells and solar electric glazing processes and, accordingly, included all MVSystems technology, know how, and resources which are part of or related to the licensed patents and technology that was then or may become applicable or beneficial to the furtherance of the business objectives of XsunX in the future. The license was exclusive as to technology pertaining to the XsunX field of use as it pertains to the business of developing, commercializing and licensing processes for the manufacture of semi-transparent (greater than 5% transparency) solar cells or photovoltaic glazing technologies. In October of 2005 the Company further expanded its licensing rights with MVSystems to include the design and manufacture of opaque solar cell designs thereby also expanding the Company's intended product base to include both semi-transparent and non-transparent thin film solar cell designs, and manufacturing methods, (see Item 8B "Subsequent Events - Expanded License and Warrants"). The Company believes that the licensed technologies provide them with key aspects to successful completion of its product development efforts, the commercial viability of future products, and the ability to deliver those products. The following are two of the patents licensed from MVSystems that are management believes to be beneficial to the development of scalable manufacturing processes for its thin film technology. Semiconductor Vacuum Deposition System And Method Having A Reel-To-Reel Substrate Cassette: US6, 258,408 B1: July 10th, 2001. (Method of Fabrication); and US Provisional Patent Application serial number 60/536,151- three terminal and four terminal solar cells, solar cell panels, and method of manufacture. (Device and Method of Fabrication) As part of the October 2005 license expansion with MVSystems the Company also received the benefit of equipment manufacturing services from MVSystems under a pricing structure of cost, without mark up for profit, plus ten percent. This provided the Company with access to initial equipment manufacturing facilities and an initial ability to market and deliver integrated manufacturing systems capable of producing its thin film solar cell designs. During its operating history MVSystems has designed, constructed, installed, and provided support for over 70 systems ranging from small research and development systems to multi-megawatt production systems. The Company may have to seek additional facilities if demand were to exceed MVSystems' delivery capacity. 9 The Company continues to develop additional processes, techniques, and device designs. These research and development efforts may provide the Company with additional proprietary technology that may lead to the filing of new provisional and patent applications. APPLICATIONS FOR XSUNX PHOTOVOLTAIC THIN FILMS The Company's thin film solar cell designs are intended to provide benefits associated with the use of light weight materials, the use of low processing or manufacturing temperatures providing diversity in the use of substrates necessary to meet specific application requirements, flexibility for molding to shapes, and semi-transparency provide characteristics beneficial in the design of diverse use applications. The first of the Company's product development efforts is Power Glass(TM) - an innovative thin film solar technology that is intended to allow windows to produce electricity from the power of the sun without significantly altering the appearance or use of the window or transparent surface. Using proprietary and patented solar cell designs and manufacturing processes, the Company is focused on the development of thin film solar cell designs for semi-transparent coatings on thin flexible plastics that create large area monolithic in appearance solar cell structures that you can see through. The Company believes that Power Glass(TM) may have ubiquitous applications -- including, but not limited to: Large Buildings - Architectural Glass: Power Glass thin films could be applied to the windows in the manufacture of large buildings, turning these structures into virtual power plants. Electrical power generated can be used to run building systems augmenting other power sources. Industrial, Agricultural, and Public Facilities - Canopy, Skylight, & Roofs: Power Glass thin films could be applied to the various transparent surfaces of manufacturing, green house, and public facilities to supply a clean and renewable portion of electrical power. XsunX believes that these types of products and applications will provide economic incentives for the wide scale adoption of the integrated use of Power Glass(TM) thin film technologies. Film produced by Company licensees using the XsunX process could be supplied to building material manufacturers worldwide for development and use in numerous applications. GROWTH, REVENUE AND DISTRIBUTION PLAN The Company intends to market integrated manufacturing systems as turnkey solutions for the manufacture it's current and future PV thin films designs. The manufacturing systems will be sold to manufacureres as modular systems and licensed for use in the manufacture the Company's thin film designs. Manufactureres would in turn agree to manufacture and distribute the Company's PV thin films, or incorporate the thin film PV technology into their product manufacturing process as an "original equipment manufacturer" (OEM) and sell the finished product to their consumers. No licenses or contracts now exist with any manufacturer. The Company intends to also target customers who are developing their own technology platforms in which the manufacture of or the integration of its thin film solar cells could play an important role. The Company intends to offer non-exclusive manufacturing licenses and expects to earn a royalty on thin films manufactured under any licenses. In selling the manufacturing equipment and licensing the technology to manufacturers, the Company reduces operating expenses and saves capital in plant, property and equipment. As a result, should the Company realize earnings it intends to reinvest its retained earnings in R&D in an effort to continuously develop related new technologies that will help achieve sustainable competitive advantages for the Company. 10 MARKET The Company's thin film Power Glass technology, upon completion of commercialization, may be applied to the large and established glass and building material industries. That is, transparent photovoltaic glazing may enable solar energy-production to enter mainstream markets because it can integral to the designs of buildings. Builders and manufacturers already use glass, plastic and other materials, so they may be attracted to the economic benefits of using the same materials that also produce electrical energy. Three key attributes of photovoltaics as an electricity source are fueling world interest in photovoltaics "PV": Environment: PV is a clean, emission-free renewable electrical generation technology, with substantial potential for a supply rate in the world's future energy demands. Technology: PV is reliable, manufacturable, consumer-friendly, and can be deployed in a wide range of applications. National Interest: PV is critical to energy security, strategic technology, and long-term economic growth. As a "distributed" generation source, this technology acts as a network--not a grid--and is much less susceptible to large-scale outages caused by disasters of natural or human origin. It mitigates its dependence on foreign energy supplies, while providing distinct benefits to its domestic economy. According to the Energy Information Administration of the US Department of Energy, the global photovoltaic industry reached $4.7 billion in worldwide sales in 2003 and is expected to grow at a rate in excess of 15-20% per year over the next several decades. The department further estimates that between the years 2000 and 2020 the demand for electrical power in the United States will require the addition of approximately 355 gigawatts of new energy production capacity. This presents a 40% increase over present electrical energy production capacity. In the long view, the Company believes solar energy production is intrinsically attractive, not only environmentally but also economically. Sunlight is readily, regularly, and widely available; it is renewable; and it is easily accessible without the massive expense of mining, drilling, or constructing huge dams or other facilities. Tapping the sun directly, rather than through the solar energy stored in fossil fuels, wood, or ethanol, makes too much economic sense not to be inevitable. MARKETING STRATEGY The Company intends to enhance and promote the idea that XsunX manufacturing systems and thin film technologies, when ready to market, present a compelling and efficient solution for the manufacture of photovoltaic thin films. In order to create a favorable environment for sales, the Company plans to undertake advertising and promotion efforts. These efforts may be outsourced and will require the services of an advertising relations firm. The Company plans to interview various firms and select those most capable of assisting us with comprehensive advertising and promotion plans. The Company intends to commence building and staffing a marketing department to accelerate these efforts in the first part of 2006. The Company has not yet finalized the potential costs of this marketing strategy. The Company, will invest in small test campaigns before committing to large promotions or marketing campaigns. The initial marketing strategy The Company will be to market to potential manufacturer partners in target markets representing solar device manufactures, glass, and building materials manufacturers. BACKLOG OF ORDERS There are currently no orders for sales at this time. GOVERNMENT CONTRACTS There are no government contracts at this time. 11 COMPETITIVE CONDITIONS Currently, management is not aware of other products substantially similar to those of the company on the market. However, a number of solar cell technologies have and are being developed by a number of companies. Such technologies include amorphous silicon, cadmium telluride, copper-indium-gallium-selenide (CIGS), and copper indium diselenide as well as advanced concepts in thin film crystalline silicon, and the use of organic materials. Given the benefit of time, investment, and advances in manufacturing technologies any of these competing technologies may achieve manufacturing costs per watt lower than the cost per watt to manufacture its thin film solar cells. In accessing the principal competitive factors in the market for solar electric power products the Company uses price per watt, stability and reliability, conversion efficiency, diversity in use applications and other performance metrics such as scalability of manufacturing processes and the ability to adapt new technologies into cell designs and the manufacturing process without antiquation of existing infrastructure. If the Company does not compete successfully with respect to these or other factors, it could materially and adversely affect its business, results of operations, and financial condition. A number of large companies are actively engaged in the development, manufacturing and marketing of solar electric power products. The five largest PV cell suppliers are Q-Cells Shell Solar, Sharp Corporation, BP Solar, and Kyocera Corporation, which together supply the significant portion of the current PV cell market. All of these companies have greater resources to devote to research, development, manufacturing and marketing than the Company does. Other competitive factors lie in the current use of other clean renewable energy technologies such as wind, ocean thermal, ocean tidal, and geo-thermal power sources, and conventional fossil fuel based technologies for the production of electricity. The Company expects its primary competition will be within the solar cell marketplace itself. Barriers to entering the solar cell manufacturing industry include the technical know-how required to produce solar cells that maintain acceptable efficiency rates and the design of efficient and scalable manufacturing processes. COMPLIANCE WITH ENVIROMENTAL LAWS AND REGULATIONS The operations of the Company are subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date, compliance with these regulations by the Company has had no material effect on the Company's operations, capital, earnings, or competitive position, and the cost of such compliance has not been material. The Company is unable to assess or predict at this time what effect additional regulations or legislation could have on its activities. ADMINISTRATIVE OFFICES As of September 30, 2005 the Company leased administrative office facilities located at 65 Enterprise, Aliso Viejo CA 92656 for approximately $750 per month pursuant to a six month lease agreement renewable in 6 month or greater increments thereafter. 12 EMPLOYEES AND CONSULTANTS The Company is a development stage company and as of September 30, 2005 had one salaried employee. Through a strategic technology sharing and facilities use relationship with MVSystems, Inc. the Company uses the services of 15 additional technologists and support staff. The Company retains its current President and Chief Executive Officer, Mr. Tom M. Djokovich, since October 1, 2003. The Company projects that during the next 12 months the Company's workforce is likely to increase to 8, with 3 of the new employees being in Administrative, and 4 in marketing and sales positions. It is anticipated that MVSystems will also expand the number of employees by 2. In addition to the anticipated retention of new employees the Company expects to continue to use outside consultants, subcontract labor, attorneys and accountants as necessary, and may find a need to engage additional full-time employees as necessary. ADVISORY BOARD In September 2004 the Company established the XsunX Scientific Advisory Board to attract qualified specialists from the fields of material and device engineering, and, industry specialists representing expertise in manufacturing, design, certification and applications associated with glass, plastics and building materials. It is anticipated that panel members will be engaged for a period of two years. The advisory board retained a chairman, Dr. Arun Madan to lead the panel, advise the development process and recommend additional candidates for inclusion on the panel. In February and March of 2005 the Company added a total of three additional members to the Scientific Advisory Board representing specialists in the fields of material sciences specific to the its thin films development efforts, (see Item 5 "Market for Registrants Common Equity and Related Stockholder Matters - Grant of Options/Warrants"). The qualifications and biographical information for the members of the panel are as follows: Dr. Arun Madan, Chairman Scientific Advisory Board Dr. Madan is a Research Professor in the Department of Metallurgical and Materials Engineering at The Colorado School of Mines, President of MVSystems Inc. and an adjunct professor at The University of Waterloo, Canada. He became one of the originators of Amorphous Silicon technologies in 1970 and fabricated the first TFT (thin film transistor) as part of his Ph.D thesis. With over 30 years of leading edge scientific accomplishments he has published well over one hundred scientific papers, published a textbook now in use at several universities and holds fourteen patents on thin film semiconductor technology as well as advanced vacuum semiconductor deposition systems. In addition to his recognized leadership in the fields of thin film semiconductors and solar cells, he is the founder of two firms, Glasstech Solar Inc. in 1985 and MVSystems, Inc. in 1989. As founder of these firms he has gained over twenty years of international business, marketing and management experience successfully establishing technology sales exceeding $150 million dollars. Leveraging his extensive scientific, business and leadership capabilities he has led teams of scientists/engineers in multi-disciplinary programs providing contract research and development work for a multitude of domestic and international agencies and firms including the National Renewable Energy Laboratory (USA), BP-Solar (USA), Shell (The Netherlands), Kovio (USA), Zettacore (USA), QinetiQ (UK), ENEA (Italy) and Pacific Solar (Australia) etc. Dr Madan received his Ph.D. - Physics from the University of Dundee, Scotland. 13 Dr. John Moore, Member Scientific Advisory Board Dr. John J. Moore is a Materials Scientist who holds the position of Trustees' Professor and Head of Department of Metallurgical and Materials Engineering at the Colorado School of Mines. Dr. Moore is also Director of the interdisciplinary graduate program in Materials Science and Director of the Advanced Coatings and Surface Engineering Laboratory, ACSEL, at the Colorado School of Mines in Golden. Dr. Moore established the Advanced Coatings and Surface Engineering Laboratory (ACSEL) at the Colorado School of Mines in 1994. The main objective of ACSEL is to perform fundamental research in advanced PVD and CVD systems that will aid the U.S. thin films, coatings and surface engineering industry. ACSEL is a national and international leader in research on advanced coatings, surface engineering and thin film processing. Dr. Moore was awarded a B.Sc. in Materials Science and Engineering from the University of Surrey, UK, in 1966, a Ph.D. in Industrial Metallurgy from the University of Birmingham, UK, in 1969, and a D.Eng. from the School of Materials of the University of Birmingham, UK, in 1996. Dr. Arokia Nathan, Member Scientific Advisory Board Arokia Nathan (SM) is a Professor in Electrical and Computer Engineering, University of Waterloo, and holds the Canada Research Chair in Nanoscale Elastic Circuits. He is also the chief technology officer of Ignis Innovation Inc., Waterloo, Canada, a company he founded to commercialize technology on thin film silicon backplanes and driving algorithms for active matrix organic light emitting diode displays. Dr. Nathan has extensive experience in device physics and modeling, and materials processing and integration. He has published extensively in the field of sensor technology and CAD, and thin film transistor electronics, and has over 15 patents filed/awarded. He is a co-author of two books, Microtransducer CAD and CCD Image Sensors in Deep-Ultraviolet. He is a Senior Member of the IEEE and a member of the American Physical Society, Electrochemical Society, Materials Research Society, Society for Information Displays, International Society for Optical Engineering, and the Institute of Electrical Engineers (UK). He chairs the 2005 IEEE Lasers and Electro-Optics Society Technical Committee on Displays and the Displays Sub-Committee in both 2004 and 2005. He serves as co-chair of the Fall 2005 Materials Research Society Symposium M: Flexible and Printed Electronics, Photonics, and Biomaterials, and is currently a Guest Editor for a Special Issue on Flexible Electronics Technology in IEEE Proceedings. He received his PhD in Electrical Engineering from the University of Alberta, Edmonton, Alberta, Canada, in 1988. Dr. Richard Rocheleau, Member Scientific Advisory Board Dr. Rocheleau is the director of the Hawaii Natural Energy Institute (HNEI) of the University of Hawaii designated as a US Department of Energy Center of Excellence. At HNEI Dr. Rocheleau has established the HNEI Thin Films Laboratory and developed a research program focused on thin film photovoltaics and renewable hydrogen production having near-term applications in both the commercial and military sectors. Dr. Rocheleau also serves as the PI of several programs including the Hawaii Energy and Environmental Technology Initiative; and the Hawaii Hydrogen Center for the Development and Deployment of Distributed Energy Systems. He is the author of over 30 publications in peer reviewed journals and over 20 conference proceedings in the areas of photovoltaics, photo electrochemical hydrogen production, and thin-film electronic materials. Dr. Rocheleau also holds six patents and three patent disclosures. Leveraging his extensive scientific and leadership capabilities he has led teams of scientists/engineers in multi-disciplinary programs providing contract research and development of PV and semiconductor manufacturing processes for a number of domestic and international firms including, Chronar Corporation, Solarex, First Solar, Trex Enterprises, and Global Solar Inc. Dr. Rocheleau received his BChE and PhD (1980) in Chemical Engineering from the University of Delaware and a M.S. in Ocean Engineering (1977) from the University of Hawaii. 14 RISK FACTORS Need For Additional Financing. The Company has very limited funds, and such funds may not be adequate to develop the Company's current business plan. The ultimate success of the Company may depend upon its ability to raise additional capital. If additional capital is needed, there is no assurance that funds will be available from any source or, if available, that they can be obtained on terms acceptable to the Company. If not available, the Company's operations will be limited to those that can be financed with its modest capital. Regulation of Penny Stocks. The Company's securities, when available for trading, will be subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. For purposes of the rule, the phrase "accredited investors" means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse's income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell the Company's securities and also may affect the ability of purchasers in this offering to sell their securities in any market that might develop therefore. In addition, the Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act of 1934, as amended. Because the securities of the Company may constitute "penny stocks" within the meaning of the rules, the rules would apply to the Company and to its securities. The rules may further affect the ability of owners of Shares to sell the securities of the Company in any market that might develop for them. Shareholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The Company's management is aware of the abuses that have occurred historically in the penny stock market. Although the Company does not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to the Company's securities. Lack of Profitable Operating History. The Company was formed in 1997 and has had an unprofitable operating history. The re-organization of the Company and the acquisition of solar electric glazing technology have provided the Company with a new opportunity for business development which carries continued special risks inherent in a new business opportunity. The Company must be regarded as a new or start-up venture with all of the unforeseen costs, expenses, problems, and difficulties to which such ventures are subject. 15 No Assurance of Success or Profitability. There is no assurance that the Company will successfully commercialize its proprietary technology. Even if the Company should successfully commercialize its proprietary technology, there is no assurance that it will generate significant revenues or profits, or that the market price of the Company's common stock will be increased thereby. Lack of Diversification. Because of the limited financial resources that the Company has, it is unlikely that the Company will be able to diversify its operations. The Company's probable inability to diversify its activities into more than one area will subject the Company to economic fluctuations within a particular business or industry and therefore increase the risks associated with the Company's operations. Dependence upon Management. The Company currently has only two (2) individuals who are serving as its officers and three (3) persons as directors. The Company will be heavily dependent upon their skills, talents, and abilities to implement its business plan. Indemnification of Officers and Directors. The Colorado Business Corporation Act provides for the indemnification of its directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of the Company. The Company will also bear the expenses of such litigation for any of its directors, officers, employees, or agents, upon such person's promise to repay the Company therefore if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by the Company which it will be unable to recoup. Directors' Liability Limited. The Colorado Business Corporation Act excludes personal liability of its directors to the Company and its stockholders for monetary damages for breach of fiduciary duty except in certain specified circumstances. Accordingly, the Company will have a much more limited right of action against its directors than otherwise would be the case. This provision does not affect the liability of any director under federal or applicable state securities laws. Dependence upon Outside Advisors. To supplement the business experience of its officers and directors, the Company employ's accountants, technical experts, appraisers, attorneys, or other consultants or advisors. The selection of any such advisors will be made by the Company's President without any input from stockholders. Furthermore, it is anticipated that such persons may be engaged on an "as needed" basis without a continuing fiduciary or other obligation to the Company. In the event the President of the Company considers it necessary to hire outside advisors, he may elect to hire persons who are affiliates, if they are able to provide the required services. Competition. The Company expects to be at a disadvantage when competing with many firms that have substantially greater financial and management resources and capabilities than the Company. No Foreseeable Dividends. The Company has not paid dividends on its common stock and does not anticipate paying such dividends in the foreseeable future. Limited Public Market. There is only a limited public market for the Company's common stock, and no assurance can be given that a market will continue or that a shareholder ever will be able to liquidate his investment without considerable delay, if at all. If a market should continue, the price may be highly volatile. Factors such as those discussed in this "Risk Factors" section may have a significant impact upon the market price of the securities offered hereby. Due to the low price of the securities, many brokerage firms may not be willing to effect transactions in the securities. Even if a purchaser finds a broker willing to effect a transaction in these securities, the combination of brokerage commissions, state transfer taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such securities as collateral for any loans. 16 ITEM 2. DESCRIPTION OF PROPERTY As of September 30, 2005 the Company leased administrative office facilities located at 65 Enterprise, Aliso Viejo CA 92656 for approximately $750 per month pursuant to a six month lease agreement. The Company owns no real property. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any pending legal proceedings, nor is its property subject to such proceedings, at January 10, 2006. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None in the period ended September 30, 2005. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the OTC Bulletin Board under the symbol "XSNX." The range of high, low and close trade quotations for the Company's common stock by fiscal quarter within the last two fiscal years, as reported by the National Quotation Bureau Incorporated, was as follows: Year Ended September 30, 2005 HIGH LOW CLOSE - ----------------------------- First Quarter ended December 31, 2004 $.51 $.33 $.33 Second Quarter ended March 31, 2005 $.40 $.08 $.11 Third Quarter ended June 30, 2005 $.19 $.08 $.15 Fourth Quarter ended September 30, 2005 $.30 $.13 $.36 Year Ended September 30, 2004 First Quarter ended December 31, 2003 $2.50 $.025 $.51 Second Quarter ended March 31, 2004 $1.00 $.25 $.47 Third Quarter ended June 30, 2004 $ .95 $.40 $.60 Fourth Quarter ended September 30, 2004 $ .65 $.30 $.45 The above quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. NUMBER OF HOLDERS As of September 30, 2005, there were approximately 612 record holders of the Company's common stock, not counting shares held in "street name" in brokerage accounts which is unknown. As of September 30, 2005, there were approximately 123,876,639 shares of common stock outstanding on record with the Company's stock transfer agent, Mountain Share Transfer. On September 30, 2005 the last reported sales price of its common stock on the OTCBB was $.36 per share. DIVIDENDS The Company has not declared or paid any cash dividends on its common stock and does not anticipate paying dividends for the foreseeable future. 17 SALE OF UNREGISTERED SECURITIES GRANT OF OPTIONS/WARRANTS 1. A Consultancy and Advisory agreement with Dr. Arokia Nathan for services to the Company as a member of the Scientific Advisory Board was approved by the Board on February 1, 2005. The Board issued a warrant agreement for the purchase of common stock to Dr. Arokia Nathan in accordance with the provisions of the Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise term and is subject to conditional vesting in accordance with the following provisions: (1) The Warrant will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was February 1, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. Arokia Nathan. 2. A Consultancy and Advisory agreement with Dr Richard E. Rocheleau for services to the Company as a member of the Scientific Advisory Board was approved by the Board on February 1, 2005. The Board issued a warrant agreement for the purchase of common stock to Dr. Richard E. Rocheleau in accordance with the provisions of the Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise term and is subject to conditional vesting in accordance with the following provisions: (1) The Warrant will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was February 1, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. Richard Rocheleau. 3. A Consultancy and Advisory agreement with Dr John J. Moore for services to the Company as a member of the Scientific Advisory Board was approved by the Board on March 8, 2005. The Board issued a warrant agreement for the purchase of common stock to Dr. John J. Moore in accordance with the provisions of the Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise term and is subject to conditional vesting in accordance with the following provisions: (1) The Warrant will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was March 8, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. John Moore. 4. Warrant to Purchase Common Stock Cornell - On July 14, 2005, the Company consummated a Securities Purchase Agreement (the "Purchase Agreement") with Cornell providing for the sale by the Company to Cornell of its 12% secured convertible debentures in the aggregate principal amount of $850,000. Under the Purchase Agreement, the Company also issued to Cornell five-year warrants to purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and $0.20, respectively (collectively, the "Warrants"). During the years ended September 30, 2004, and September 30, 2005, the board of directors approved the issuance of warrants to purchase an aggregate of 15,125,000 shares of the Company's common stock. Such warrants are exercisable at prices ranging from $.15 to $.20 per share, vest over periods up to 60 months, and expire at various times through June 2010. During the years ended September 30, 2004, and September 30, 20005, no warrant holders exercised warrants to purchase the Company's common stock. 18
A summary of warrant activity for the year ended September 30, 2004 and 2005 is as follows: Weighted- Weighted- Number of Average Average Warrants Exercise Warrants Exercise Price Exercisable Price -------------- ------------- --------------- -------------- Outstanding, September 30, 2003 0 $0.0 0 $0.0 Granted 2004 8,000,000 $.15 6,700,000 $.15 Exercised 2004 0 $0.0 -------------- ------------- --------------- -------------- Outstanding, September 30, 2004 8,000,000 $.15 6,700,000 $.15 Granted 2005 7,125,000 $.17 6,725,000 $.17 Exercised 2005 0 $0.0 -------------- ------------- --------------- -------------- Outstanding, September 30, 2005 15,125,000 $.1595 14,450,000 $.1595 ==============
At September 30, 2005, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as follows: Warrants Outstanding Warrants Exercisable -------------------------------------------------- --------------------------------- Weighted- Weighted- Average Weighted- Range of Number of Average Remaining Number Average Warrant Warrants Exercise Contractual Of Exercise Exercise Price Price Life Warrants Price - -------------------- ------------ -------------- ---------------- ---------------- ------------- $.15 8,000,000 $ .15 2 6,700,000 $ .15 .17 7,125,000 .17 2.8 6,725,000 .17 ------------ ---------------- 15,125.000 14,450,000 ============ ================
SALES OF SHARES AND DEBENTURE In a private placement of the Company's common stock pursuant to Regulation S of the Act on November 8, 2004, the Company accepted an offer for the sale of 1,543,500 shares at a price of $.11 per share, which raised gross proceeds of $169,785.00. This offer and sale was completed on November 8, 2004. In a private placement of the Company's common stock made by the Company that began on December 19, 2003 pursuant to Regulation S of the Act at a variable price equal to 27% of the five (5) day average closing bid price, the Company raised gross proceeds of $108,518.77 from the sale of 1,636,800 shares during the quarter ending December 31, 2004. The offering was terminated on January 3, 2005. In a private placement of the Company's common stock pursuant to Regulation S of the Act that began on August 26, 2004 at a variable price equal to 25% of the previous days closing bid price on the date of the purchase, the Company raised gross proceeds of $192,764.35 from the sale 2,727,237 shares during the period ending December 31, 2004. This offering was terminated on December 1, 2004. 19 In a private placement of the Company's common stock pursuant to Regulation S of the Act on or about January 3, 2005 the Company accepted an offer for the sale of 66,500 shares at a price of $.0944 per share, which raised gross proceeds of $6,284.25. This offer and sale was completed on January 3, 2005. On or about February 4, 2005 the Company issued 300,000 shares of common stock pursuant to Rule 144 of the Act to 1 consultant as compensation for seven months of services to be rendered to the company. The shares were valued at the market price of the Company's common stock at the time of issuance which was $0.08 per share for a total compensated value of $24,000.00. In a private placement of the Company's common stock pursuant to Regulation S of the Act on or about February 19, 2005, the Company accepted an offer for the sale of 234,000 shares at a price of $.0589 per share, which raised gross proceeds of $13,782.60. This offer and sale was completed on February 19, 2005. In a private placement of the Company's common stock pursuant to Regulation S of the Act on or about April 1, 2005, the Company accepted an offer for the sale of 327,000 shares at a price of $.0764 per share, which raised gross proceeds of $24,980. This offer and sale was completed on April 1, 2005. On or about May 5, 2005 the Company issued 125,000 shares of common stock pursuant to Rule 144 of the Act to 1 consultant as compensation for three months of services to be rendered to the company. The shares were valued at the market price of the Company's common stock at the time of issuance which was $0.08 per share for a total compensated value of $10,000.00. In a private placement of the Company's common stock pursuant to Regulation S of the Act on or about May 12, 2005, the Company accepted an offer for the sale of 200,000 shares at a price of $.0764 per share, which raised gross proceeds of $15,280. This offer and sale was completed on May 12, 2005. On or about July 21, 2005 the Company issued 49,231 shares of common stock pursuant to Rule 144 of the Act to 1 consultant as compensation for three months of services that had been rendered to the company. The shares were valued at the average market price of the Company's common stock over the previous three month period of services which was $0.1219 per share for a total compensated value of $6,000.00. In July 2005, the Company issued secured convertible debentures for aggregate proceeds of $850,000. In connection with this transaction, the Company also issued 2,609,263 shares of common stock and five-year warrants to purchase 4,250,000 shares and 2,125,000 shares at $0.15 and $0.20, respectively. All securities were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company's obligations under the Debenture Agreement are secured by substantially all of the Company's assets. As further security for its obligations thereunder, the Company has deposited into escrow 26,798,418 shares of Common Stock. In addition, Tom Djokovich, the Company's Chief Executive Officer, has granted a security interest in 925,000 shares of Common Stock that he owns. 19 In July 2005, in association with the above referenced secured convertible debenture the Company entered into a Standby Equity Distribution Agreement (the "Distribution Agreement") with an investor providing for the sale and issuance of up to $10,000,000 of Common Stock over a period of up to 24 months after the signing of the Distribution Agreement. Under the Distribution Agreement, the Company may sell up to $250,000 in shares of its common stock (the "Common Stock") once every five trading days at a price of 96% of the lowest closing bid price (as reported by Bloomberg L.P.), of the Common Stock on the principal market where the Common Stock is traded for the five consecutive trading days following a notice by the Company to the investor of its intention to sell shares. The Company will also pay a 5% commitment fee upon each sale of shares under the Distribution Agreement. The investor has agreed not to short any of the shares of Common Stock. In connection with the Distribution Agreement, the Company has issued to the investor 2,544,031 shares of Common Stock as a commitment fee. It also issued 65,232 shares of Common Stock to a placement agent as compensation for its services as the exclusive placement agent for the sale of the Common Stock under the Distribution Agreement. In regard to the above referenced Distribution Agreement the Company agreed to file a registration statement registering the Common Stock issuable upon sales under the Distribution Agreement and for the underlying shares associated with the sale of a Convertible Secured 12% Debenture, (see above). On August 17, 2005 the Company filed a registration statement with the U.S. Securities and Exchange Commission. On December 9, 2005 the Company and the investor agreed to the termination of the Distribution Agreement and withdrawal of the registration statement as part of a subsequent financing agreement, (see Item 8B "Other Information - Funding Agreement"). No shares were sold under the Distribution Agreement prior to its termination. On or about December 5, 2005 the Company issued 40,441 shares of common stock pursuant to Rule 144 of the Act to 1 consultant as compensation for three months of services that had been rendered to the company for the periods between July 7, 2005 and October 6, 2005. The shares were valued at the average market price of the Company's common stock over the three month period of services which was $0.18559 per share for a total compensated value of $7,500.00. USES OF PROCEEDS FROM SALES OF UNREGISTERED SECURITIES The proceeds from the above sales of unregistered securities were used primarily to fund the research and developments efforts and day-to-day operations of the Company and to pay the accrued liabilities associated with these operations. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS CAUTIONARY AND FORWARD LOOKING STATEMENTS In addition to statements of historical fact, this Form 10-KSB contains forward-looking statements. The presentation of future aspects of XsunX, Inc. ("XsunX," the "Company" or "issuer") found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," or "could" or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause XsunX's actual results to be materially different from any future results expressed or implied by XsunX in those statements. Important facts that could prevent XsunX from achieving any stated goals include, but are not limited to, the following: 20 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-QSB and Annual Report on Form 10-KSB filed by the Company in 2005 and 2004 and any Current Reports on Form 8-K filed by the Company. For the year ended September 30, 2005, the Company had and continues to focus on the development and refinement of commercially appealing solar cell designs, proprietary manufacturing processes and facilities design that could be provided to its future licensees as turn-key solutions for the mass production of Power Glass(TM) thin films. A large part of the Company's capital was used for product development. However, this may begin to shift towards marketing, sales, and business development in this new fiscal year ending September 30, 2006. GROWTH, REVENUE AND DISTRIBUTION PLAN The Company intends to market its integrated manufacturing systems as turnkey solutions for the manufacture of its current and future PV thin films designs. The manufacturing systems will be sold to manufacturers as modular systems and licensed for use in the manufacture the Company's thin film designs. Manufacturers would in turn agree to manufacture and distribute the Company's PV thin films, or incorporate the thin film PV technology into their product manufacturing process as an "original equipment manufacturer" (OEM) and sell the finished product to their consumers. No licenses or contracts now exist with any manufacturer. The Company intends to target customers who are developing their own technology platforms in which the manufacture of or the integration of its thin film solar cells could play an important role. The Company will offer non-exclusive manufacturing licenses and expects to earn a royalty on thin films manufactured. In selling the manufacturing equipment and licensing the technology to manufacturers, the Company reduces operating expenses and saves capital in plant, property and equipment. As a result, should the Company realize earnings, it intends to reinvest its retained earnings in R&D in an effort to continuously develop related new technologies that will help achieve sustainable competitive advantages for the Company. 21 MARKETING STRATEGY The Company intends to enhance, promote and support the idea that XsunX manufacturing systems and thin film technologies present a compelling and efficient solution for the scalable manufacture of diverse photovoltaic thin films. In order to create a favorable environment for sales, the Company plans to undertake advertising and promotion efforts. These efforts may be outsourced and will require the services of an advertising relations firm. The Company plans to interview various firms and select those most capable of assisting us with comprehensive advertising and promotion plans. The Company intends to commence building and staffing its marketing department to accelerate these efforts in the first part of 2006. The Company has not yet finalized the potential costs of its marketing strategy. The Company will invest in small test campaigns before committing to large promotions or marketing campaigns. The initial marketing strategy the Company will be to market to potential manufacturer partners in its target markets representing solar device manufactures, glass, and building materials manufacturers. PLAN OF OPERATIONS XsunX anticipates the 12-month capital operational requirements of the company to be $4,500,000 dollars. Since the reorganization of the Company on September 30, 2003 the Company has raised amounts necessary to finance operations through the placement of equity capital in the form of one or more private offering's of common stock to accredited investors. On July 14, 2005 and December 12, 2005 the Company issued convertible debentures in the amount of $850,000, (see Item 5 "Market for Registrants Common Equity and Related Stockholder Matters - Sale of Shares and Debenture") and $5,000,000, (see Item 8B "Subsequent Events - Funding Agreement") respectively to an accredited investor. The net proceeds from the placement of equity capital and the debentures will be applied to its 12 month plan of operations as follows: (i) approximately $550,000 will be used to pay costs associated with completion of product development of the Power Glass(R) product under its Phase III development plan, (ii) approximately $675,000 will be used to pay costs associated with the development of a 4-Terminal nano-crystalline solar cell patent for commercialization purposes, (iii) approximately $1,700,000 will be used for the manufacture of a marketable commercial scale manufacturing system, (iv) approximately $210,000 will be used for the engineering and adaptation of certain manufacturing devices and techniques to provide product manufacturing demonstration capabilities, (v) approximately $50,000 will be used to purchase testing and development equipment or expand existing facilities, (vi) approximately $100,000 will be used to pay for third party engineering, testing, and consulting services, (vii) approximately $485,000 will be used to pay salaries and general administrative costs, and for intellectual property protection, (viii) approximately $225,000 will be used to pay for sales and market development, general competitive research and publicity costs, and (v) approximately $505,000 will be used for general working capital. The Company may change any or all of the budget categories in the execution of its business attempts. None of the items is to be considered fixed or unchangeable. The Company will need substantial additional capital to support its budget. The Company has no revenues. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, the Company may not be able to carry out its business plan, may never achieve sales or royalty income, and could fail in business as a result of these uncertainties. The Company will need to seek additional financing for this budget. (See "Risk Factors" at p. 14. 22 Management believes the summary data and audit presented herein is a fair presentation of the Company's results of operations for the periods presented. 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. RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005, COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2004 The Company generated no revenues in the period ended September 30, 2005 as well as for the same period in 2004. The Company incurred expenses totaling $1,383,406 in 2005 compared to $1,528,193 in 2004. The decrease of $144,787 resulted from the absence of a one time non-cash warrant issuance expense of $900,000 for the licensure of patents accounted for in the period ended September 30, 2004. Excluding this non-cash warrant expense in the comparative analysis between the periods results in an increase of $755,213 in normal and customary operational expenses for the period ending September 30, 2005 as compared to the same period 2004. Primary sources for the increase to operating expense of $755,213 include: an increase of $371,930 in Research and Development activities totaling $501,423 as compared to $129,493 incurred for the same period in 2004, an increase of $109,773 in Public Relations activity totaling $116,413 as compared to activity totaling $6,640 for the same period in 2004, an increase of $35,900 in Salaries totaling $155,236 as compared to Salaries totaling $119,336 for the same period in 2004, an increase in consulting fees of $301,000 to $320,944 in the period in 2005 compared to $19,900 in the period in 2004, an increase of $80,046 in Legal and Accounting expenses totaling $107,249 as compared to Legal and Accounting totaling $27,203 for the same period in 2004, an increase of $115,000 for Loan Origination and Service fees as compared to $0 expenses for the same period in 2004, and an increase of $42,564 in General and Administrative expenses related to an increase in travel, advertising, depreciation and business development expenses. The $1,383,406 in operating expenses includes non-cash charges of $360,944 for the issuance of unregistered stock for public relations, advisory services, and financing fees in lieu of cash payment for services and financing fees. For the twelve months ended September 30, 2005, the Company's consolidated net loss was $(1,400,839) including an interest expense of $17,433 as compared to a consolidated net loss of $(1,509,068) for the same period ended September 30, 2004 including an interest expense of $251. The decrease of $108,229 resulted from the absence of a one time non-cash warrant issuance expense of $900,000 for the licensure of patents accounted for in the period ended September 30, 2004. Excluding this one time non-cash warrant expense, in the comparative analysis between the period's, results in an increase of $791,771 in net loss for the period ended September 30, 2005 as compared to the same period 2004. The net loss per share was less than $(0.02) for the twelve month period ended September 30, 2005 compared to ($.01) per share loss in the prior year. 23 Due to the Company's change in primary business focus in October 2003 and the developing nature of its 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. Since inception in 1997 the Company has accumulated deficits totaling ($6,204,284) to September 30, 2005. LIQUIDITY AND CAPITAL RESOURCES Working capital (deficit) at September 30, 2005 was $(718,380) as compared to $(38,819) at September 30, 2004. During the year ended, September 30, 2005, the Company used $1,049,650 net cash in operating activities as compared to using $1,436,630 net cash for the year ended, September 30, 2004. The decrease of $386,980 resulted from the absence of a one time non-cash warrant issuance expense of $900,000 for the licensure of patents accounted for in the period ended September 30, 2004. Excluding this one time non-cash warrant expense, in the comparative analysis between the period's, results in an increase of $513,020 in net cash used in operations for the period ended September 30, 2005.This increase of net cash used in operations was primarily a result of an increase of $371,930 in Research and Development activities and an increase to operational costs associated with the development of the Company's business plan. For the twelve months ended, September 30, 2005, the Company's capital needs have primarily been met from the proceeds of (i) private placement of common stock made by the Company pursuant to Regulation S of the Act, as amended (the "Act"), to an accredited investor at $0.15 per share which raised gross proceeds of $169,785; (ii) private placements of common stock made by the Company pursuant to Regulation S of the Act, at a variable price ranging from 25% to 30% of the closing bid price on the date of the purchase of the stock, which raised gross proceeds of $301,283; (iii) private placements of common stock made by the Company pursuant to Regulation S of the Act, at prices ranging from $.0944 to $.0589, which raised gross proceeds of $60,327; (iv) loans to the Company of $3,775 with a remaining balance of $0.0; and (v) the sale of a secured convertible 12% debenture in the amount of $850,000. Total cash provided by financing activities during the year ended September 30, 2005 increased to $1,385,170 from $283,895 during the period ended September 30, 2004. The increase of $1,101,275 was mainly attributable to an increase of $248,725 in the sale of unregistered securities and the sale of a $850,000 secured convertible 12% debenture by the Company. Cash Flows There were no cash flows provided by operations during the twelve months ended September 30, 2005. Cash and cash equivalents at September 30, 2005 were $255,853, an increase of $198,509 from September 30, 2004. During the year ended, September 30, 2005, the Company used $191,995 for investing activities as compared to $12,267 for the year ended September 30, 2004. The increased use of cash for investing activities resulted from an increase in the acquisition of assets in the form of equipment and trademark rights. The Company had, at September 30, 2005, working capital of $255,853. The Company anticipates that there will not be sufficient cash generated from operations in the current year necessary to fund its current and anticipated cash requirements. The Company plans to obtain additional financing from equity and debt placements. The Company has been able to raise capital in a series of equity and debt offerings in the past. While there can be no assurances that it will be able to obtain such additional financing, on terms acceptable to us and at the times required, or at all, the Company believes that sufficient capital can be raised in the foreseeable future. On December 12, 2005 the Company sold a secured 10% convertible debenture in the amount of $5,000,000 (see "Item 8B "Subsequent Events - Funding Agreement"). 24 NET OPERATING LOSS For federal income tax purposes, the Company have net operating loss carry forwards of approximately $6,204,284 as of September 30, 2005. These carry forwards will begin to expire in 2010. The use of such net operating loss carry forwards to be offset against future taxable income, if achieved, may be subject to specified annual limitations. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Please refer to pages F-1 through F-14. ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Michael Johnson & Co., LLC, formerly auditors for the Company, was dismissed as auditor on July 18, 2005. Jaspers + Hall, PC were engaged as auditors for Company on July 18, 2005. The Change of Accountants was approved by the Board of Directors. No audit committee exists other than the members of the Board of Directors. In connection with audit of the two most recent fiscal years, and through the date of termination of the accountants, no disagreements exist with any former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure, which disagreements if not resolved to the satisfaction of the former accountant would have caused them to make reference in connection with his report to the subject of the disagreement(s). The audit report by Michael Johnson & Co., LLC. for the periods ended September 30, 2004 and September 30, 2003 contained an opinion which included a paragraph discussing uncertainties related to continuation of the Registrant as a going concern. Otherwise, the audit reports by Michael Johnson & Co., LLC for the period September 30, 2004 and September 30, 2003 did not contain an adverse opinion or disclaimer of opinion, nor was qualified or modified as to uncertainty, audit scope, or accounting principles. ITEM 8A. CONTROLS AND PROCEEDURES The management of the Company has evaluated the effectiveness of the issuer's disclosure controls and procedures as of the end of the period covered by the report (evaluation date) and have concluded that the disclosure controls and procedures are adequate and effective based upon their evaluation as of the evaluation date. There were no material changes in disclosure controls and procedures or in internal controls or in other factors that could materially affect disclosure controls and procedures or internal controls in the fourth fiscal quarter, including any corrective actions with regard to material deficiencies and material weaknesses. ITEM 8B. OTHER INFORMATION On December 12, 2005, the Company consummated a Securities Purchase Agreement (the "Purchase Agreement") dated December 12, 2005 with Cornell Capital Partners L.P. ("Cornell") providing for the sale by the Company to Cornell of its 10% secured convertible debentures in the aggregate principal amount of $5,000,000 (the "Debentures") of which $2,000,000 was advanced immediately. The second installment of $2,000,000 will be advanced immediately prior to the filing by 25 the Company with the Securities and Exchange Commission (the "Commissions") of the Registration Statement (as defined below). The last installment of $1,000,000 will be advanced three days prior to the date the Registration Statement is declared effective by the Commission. The Debentures mature on the third anniversary of the date of issuance (the "Maturity Date") and the Company is not required to make any payments until the Maturity Date. Holders (the "Holders") of the Debentures may convert at any time amounts outstanding under the Debentures into shares of Common Stock of the Company (the "Common Stock") at a conversion price per share equal to the lesser of $0.38 or 95% of the lowest daily volume weighted average price of the Common Stock, as quoted by Bloomberg, LP, for the 30 trading days immediately preceding the date of conversion (the "Variable Market Price"). Unless waived by the Company, the Holders may not, together with their affiliates, convert more than an aggregate of $350,000 in any 30-day period of principal amount of the Debentures at the Variable Market Price. Cornell has agreed not to short any of the shares of Common Stock. The Company has the right to redeem a portion or all amounts outstanding under the Debenture prior to the Maturity Date at a 15% redemption premium provided that the closing bid price of the Common Stock is less than $0.38. Under the Purchase Agreement, the Company also issued to Cornell five-year warrants to purchase 3,125,000 and 1,250,000 shares of Common Stock at $0.45 and $0.55, respectively (collectively, the "Warrants"). In connection with the Purchase Agreement, the Company also entered into a registration rights agreement (the "Registration Rights Agreement") providing for the filing of a registration statement (the "Registration Statement") with the Securities and Exchange Commission registering the Common Stock issuable upon conversion of the Debentures and exercise of the Warrants. The Company is obligated to use its best efforts to cause the Registration Statement to be declared effective no later than April 11, 2006 and to insure that the registration statement remains in effect until all of the shares of common stock issuable upon conversion of the Debentures and exercise of the Warrants have been sold. In the event of a default of its obligations under the Registration Rights Agreement, including its agreement to file the Registration Statement with the Securities and Exchange Commission no later than January 11, 2006, or if the Registration Statement is not declared effective by April 11, 2006, it is required pay to Cornell, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the Debentures. Prior to executing the Purchase Agreement, the Company had withdrawn the registration statement that included Common Stock issued to Cornell and Common Stock to be issued upon the conversion of debentures and the exercise of warrants previously sold to Cornell (collectively, the "Initial Securities") pursuant to a securities purchase agreement executed on July 14, 2005 (the "Prior Agreement") as well as Common Stock to be issued pursuant to the Standby Equity Distribution Agreement dated July 14, 2005 between the Company and Cornell (the "Distribution Agreement"). All Initial Securities will be included in the Registration Statement. The Company and Cornell also agreed to terminate the Distribution Agreement. 26 The Company's obligations under the Prior Agreement and the Purchase Agreement are secured by substantially all of the Company's assets. As further security for its obligations thereunder, the Company has deposited into escrow 26,798,418 shares of Common Stock. In addition, Tom Djokovich, the Company's Chief Executive Officer, has granted a security interest in 925,000 shares of Common Stock that he owns to secure the Company's obligations under the Prior Agreement only. Standby Equity Distribution Agreement On July 14, 2005, XsunX, Inc. (the "Company") entered into a Standby Equity Distribution Agreement (the "Distribution Agreement") with Cornell Capital Partners LP ("Cornell") providing for the sale and issuance to Cornell of up to $10,000,000 of Common Stock over a period of up to 24 months after the signing of the Distribution Agreement. Under the Distribution Agreement, the Company may sell to Cornell up to $250,000 in shares of its common stock (the "Common Stock") once every five trading days at a price of 96% of the lowest closing bid price (as reported by Bloomberg L.P.), of the Common Stock on the principal market where the Common Stock is traded for the five consecutive trading days following a notice by the Company to Cornell of its intention to sell shares. The Company will also pay a 5% commitment fee upon each sale of shares under the Distribution Agreement. Cornell has agreed not to short any of the shares of Common Stock The Company has agreed to file a registration statement registering the Common Stock issuable upon sales under the Distribution Agreement and no sale will be made to Cornell unless and until such registration statement has been declared effective. In connection with the Distribution Agreement, the Company has issued to Cornell 2,544,031 shares of Common Stock as a commitment fee. It also issued to Newbridge Securities Corporation, a registered broker dealer, 65,232 shares of Common Stock as compensation for its services as the exclusive placement agent for the sale of the Common Stock under the Distribution Agreement. 12% Secured Convertible Debentures Also on July 14, 2005, the Company consummated a Securities Purchase Agreement (the "Purchase Agreement") dated July 14, 2005 with Cornell providing for the sale by the Company to Cornell of its 12% secured convertible debentures in the aggregate principal amount of $850,000 (the "Debentures") of which $400,000 was advanced immediately. The balance of $450,000 will be advanced two business days prior to the filing by the Company with the Securities and Exchange Commission of the Registration Statement (as defined below). The Debentures mature on the first anniversary of the date of issuance and bear interest at the annual rate of 12% in cash. The Company is required to make monthly principal and interest commencing on the first day of the month following the declaration of effectiveness of the Registration Statement or 120 days from the date of issuance of the Debentures, whichever occurs first. Holders may convert, at any time, the principal amount outstanding under the Debentures into shares of Common Stock, at a conversion price per share equal to $0.10, subject to 27 adjustment. Upon three-business day advance written notice, the Company may redeem the Debentures, in whole or part. In the event that the closing bid price of the Common Stock on the date that the Company provides advance written notice of redemption or on the date redemption is made exceeds the conversion price then in effect, the redemption will be calculated at 120% of the Debentures face value. Under the Purchase Agreement, the Company also issued to Cornell five-year warrants to purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and $0.20, respectively (collectively, the "Warrants"). In connection with the Purchase Agreement, the Company also entered into a registration rights agreement (the "Registration Rights Agreement") providing for the filing of a registration statement (the "Registration Statement") with the Securities and Exchange Commission registering the Common Stock issuable upon conversion of the Debentures and exercise of the Warrants. The Company is obligated to use its best efforts to cause the Registration Statement to be declared effective no later than November 28, 2005 and to insure that the registration statement remains in effect until all of the shares of common stock issuable upon conversion of the Debentures and exercise of the Warrants have been sold. In the event of a default of its obligations under the Registration Rights Agreement, including its agreement to file the Registration Statement with the Securities and Exchange Commission no later than August 29, 2005, or if the Registration Statement is not declared effective by November 28, 2005, it is required pay to Cornell, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the Debentures. The Company's obligations under the Purchase Agreement are secured by substantially all of the Company's assets. As further security for its obligations thereunder, the Company has deposited into escrow 26,798,418 shares of Common Stock. In addition, Tom Djokovich, the Company's Chief Executive Officer, has granted a security interest in 925,000 shares of Common Stock that he owns. XsunX, Inc. announed today that its Phase III development program is set to expand R&D capabilities through the addition of new laser development equipment, necessary in the development of key licensable manufacturing techniques. 28 The Company determined that to ensure performance characteristics of solar film, it needed to bring this phase of development in-house. Over the next month it plans to complete the installation of the laser and move as rapidly as possible into developing key manufacturing techniques. Michael Johnson & Co., LLC, formerly auditors for the Company, was dismissed as auditor on July 18, 2005. Jaspers + Hall, PC were engaged as auditors for Company on July 18, 2005. The Change of Accountants was approved by the Board of Directors. No audit committee exists other than the members of the Board of Directors. In connection with audit of the two most recent fiscal years and through the date of termination of the accountants, no disagreements exist with any former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure, which disagreements if not resolved to the satisfaction of the former accountant would have caused them to make reference in connection with his report to the subject of the disagreement(s). The audit report by Michael Johnson & Co., LLC.for the period ended September 30, 2004 and September 30, 2003 contained an opinion which included a paragraph discussing uncertainties related to continuation of the Registrant as a going concern. Otherwise, the audit report by Michael Johnson & Co., LLC for the period September 30, 2004 and September 30, 2003 did not contain an adverse opinion or disclaimer of opinion, nor was qualified or modified as to uncertainty, audit scope, or accounting principles. XsunX, Inc. announced on September 7, 2005 that the design of its mass production systems for the manufacture of its proprietary Power Glass photovoltaic "PV" films will provide for modular expansion capabilities. The system design will provide for production capacities of as little as 1 megawatt annually while maintaining expansion capabilities, allowing manufacturers to ramp up to meet increasing production requirements incrementally through 20 megawatts or more. The Company believes that this modular approach may best suit the needs of manufacturers and their markets as the demand for building integrated PV increases. The core design is based on a patented multi-chamber cluster tool approach using cassettes to control or handle rolls of thin plastic films. The rolls of material (transparent plastic films) are loaded into the cassettes and robotically moved between chambers or stations. Layers of transparent semiconductor and conducting materials are deposited onto the plastics in a manner which prevents cross contamination between chambers to achieve high performance, semi-transparent, large area solar cell devices. The system design allows for co-joining of cluster tool systems and hence, increased output, which can be a limiting factor in conventional in-line systems. The modular cluster design may also provide manufacturers additional advantages such as reduced facility costs due to the smaller footprint size of systems, added redundancy allowing production throughput to continue even when a processing chamber fails, reductions in material costs through the use of inexpensive plastics, and the reduction of processing gases which further reduces material costs. 29 Expanded License and Warrants Expanded Use License stock warrant MVSystems, Inc. - As consideration for the grant of an Expanded Use License on October 12, 2005, granting XsunX additional benefits for use of licensed technologies and patents, XsunX granted MVS a warrant (the "Expanded Use License Stock Warrant") for the purchase of up to Seven Million (7,000,000) shares of common stock of XsunX, the warrant will expire five (5) years after the date of the grant and is subject to the following vesting provisions: (1) The Expanded Use License Stock Warrant allowed for the vesting of one million (1,000,000) warrants on the effective date of the agreements. (2) Another one million (1,000,000) warrants will vest upon the satisfactory completion of a Phase 4 development program for the development of technologies licensed under the Expanded Use License. (3) The balance of five million (5,000,000) warrants will vest upon the date the technologies licensed within the Expanded Use License are licensed to a third party in a bona fide arms-length commercial setting. Funding Agreement On December 12, 2005, XsunX, Inc. consummated a Securities Purchase Agreement dated December 12, 2005 with Cornell Capital Partners L.P. providing for the sale by the Company to Cornell of 10% secured convertible debentures in the aggregate principal amount of $5,000,000 (the "Debentures") of which $2,000,000 was advanced immediately. The second installment of $2,000,000 will be advanced immediately prior to the filing by the Company, with the Securities and Exchange Commission, of a Registration Statement. The last installment of $1,000,000 will be advanced three days prior to the date the Registration Statement is declared effective by the Commission. The Debenture is convertible into shares of Common Stock at the option of the Holder at a conversion price per share equal to the lesser of $0.38 or 95% of the lowest daily volume weighted average price of the Common Stock, as quoted by Bloomberg, LP, for the 30 trading days immediately preceding the date of conversion (the "Variable Market Price"). Unless waived by the Company, the Holders may not, together with their affiliates, convert more than an aggregate of $350,000 in any 30-day period of principal amount of the Debentures at the Variable Market Price. Termination of Distribution Agreement In July 2005, in association with the sale of a Convertible 12% Secured Debenture, the Company entered into a Standby Equity Distribution Agreement (the "Distribution Agreement") with an investor providing for the sale and issuance of up to $10,000,000 of Common Stock over a period of up to 24 months after the signing of the Distribution Agreement. The Company agreed to file a registration statement registering the Common Stock issuable upon sales under the Distribution Agreement and for the underlying shares associated with the sale of a Convertible 12% Secured Debenture. On August 17, 2005 the Company filed a registration statement with the U.S. Securities and Exchange Commission in relation to these agreements. On December 9, 2005 the Company and the investor agreed to the termination of the Distribution Agreement and withdrawal of the registration statement as part of a subsequent financing agreement, (see Item 8 "Subsequent Events - Funding Agreement" above). No shares were sold under the Distribution Agreement prior to its termination. 30 Issuance of Shares For Services On or about December 5, 2005 the Company issued 40,441 shares of common stock pursuant to Rule 144 of the Act to 1 consultant as compensation for three months of services that had been rendered to the company for the periods between July 7, 2005 and October 6, 2005. The shares were valued at the average market price of the Company's common stock over the three month period of services which was $0.18559 per share for a total compensated value of $7,500.00. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) The following table lists the executive offices and directors of the Company as of September 30, 2004: NAME Age POSITION HELD TENURE Brian Altounian 42 Secretary, Director Since September 2003 Tom Djokovich 48 President, CEO, CFO, Director Since September 2003 Thomas Anderson 40 Director Since August 2001 The directors named above will serve until the next annual meeting of the Company's stockholders. Thereafter, directors will be elected for one-year terms at the annual stockholders' meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement, of which none currently exists or is contemplated. There is no arrangement or understanding between the directors and officers of the Company and any other person pursuant to which any director or officer was or is to be selected as a director or officer. The directors of the Company will devote such time to the Company's affairs on an "as needed" basis, but typically less than 20 hours per month. As a result, the actual amount of time which they will devote to the Company's affairs is unknown and is likely to vary substantially from month to month. BIOGRAPHICAL INFORMATION BRIAN ALTOUNIAN, age 42, Chairman of the Board, and Secretary as of September 30, 2003; Mr. Altounian has over 16 years of experience in the area of finance, administration and operations. He is currently Chief Operating Officer of Platinum Studios, a Beverly Hills-based entertainment company that controls the world's largest independent library of comic book characters, which it adapts and produces for film, television and all other media. In addition to managing fiscal growth and staffing, he is spearheading the company's digital strategy, overseeing business development and acquisitions in the online, interactive, and wireless industries. Mr. Altounian previously served as the Vice President of Finance for Lynch Entertainment, a producer of family television series' for the Nickelodeon and Disney Channels. Prior to joining Lynch Entertainment, Mr. Altounian held key management positions at numerous entertainment companies including Director of Finance and Administration at Time Warner Interactive; Finance Manager for National Geographic Television; and Manager of Business Services for WQED, the nation's first community-owned public television station. He also founded his own consulting company, BKA Enterprises, a firm that supported and advised entertainment and multimedia companies in the areas of financial and business management. Mr. Altounian holds an undergraduate degree from UCLA and an MBA from Pepperdine University. 31 TOM DJOKOVICH, age 48, President and Chief Executive Officer as of September 30, 2003, and Director; Mr. Djokovich was the founder and served from 1995 to 2002 as the Chief Executive Officer of Accesspoint Corporation, a vertically integrated provider of electronic transaction processing and e-business solutions for merchants. Under Mr. Djokovich's guidance, Accesspoint became a member of the Visa/MasterCard association, the national check processing association NACHA, and developed one of the payment industry's most diverse set of network based transaction processing, business management and CRM systems for both Internet and conventional points of sale. Prior to Accesspoint, Mr. Djokovich founded TMD Construction and Development in 1979. TMD provided management for multimillion-dollar projects incorporating at times hundreds of employees, subcontractors and international material acquisitions for commercial, industrial and custom residential construction services as a licensed building firm in California. In 1995 Mr. Djokovich developed an early Internet based business-to-business ordering system for the construction industry. Mr. Djokovich also currently serves as a Director and Chairman of the Audit Committee for Roaming Messenger, Inc., a publicly reporting company that provides a breakthrough software solution for delivering real-time actionable information for Homeland Security, emergency response, military and enterprise applications. THOMAS ANDERSON, age 40, became a director of the Company in August 2001; Mr. Anderson presently works as a Senior Environmental Scientist for the Energy and Environmental Engineering Division of Apogen Technologies in Los Alamos, New Mexico. He earned his B.S. in Geology from Denison University and his M.S. in Environmental Science and Engineering from Colorado School of Mines. Mr. Anderson has worked for past 16 years in the environmental consulting field, providing environmental compliance, characterization and remediation services to Department of Energy, Department of Defense, and industrial clients. He formerly worked as a Senior Environmental Scientist at Concurrent Technologies Corp. from November 2000 to December 2004. From March 2000 to November 2000 he was employed as a hydrologist at Stone & Webster Engineering, Inc. From July 1998 to March 2000 he was employed by advanced Integrated Management Services as an Environmental Scientist/Engineer. From 1997 to 1998 he was a graduate research assistant at Colorado School of Mines in the Environmental Science and Engineering Program. COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT No disclosure contained herein. ITEM 10. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION Directors received no cash compensation for their service to the Company as directors, but can be reimbursed for expenses actually incurred in connection with attending meetings of the Board of Directors. 32
SUMMARY COMPENSATION TABLE OF DIRECTORS (excludes compensation for executives) - ------------------------------------ -------------- -------------- ----------------- ---------------- ------------------- Name Annual Meeting Fees Consulting Number of Number of Retainer ($) Fees/Other Fees Shares (#) Securities Fees ($) ($) Underlying Options SARS (#) - ------------------------------------ -------------- -------------- ----------------- ---------------- ------------------- Director, Tom Djokovich $0 $0 $0 0 0 - ------------------------------------ -------------- -------------- ----------------- ---------------- ------------------- Director, Brian Altounian $0 $0 $0 0 0 - ------------------------------------ -------------- -------------- ----------------- ---------------- ------------------- Director, Thomas Anderson $0 $0 $0 0 0 - ------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
EXCUTIVE OFFICER COMPENSATION The annual compensation for the executive officers of the Company for the post reorganization operations has not yet been determined, but is expected to be established by a resolution of the Company's Board of Directors in the future. The Company has not entered into any employment agreements with its executive officers to date. The Company may enter into employment agreements with them in the future. The following table and notes set forth the annual cash compensation paid to officers of the Company.
SUMMARY COMPENSATION TABLE OF EXECUTIVES - --------------------------- --------- ------------ --------------- -------------------- ---------------- ---------------- Name & Principal Position Fiscal Annual Annual Bonus Awards Other Restricted Securities Year Salary ($) ($) Annual Stock Award(s) Underlying Compensation ($) ($) Options/ SARS (#) - --------------------------- --------- ------------ --------------- -------------------- ---------------- ---------------- Tom Djokovich, President 2005 $150,000 0 0 0 0 2004 $130,000 0 0 0 0 2003 $0 0 0 0 0 - --------------------------- --------- ------------ --------------- -------------------- ---------------- ---------------- Brian Altounian, Secretary 2005 $0 0 0 0 0 2004 $0 0 0 0 0 2003 $0 0 0 0 0 - --------------------------- --------- ------------ --------------- -------------------- ---------------- ---------------- Thomas Anderson, Director 2005 $0 0 0 0 0 2004 $0 0 0 0 0 2003 $0 0 0 0 0 - --------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
(1) The Company has agreed to pay Mr. Djokovich $2,884 per week for services provided as Chief Executive Officer up to and until the Company determines executive compensation pursuant to an employment agreement as determined by the Board. When necessitated by the Company's adverse financial condition Mr. Djokovich has agreed to the deferment of his monthly salary up to and until such time that the Company can repay any such deferred amounts. In the period ended September 30, 2004 Mr. Djokovich agreed to the deferment of $65,000 dollars of his salary until such time that the Company could begin to repay him. As of the period ended September 30, 2005 the remaining balance of Mr. Djokovich's deferred salary was $29,423. 33 Option/SAR Grants Table (None) Aggregated Option/SAR Exercises in Last Fiscal Year an FY-End Option/SAR value (None) Long Term Incentive Plans - Awards in Last Fiscal Year (None) WARRANTS The following table sets forth information with respect to warrants to purchase common stock of the Company granted during fiscal year ended September 30, 2005.
Non-Qualified Options - ----------------------- ---------------------- ----------------- --------- --------------------- --------------------- Name Date Issued Number Issued Exercise Expiration Date Consideration Price - ----------------------- ---------------------- ----------------- --------- --------------------- --------------------- Dr.Richard Rocheleau(1) February 1, 2005 250,000 $0.20 February 1, 2008 Advisory Board service 2 year agreement - ----------------------- ---------------------- ----------------- --------- --------------------- --------------------- Dr. Arokia Nathan(2) February 1, 2005 250,000 $0.20 February 1, 2008 Advisory Board service 2 year agreement - ----------------------- ---------------------- ----------------- --------- --------------------- --------------------- Dr. John Moore (3) March 8, 2005 250,000 $0.20 March 8, 2008 Advisory Board service 2 year agreement - ----------------------- ---------------------- ----------------- --------- --------------------- --------------------- Cornell Capital, LP(4) July 14, 2005 4,250,000 $0.15 July 14, 2010 As part of a financing agreement - ----------------------- ---------------------- ----------------- --------- --------------------- --------------------- Cornell Capital, LP(5) July 14, 2005 2,125,000 $0.20 July 14, 2010 As part of a financing agreement - ----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
(1) The Warrant granted to Dr. Richard Rocheleau will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was February 1, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. Richard Rocheleau. (2) The Warrant granted to Dr. Arokia Nathan will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was February 1, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. Arokia Nathan. (3) The Warrant will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was March 8, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. John Moore. (4), (5) Warrant to Purchase Common Stock Cornell - On July 14, 2005, the Company consummated a Securities Purchase Agreement with Cornell providing for the sale by the Company to Cornell of its 12% secured convertible debentures in the aggregate principal amount of $850,000. Under the Purchase Agreement, the Company also issued to Cornell five-year warrants to purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and $0.20, respectively (collectively, the "Warrants"). During the years ended September 30, 2004, and September 30, 20005, no warrant holders exercised warrants to purchase the Company's common stock. 34 A summary of warrant activity for the year ended September 30, 2004 and 2005 is as follows:
Weighted- Weighted- Number of Average Average Warrants Exercise Warrants Exercise Price Exercisable Price -------------- ------------- --------------- -------------- Outstanding, September 30, 2003 0 $0.0 0 $0.0 Granted 2004 8,000,000 $.15 6,700,000 $.15 Exercised 2004 0 $0.0 -------------- ------------- --------------- -------------- Outstanding, September 30, 2004 8,000,000 $.15 6,700,000 $.15 Granted 2005 7,125,000 $.17 6,725,000 $.17 Exercised 2005 0 $0.0 -------------- ------------- --------------- -------------- Outstanding, September 30, 2005 15,125,000 $.1595 14,450,000 $.1595 ==============
At September 30, 2005, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable -------------------------------------------------- --------------------------------- Weighted- Weighted- Average Weighted- Range of Number of Average Remaining Number Average Warrant Warrants Exercise Contractual Of Exercise Exercise Price Price Life Warrants Price - -------------------- ------------ -------------- ---------------- ---------------- ------------- $.15 8,000,000 $ .15 2 6,700,000 $ .15 .17 7,125,000 .17 2.8 6,725,000 .17 ------------ ---------------- 15,125.000 14,450,000 ============ ================
No other compensation not described above was paid or distributed during the last fiscal year to the executive officers of the Company. There are no compensatory plans or arrangements, with respect to any executive office of the Company, which result or will result from the resignation, retirement or any other termination of such individual's employment with the Company or from a change in control of the Company or a change in the individual's responsibilities following a change in control. 35 INCENTIVE STOCK OPTIONS On July 15, 2004, the Board of Directors of XsunX resolved to establish the 2004 Stock Option Plan. The plan was adopted to provide equity incentives to employees, consultants and suppliers of the Company. The adoption of the Plan was subject to ratification by a majority of the Company's stockholders, which approval was to be obtained within 12 months from the date the Plan was adopted by the Board. The Plan was cancelled by the Board, due to non-approval by the shareholders, in August 2005. No stocks or options were issued at September 30, 2005 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of the date of this Report, the number of shares of common stock owned of record and beneficially by executive officers, directors and persons who hold 5.0% or more of the outstanding common stock of the Company as of December 31, 2005. Also included are the shares held by all executive officers and directors as a group. SHAREHOLDERS/ NUMBER OF SHARES OWNERSHIP BENEFICIAL OWNERS PERCENTAGE(1) - --------------------------------------------------------------------------- Tom Djokovich 17,903,000(2) 14.45% President & Director 65 Enterprise Aliso Viejo, CA 92656 Brian Altounian 3,650,000 2.95% Secretary 65 Enterprise Aliso Viejo, CA 92656 Thomas Anderson 56,900 >.01% 65 Enterprise Aliso Viejo, CA 92656 All directors and executive officers as a group (3 persons) 21,609,900 17.44%. Each principal shareholder has sole investment power and sole voting power over the shares. (1) Applicable percentage ownership is based on 123,917,080 shares of common stock outstanding as of January 9, 2006. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of January 9, 2006 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes 16,978,000 shares owned by the Djokovich Limited Partnership. Mr. Djokovich shares voting and dispositive power with respect to these shares with Mrs. Djokovich. 36 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS No officer or director of the Company has or proposes to have any direct or indirect material interest in any asset proposed to be acquired by the Company through security holdings, contracts, options, or otherwise. ADDITION OF MEMBERS TO SCIENTIFIC ADVISORY BOARD Grant of Options/Warrants During the quarter period ending September 30, 2005 the Company issued consultancy and advisory Warrants to 3 individuals, Dr. Richard Rocheleau on February 1, 2005, Dr. Arokia Nathan on February 1, 2005, and Dr. John Moore on March 8, 2005 as compensation for 2 years service each as members of the Company's Scientific Advisory Board. Each individual was granted Warrants totaling 250,000 shares with an exercise price of $0.20 per share. The Warrants were issued as part of Consultancy and Advisory Agreements and each carry a 3 year exercise term and the following vesting provisions: (i) 50,000 shares upon the effective date of Warrant. Thereafter, the Warrant shall become exercisable at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of engagement between the consultant and the Company. Expanded License and Warrants Expanded Use License stock warrant MVSystems, Inc. - As consideration for the grant of an Expanded Use License on October 12, 2005, granting XsunX additional benefits for use of licensed technologies and patents, XsunX granted MVS a warrant (the "Expanded Use License Stock Warrant") for the purchase of up to Seven Million (7,000,000) shares of common stock of XsunX, the warrant will expire five (5) years after the date of the grant and is subject to the following vesting provisions: (4) The Expanded Use License Stock Warrant allowed for the vesting of one million (1,000,000) warrants on the effective date of the agreements. (5) Another one million (1,000,000) warrants will vest upon the satisfactory completion of a Phase 4 development program for the development of technologies licensed under the Expanded Use License. (6) The balance of five million (5,000,000) warrants will vest upon the date the technologies licensed within the Expanded Use License are licensed to a third party in a bona fide arms-length commercial setting. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K The following documents are filed as part of this report: 1. Reports on Form 8-K: 8-K filed 7-18-05 8-K filed 8-10-05 8-K filed 8-11-05 8-K filed 9-7-05 8-K/A filed 10-11-05 8-K filed 10-17-05 8-K filed 10-28-05 8-K 12-12-05 37
2. Exhibits: 10.1 EXPANDED USE LICENSE AGREEMENT 10.2 EXPANDED USE LICENSE STOCK WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC. 10.3 SUBSCRIPTION FORM AND NOTICE OF EXERCISE 10.4 CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC. 10.5 CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC. 10.6 CONSULTING AND ADVISORY AGREEMENT 10.7 CONSULTING AND ADVISORY AGREEMENT 10.8 CONSULTING AND ADVISORY AGREEMENT 31 Sarbanes-Oxley Certification 32 Sarbanes-Oxley Certification
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company's Board acts as the audit committee and had no "pre-approval policies and procedures" in effect for the auditors' engagement for the audit year 2004 and 2005. All audit work was performed by the auditors' full time employees. Michael Johnson & Co., LLC, formerly auditors for the Company, was dismissed as auditor on July 18, 2005. Jaspers + Hall, PC were engaged as auditors for Company on July 18, 2005. Jaspers + Hall, PC, is now the Company's principal auditing accountant firm. The Company's Board of Directors has considered whether the provision of the audit services is compatible with maintaining Jaspers + Hall, PC independence. AUDIT FEES 2005: As of the period ended September 30, 2005 Jaspers + Hall had billed the Company $1,500 for the following professional services: review of the interim financial statements included in quarterly reports on Form 10-QSB for the periods ended June 30, 2005. No other fees the Company billed by Jaspers + Hall in the period ended September 30, 2005. The Company's previous auditor, Michael Johnson & Co, LLC, billed the Company $7,500 for the following professional services: audit of the annual financial statement of the Company for the fiscal year ended September 30, 2004, review of the interim financial statements included in quarterly reports on Form 10-QSB for the periods ended December 31, 2004, March 31, 2005. AUDIT FEES 2004: The Company's previous auditor, Michael Johnson & Co, LLC, billed the Company $5,900 for the following professional services: audit of the annual financial statement of the Company for the fiscal year ended September 30, 2003, and review of the interim financial statements included in quarterly reports on Form 10-QSB for the periods ended December 31, 2003, March 31, 2004, and June 30, 2004. Michael Johnson & Co, LLC, billed the Company $4,250 for the 2002 audit. The Company's Board acts as the audit committee and had no "pre-approval policies and procedures" in effect for the auditors' engagement for the audit year 2004 and 2005. 38 INDEX Form 10-KSB Regulation Consecutive S-K Number Exhibit Page Number 3.1 Articles of Incorporation Incorporated by reference to Registration Statement Form 10SB12G #000-29621 3.2 Bylaws Incorporated by Reference to Registration Statement Form 10SB12G #000-29621 39 INDEPENDENT AUDITOR'S REPORT Board of Directors XSUNX, INC. Aliso Viejo, CA We have audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun River Mining, Inc). (A Development Stage Company) as of September 30, 2004 and 2003, and the related statements of operations, cash flows, and stockholders' equity for the years ended September 30, 2004 and 2003 and for the period from February 25, 1997 (inception) to September 30, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits "in accordance with the standards of the Public Company Accounting Oversight Board (United States)" as outlined in PCAOB Auditing Standard No. 1. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XSUNX, INC., (formerly Sun River Mining, Inc.) at September 30, 2004 and 2003 and the results of their operations and their cash flows for the years ended September 30, 2004 and 2003 and for the period from February 25, 1997 (inception) to September 30, 2004 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, conditions exist which raise substantial doubt about the Company's ability to continue as a going concern unless it is able to generate sufficient cash flows to meet its obligations and sustain its operations. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Michael Johnson & Co., LLC Michael Johnson & Co., LLC Denver, Colorado February 24, 2005 May 5, 2005 F-1 JASPERS + HALL, PC CERTIFIED PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- 9175 E. Kenyon Avenue, Suite 100 Denver, CO 80237 303-796-0099 REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM Board of Directors XSUNX, INC. Aliso Viejo, CA We have audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun River Mining, Inc). (A Development Stage Company) as of September 30, 2005, and the related statements of operations, cash flows, and stockholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XSUNX, INC., (formerly Sun River Mining, Inc.) at September 30, 2005 and the results of their operations and their cash flows for the year ended September 30, 2005 in conformity with accounting principles generally accepted in the United States. The financial statements for the years ended September 30, 2004 and 2003 and from the period February 25, 1997 (inception) to September 30, 2004, were audited by other accountants, whose report dated May 5, 2005 expressed an unqualified opinion on those statements. They have not performed any auditing procedures since that date. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, conditions exist which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ JASPERS + HALL, PC Denver, CO December 28, 2005 F-2
XSUNX, INC. (A Development Stage Company) Balance Sheets September 30, 2005 2004 ---------------- ---------------- ASSETS: Current assets: Cash $ 175,869 $ 37,344 Prepaid Expense 79,984 20,000 ---------------- ---------------- Total current assets 255,853 57,344 ---------------- ---------------- Fixed Assets: Office Equipment (Net) 165,831 2,270 ---------------- ---------------- Total Fixed Assets 165,831 2,270 ---------------- ---------------- Other Assets: Patents 20,000 10,000 Deposits - 2,500 ---------------- ---------------- Total other assets 20,000 12,500 ---------------- ---------------- TOTAL ASSETS $ 441,684 $ 72,114 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): Current liabilities: Accounts Payable $ 78,377 $ 89,030 Accrued Interest 45,856 5,908 Note Payable 850,000 - Note Payable - Stockholder - 1,225 ---------------- ---------------- Total current liabilities 974,233 96,163 ---------------- ---------------- Stockholders' equity (deficit): Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized; no shares issued and outstanding - - Treasury Stock, no par value; 26,798,418 issued and outstanding - - Common Stock, no par value; 500,000,000 shares authorized; 123,876,633 shares issued and outstanding in 2005, and 114,036,102 3,996,735 3,104,396 shares issued and outstanding in 2004. Common Stock Warrants 1,200,000 1,200,000 Deficit accumulated during the development stage (5,729,284) (4,328,445) ---------------- ---------------- Total stockholders' deficit (532,549) (24,049) ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 441,684 $ 72,114 ================ ================
The accompanying notes are an integral part of these financial statements. F-3
XSUNX, INC. (A Development Stage Company) Statements of Operations February 25, 1997 Year Ended (Inception) to September 30, September 30, ----------------------------------- 2005 2004 2005 -------------- -------------- ------------------ Revenue $ - $ - $ - Expenses: Abandoned Equipment - - 808 Advertising 3,979 - 3,979 Bank Charges 500 401 2,613 Consulting 320,944 19,900 1,344,983 Depreciation 18,435 - 21,613 Directors' Fees - - 11,983 Due Dilgence - - 45,832 Equipment Rental - - 1,733 Filing Fees 1,800 - 1,800 Impairment loss - - 923,834 Insurance 758 - 758 Legal and Accounting 107,249 27,203 295,609 Licenses & Fees 25 190 6,435 Loan Fees 115,000 - 115,000 Meals & Entertainment - - 4,119 Miscellaneous Expenses 1,675 - 1,675 Office Expenses 2,634 5,218 21,833 Patent Fees 663 - 663 Salaries 155,236 119,336 655,322 Postage 2,161 - 5,378 Printing 4,300 - 9,880 Public Relations 116,413 6,640 227,379 Rent 9,000 8,905 25,963 Research & Development 501,423 129,493 630,916 Subscription Reports 860 - 860 Taxes - - 4,657 Telephone 5,489 4,270 40,304 Transfer Agent Expense 3,628 2,997 19,954 Travel 11,234 3,640 74,167 Warrant Option Expense - 1,200,000 1,675,000 -------------- -------------- ------------------ Total Expenses 1,383,406 1,528,193 6,175,050 -------------- -------------- ------------------ Other Income and Expense Interest Expense 17,433 251 89,030 Interest Income - - (23) Forgiveness of Debt - (19,376) (59,773) -------------- -------------- ------------------ Net Loss $ (1,400,839) $ (1,509,068) $ (6,204,284) ============== ============== ================== Per Share Information: Weighted average number of common shares outstanding 123,854,733 114,036,102 -------------- -------------- Net Loss per Common Share $ (0.02) $(0.01) ======== =======
* Less than $.01 The accompanying notes are an integral part of these financial statements. F-4
XSUNX (A Development Stage Company) Statements of Cash Flows (Indirect Method) February 25, 1997 Year Ended (Inception) to September 30, September 30, ------------------------------------ 2005 2004 2005 -------------- --------------- ------------------- Cash Flows from Operating Activities: Net Loss $ (1,400,839) $(1,509,068) $ (6,204,284) Issuance of Common Stock for Services 50,827 - 1,288,384 Issuance of Common Stock for Loan Inducement 310,117 310,117 Depreciation Expense 18,435 18,435 Adjustments to reconcile net loss to net cash used in operations. (Increase) Decrease in Deposits 2,500 (22,500) - (Increase) in Prepaid Expenses (59,985) (79,985) Increase (Decrease) in Accounts Payable (10,653) 89,030 78,377 Increase (Decrease) in Accrued Liabilities 39,948 5,908 45,856 -------------- --------------- ------------------- Net Cash Flows Used by Operations (1,049,650) (1,436,630) (4,543,100) -------------- --------------- ------------------- Cash Flows from Investing Activities: Purchase of Equipment (181,995) (2,270) (184,265) Purchase of Intangible Assets (10,000) (9,997) (20,000) -------------- --------------- ------------------- Net cash used by investing activities (191,995) (12,267) (204,265) -------------- --------------- ------------------- Cash Flows from Financing Activities: Proceeds from Notes payable - Stockholder 3,775 1,225 - Payment for Notes payable - Stockholder (5,000) - - Proceeds from Convertible Debt 850,000 - 850,000 Issuance of Common Stock Warrants - 1,200,000 1,675,000 Issuance of Common Stock for cash 531,395 282,670 2,398,234 -------------- --------------- ------------------- Net Cash Flows Provided by Financing Activities 1,380,170 1,483,895 4,923,234 -------------- --------------- ------------------- Increase in Cash 138,525 34,998 175,869 -------------- --------------- ------------------- Cash at Beginning of Period 37,344 2,346 - -------------- --------------- ------------------- Cash at End of Period $ 175,869 $ 37,344 $ 175,869 ============== =============== =================== Supplemental Disclosure of Cash Flow Information Cash paid for Interest $ - $ - $ 71,346 ============== =============== =================== Cash paid for income taxes $ - $ - $ - ============== =============== =================== NON-CASH TRANSACTIONS Stock issued for services $ 50,827 $ - $ 1,288,384 ============== =============== =================== Stock issued for Loan Inducement $ 310,117 $ - 310,117 ============== =============== ===================
The accompanying notes are an integral part of these financial statements. F-4
XSUNX, INC. (A Development Stage Company) Statement of Stockholders' Equity (Deficit) September 30, 2005 Deficit Accumulated Common During Treasury Stock Common Stock Stock Development ---------------------- -------------------- # of Shares Amount # of Shares Amount Warrants Stage Totals ------------------------ --------- Inception February 25, 1997 $ - $ - - $ - $ - $ - - Issuance of stock for cash 3/97 - - 10,590 111,900 - - 111,900 Issuance of stock to Founders 3/97 - - 14,110 - - - - Issuance of stock for consolidation 4/97 - - 445,000 312,106 - - 312,106 Issuance of stock for cash 8/97 - - 2,900 58,000 - - 58,000 Issuance of stock for cash 9/97 - - 2,390 47,800 - - 47,800 Net Loss for Year - - - - - (193,973) (193,973) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 1997 - - 474,990 529,806 - (193,973) 335,833 ---------- ---------- --------- -------- ---------- ----------- --------- Issuance of stock for services 11/97 - - 1,500 30,000 - - 30,000 Issuance of stock for cash 9/98 - - 50,200 204,000 - - 204,000 Consolidation stock cancelled 9/98 - - (60,000) (50,000) - - (50,000) Net Loss for Year - - - - - (799,451) (799,451) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 1998 - - 466,690 713,806 - (993,424) (279,618) ---------- ---------- --------- -------- ---------- ----------- --------- Issuance of stock for cash 10/98 - - 21,233 159,367 - - 159,367 Issuance of stock for services 1/99 - - 65,000 316,500 - - 316,500 Issuance of stock for cash 1/99 - - 37,500 296,125 - - 296,125 Issuance of stock for cash 2/99 - - 7,500 70,313 - - 70,313 Issuance of stock for cash 4/99 - - 45,225 122,108 - - 122,108 Issuance of stock for services 6/99 - - 70,000 147,000 - - 147,000 Issuance of stock for cash 9/99 - - 40,000 69,200 - - 69,200 Net Loss for Year - - - - - (1,482,017) (1,482,017) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 1999 - - 753,148 1,894,419 - (2,475,441) (581,022) ---------- ---------- --------- -------- ---------- ----------- --------- Issuance of stock for cash 9/00 - - 15,000 27,000 - - 27,000 Net Loss for year - - - - - (118,369) (118,369) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 2000 - - 768,148 1,921,419 - (2,593,810) (672,391) ---------- ---------- --------- -------- ---------- ----------- --------- Extinquishment of debt - - - 337,887 - - 337,887 Net Loss for year - - - - - (32,402) (32,402) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 2001 - - 768,148 2,259,306 - (2,626,212) (366,906) ---------- ---------- --------- -------- ---------- ----------- --------- Net Loss for year - - - - - (47,297) (47,297) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 2002 - - 768,148 2,259,306 - (2,673,509) (414,203) ---------- ---------- --------- -------- ---------- ----------- --------- Issuance of stock for Assets 7/03 - - 70,000,000 3 - - 3 Issuance of stock for Cash 8/03 - - 9,000,000 225,450 - - 225,450 Issuance of stock for Debt 9/03 - - 115,000 121,828 - - 121,828 Issuance of stock for Expenses 9/03 - - 115,000 89,939 - - 89,939 Issuance of stock for Services 9/03 - - 31,300,000 125,200 - - 125,200 Net Loss for year - - - - - (145,868) (145,868) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 2003 - - 111,298,148 2,821,726 - (2,819,377) 2,349 ---------- ---------- --------- -------- ---------- ----------- --------- F-5 ...Continued XSUNX, INC. ...Continued (A Development Stage Company) Statement of Stockholders' Equity (Deficit) September 30, 2005 Deficit Accumulated Common During Treasury Stock Common Stock Stock Development ---------------------- -------------------- # of Shares Amount # of Shares Amount Warrants Stage Totals ------------------------ --------- Issuance of stock for Cash - - 181,750 21,071 - - 21,071 Issuance of stock for Cash - - 217,450 22,598 - - 22,598 Issuance of stock for Cash - - 254,956 34,669 - - 34,669 Issuance of stock for Cash - - 694,649 96,306 - - 96,306 Issuance of stock for Cash - - 157,649 21,421 - - 21,421 Issuance of stock for Cash - - 57,000 5,133 - - 5,133 Issuance of stock for Cash - - 1,174,500 81,472 - - 81,472 Issuance of Common Stock Warrants - - - - 1,200,000 - 1,200,000 Net Loss for year - - - - - (1,509,068) (1,509,068) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 2004 - - 114,036,102 3,104,396 1,200,000 (4,328,445) (24,049) ---------- ---------- --------- -------- ---------- ----------- --------- Issuance of stock for cash - - 5,919,537 471,068 - - 471,068 Issuance of stock for cash - - 300,500 20,067 - - 20,067 Issuance of stock for services - - 10,000 3,000 - - 3,000 Issuance of stock for services - - 300,000 24,000 - - 24,000 Issuance of stock for cash - - 527,000 40,260 - - 40,260 Issuance of stock for services - - 125,000 10,000 - - 10,000 Issuance of stock for services - - 114,469 13,827 - - 13,827 Issuance of stock for Collateral 26,798,418 - - - - - - Issuance of stock for loan inducement - - 2,544,031 310,117 - - 310,117 Net Loss for year - - - - - (1,400,839) (1,400,839) ---------- ---------- --------- -------- ---------- ----------- --------- Balance - September 30, 2005 26,798,418 $ - 23,876,639 $3,996,735 $1,200,000 $ (5,729,284) $(532,549) ========== ========== ========= ======== ========== =========== =========
The accompanying notes are an integral part of these financial statements. F-6 XSUNX, INC. (A Development Stage Company) Notes to Financial Statements September 30, 2005 Note 1 - 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. In May 1999 management decided to write-off the Sun River Bolivian subsidiaries and to take the subsequent loss, of all investments associated with the subsidiaries. Effective September 24, 2003, The Company completed a Plan of Reorganization and Asset Purchase Agreement with Xoptix, Inc., a California corporation. Pursuant to the Plan the Company acquire the following three patents for Seventy Million (70,000,000) shares (post reverse split one for twenty): No. 6,180,871 for Transparent Solar Cell and Method of Fabrication (Device), granted on January 30, 2001; No. 6,320,117 for Transparent Solar Cell and Method of Fabrication (Method of Fabrication), granted on November 20, 2001; and No. 6,509,204 for Transparent Solar Cell and Method of Fabrication (formed with a Schottky barrier diode and method of its manufacture), granted on January 21, 2003. Pursuant to the Plan, the Company authorized the issuance of 110,530,000 (post reverse split) common shares. Prior to the Plan the Company had no tangible assets and insignificant liabilities. Subsequent to the Plan the Company completed its name change from Sun River Mining, Inc. to XsunX, Inc. The transaction was completed on September 30, 2003. XsunX, Inc. is developing solar cell designs and manufacturing process with the intent to provide commercially viable solar cell design applications that convert sun light into electrical energy. The process for producing electricity from sun light is known as Photovoltaics. Photovoltaic ("PV") is the science of capturing and converting solar energy into electricity. The product of the Company's development efforts is intended to deliver two aspects of deliverable technologies in the form of an integrated solution providing, a) commercially scalable manufactured processes and equipment designed for the specific manufacture of the Company's thin film solar technologies, and b) proprietary thin film solar cell designs that address new application opportunities. Note 2 - Going Concern Going Concern: The financial statements of the Company have been presented on the basis that they are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated any revenue and has an accumulated deficit at September 30, 2005 of $6,201,284. The future success of the Company is likely dependent on its ability to attain additional capital, or to find an acquisition to add value to its present shareholders and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. The Company has made substantial investments this last year in the development of intellectual property assets as part of a business-restructuring plan. The purpose of these investments was to acquire patented solar electric glass technology. The Company believes that its patented solar electric glass technology has a number of market opportunities in the multi-billion dollar worldwide architectural glass markets. Note 3 - Summary of Significant Accounting Policies: Basis of Presentation - Development Stage Company: The Company has not earned significant revenues from operations. Accordingly, the Company's activities have been accounted for as those of a "Development Stage Enterprise" as set forth in Financial Accounting Standards Board Statement No. 7 ("SFAS 7"). Among the disclosures required by SFAS 7 are that the Company's financial statements be identified as those of a development stage company, and that the statements of operations, stockholders' equity (deficit) and cash flows disclose activity since the date of the Company's inception. F-7 Basis of Accounting: The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. 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. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates made in preparing these financial statements include the estimate for the useful life of property and equipment, and the fair value of stock warrants. Actual results could differ from those estimates 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 September 30, 2005 and 2004, 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. Property and Equipment Property and equipment are stated at cost, and are depreciated or amortized using the straight-line method over the following estimated useful lives: Furniture, fixtures & equipment 7 Years Computer equipment 5 Years Commerce server 5 Years Computer software 3-5 Years Leasehold improvements Length of the lease Net earning (loss) per share: Basic loss per share is computed on the basis of the weighted average number of common shares outstanding. For all periods, all of the Company's common stock equivalents were excluded from the calculation of diluted loss per common share because they were anti-dilutive, due to the Company's net losses. Advertising: Advertising costs are expensed as incurred. Total advertising costs were $3,975 and $0.0 for the years ended September 30, 2005 and 2004, respectively. Research and Development: Research and development costs are expensed as incurred. Total research and development costs were $ 501,423 and $129,493 for the years ended September 30, 2005 and 2004, respectively. Other Comprehensive Income: The Company has no components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods. F-8 Note 4 - Federal Income Tax: The Company accounts for income taxes under SFAS No. 109, which requires the asset and liability approach to accounting for income taxes. Under this approach, deferred income taxes are determined based upon differences between the financial statement and tax bases of the Company's assets and liabilities and operating loss carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the future tax benefit will be realized. Significant components of the Company's deferred tax liabilities and assets are as follows: 2005 2004 ----------- ----------- Deferred Tax Liability $ 6,204,284 $ 4,328,445 Deferred Tax Assets Net Operating Loss Carry forwards Book/Tax Differences in Bases of Assets 0 0 -------------- --------------- Valuation allowance $ 6,204,284 $ 4,328,445 -------------- --------------- Net Deferred tax assets $ 0 $ 0 ============== =============== At September 30, 2005, the Company had net operating loss carry forwards of approximately, $6,204,284 for federal income tax purposes. These carry forwards if not utilized to offset taxable income will begin to expire in 2010. Note 5 - Capital Stock Transactions: The authorized capital stock of the Company was established at 500,000,000 with no par value. On September 29, 2003 the Board of Directors authorized a reverse split of 1 for 20 shares of stock. The stocks issued in 2003 were for accrued directors fees and salaries and to pay off past debt to investors. 70,000,000 shares of stock were issued to obtain the patent rights from Xoptix, Inc. Also shares of stock were issued in 2003 for consulting fees in arranging the formation of the new Corporation. In 2004 2,737,954 shares of stock were issued for cash and consulting fees. 9,840,537 shares of common stock were issued in 2005 for cash and consulting fees. In July 2005, 26,798,418 shares of common stock were placed in XSUNX, Inc. Treasury Stocks as collateral for the long-term note with Cornell Capital Partners. In 2005, the Company issued 6,747,037 shares of common stock for $531,395 in cash, 549,419 shares of common stock for consulting fees with estimated value of $50,827, and 2,544,031 shares for a loan inducement with estimated value of $310,117. Note 6 - Stock Options and Warrants: Stock Option Plan: On July 15, 2004, the Board of Directors of XsunX resolved to establish the 2004 Stock Option Plan. The plan was adopted to provide equity incentives to employees, consultants and suppliers of the Company. The adoption of the Plan was subject to ratification by a majority of the Company's stockholders, which approval was to be obtained within 12 months from the date the Plan was adopted by the Board. The Plan was cancelled by the Board, due to non-approval by the shareholders, in August 2005. No stocks or options were issued at September 30, 2005 Warrant/Option Expense Warrant/Option Expense for the Company was computed by multiplying the value of the difference between the warrant exercise price, if less than the market price, and the market price of the stock at date of grant. This method resulted in a $0.0 charge to expenses for the warrants granted in the year ended September 30, 2005, as follows: F-9
2005 WARRANT/OPTION EXPENSE CHART Underlying In the Money # of Warrants Exercise Price Share Value at Spread at Date Warrant Expense Holder Date of Grant of Grant - ------------------------ -------------- --------------- ----------------- ----------------- ----------------- 250,000 $.20 $.15 $.0 $.0 Richard Rocheleau - ------------------------ -------------- --------------- ----------------- ----------------- ----------------- Arokia Nathan 250,000 $.20 $.15 $.0 $.0 - ------------------------ -------------- --------------- ----------------- ----------------- ----------------- John Moore 250,000 $.20 $.12 $.0 $.0 - ------------------------ -------------- --------------- ----------------- ----------------- ----------------- Cornell Capital, LP 4,250,000 $.15 $.15 $.0 $.0 - ------------------------ -------------- --------------- ----------------- ----------------- ----------------- Cornell Capital, LP 2,125,000 $.20 $.15 $.0 $.0 - ------------------------ -------------- --------------- ----------------- ----------------- ----------------- Totals $0.0 - ------------------------ -------------- --------------- ----------------- ----------------- -----------------
Warrant Grants License Stock Warrant MVSystems, Inc.- In September 2004 as consideration for the grant of the License, XsunX granted MVS a warrant (the "License Stock Warrant") for the purchase of up to Five Million (5,000,000) shares of common stock of XsunX (the "License Stock Warrant Shares"), the warrant will expire five (5) years after the date of the grant. Technology Sharing Warrant MVSystems, Inc.- In September 2004 as consideration for access to MVS know how and Service at Cost pursuant to the technology sharing agreement between the parties, XsunX granted to MVS a warrant to purchase up to One Million shares (1,000,000) of common stock of XsunX (the "Technology Sharing Warrant Shares"). The Technology Sharing Warrant carries a five (5) year exercise term and is subject to conditional vesting in accordance with the following provisions: (1) The Technology Sharing Warrant shall become exercisable in the amount of 250,000 shares upon the satisfactory completion of Phase 2 under the MVS Phase 2 Development Agreement. (2) The Technology Sharing Warrant shall become exercisable in the amount of 250,000 shares upon the satisfactory completion, as reasonably determined by the XsunX Board of Directors, of any subsequent phase of development as may be defined under the MVS future development proposal. (3) The Technology Sharing Warrant shall become exercisable in the amount of 500,000 shares upon the Commercialization of an XsunX process. Consultancy Warrant Bentley - In September 2004 the Company granted James Bentley a consultancy and advisory warrant in the amount of 1,000,000 shares with an exercise price of $.15 per share. Mr. Bentley has worked with the Company in its initial stage helping to establish a plan for the development of working samples and the review and selection process for engaging qualified research and development firms to initiate development efforts. Mr. Bentley had also assisted the Company in continued efforts to expand research efforts and business development opportunities. The warrant was issued for the conversion of $15,000 in accrued consultancy fees, and as part of a Consultancy and Advisory Agreement and carries a 3 year exercise term and is subject to the following vesting provisions: (1) 500,000 shares upon the effective date of the warrant. Thereafter, the warrant shall become exercisable at the rate of 125,000 shares per calendar quarter up to the full amount of the warrant. Consultancy and Advisory Warrant Dr. Madan - In September 2004 as compensation for Dr. Madan's advice and consultation efforts in the furtherance of XsunX business initiatives as Chairman of the XsunX Scientific Advisory Board , XsunX granted Dr. Madan the a warrant (the "Consultancy and Advisory Warrant") to purchase up to One Million (1,000,000) shares of common stock of XsunX (the "Consultancy and Advisory Stock Warrant Shares") The Warrant carries a five (5) year exercise term and is subject to conditional vesting in accordance with the following provisions: (1) The Consultancy and Advisory Warrant shall become exercisable at the rate of 25,000 Shares per month during and up to the first twenty-four (24) months of engagement by XsunX of Dr. Madan. (2) The Consultancy and Advisory Warrant shall become exercisable in the amount of 150,000 shares upon the satisfactory completion of Phase 2 under the MVS Phase 2 Development Agreement. (3) The Consultancy and Advisory Warrant shall become exercisable in the amount of 250,000 shares upon the Commercialization of an XsunX process. Consultancy and Advisory Warrant Nathan - A Consultancy and Advisory agreement with Dr. Arokia Nathan for services to the Company as a member of the Scientific F-10 Advisory Board was approved by the Board on February 1, 2005. The Board issued a warrant agreement for the purchase of common stock to Dr. Arokia Nathan in accordance with the provisions of the Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise term and is subject to conditional vesting in accordance with the following provisions: (2) The Warrant will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was February 1, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. Arokia Nathan. Consultancy and Advisory Warrant Agreement Rocheleau- A Consultancy and Advisory agreement with Dr Richard E. Rocheleau for services to the Company as a member of the Scientific Advisory Board was approved by the Board on February 1, 2005. The Board issued a warrant agreement for the purchase of common stock to Dr. Richard E. Rocheleau in accordance with the provisions of the Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise term and is subject to conditional vesting in accordance with the following provisions: (2) The Warrant will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was February 1, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. Richard Rocheleau. Consultancy and Advisory Warrant Agreement Moore - A Consultancy and Advisory agreement with Dr John J. Moore for services to the Company as a member of the Scientific Advisory Board was approved by the Board on March 8, 2005. The Board issued a warrant agreement for the purchase of common stock to Dr. John J. Moore in accordance with the provisions of the Consulting and Advisory Agreement totaling two hundred fifty thousand (250,000) warrants exercisable at $.20 each. The Warrant carries a three (3) year exercise term and is subject to conditional vesting in accordance with the following provisions: (2) The Warrant will vest in the amount of 50,000 shares upon the effective date of the Consultancy and Advisory Agreement which was March 8, 2005. Thereafter, the Warrant will vest at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of two (2) year engagement by XsunX, Inc. of Dr. John Moore. Warrant to Purchase Common Stock Cornell - On July 14, 2005, the Company consummated a Securities Purchase Agreement (the "Purchase Agreement") with Cornell providing for the sale by the Company to Cornell of its 12% secured convertible debentures in the aggregate principal amount of $850,000. Under the Purchase Agreement, the Company also issued to Cornell five-year warrants to purchase 4,250,000 and 2,125,000 shares of Common Stock at $0.15 and $0.20, respectively (collectively, the "Warrants"). During the years ended September 30, 2004, and September 30, 2005, the board of directors approved the issuance of warrants to purchase an aggregate of 15,125,000 shares of the Company's common stock. Such warrants are exercisable at prices ranging from $.15 to $.20 per share, vest over periods up to 60 months, and expire at various times through June 2010. During the years ended September 30, 2004, and September 30, 20005, no warrant holders exercised warrants to purchase the Company's common stock. A summary of warrant activity for the year ended September 30, 2004 and 2005 is as follows:
Weighted- Weighted- Number of Average Average Warrants Exercise Warrants Exercise Price Exercisable Price -------------- ------------- --------------- -------------- Outstanding, September 30, 2003 0 $0.0 0 $0.0 Granted 2004 8,000,000 $.15 6,700,000 $.15 Exercised 2004 0 $0.0 -------------- ------------- --------------- -------------- Outstanding, September 30, 2004 8,000,000 $.15 6,700,000 $.15 Granted 2005 7,125,000 $.17 6,725,000 $.17 Exercised 2005 0 $0.0 -------------- ------------- --------------- -------------- Outstanding, September 30, 2005 15,125,000 $.1595 14,450,000 $.1595 ==============
At September 30, 2005, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as follows: F-11
Warrants Outstanding Warrants Exercisable -------------------------------------------------- --------------------------------- Weighted- Weighted- Average Weighted- Range of Number of Average Remaining Number Average Warrant Warrants Exercise Contractual Of Exercise Exercise Price Price Life Warrants Price - -------------------- ------------ -------------- ---------------- ---------------- ------------- $.15 8,000,000 $ .15 2 6,700,000 $ .15 .17 7,125,000 .17 2.8 6,725,000 .17 ------------ ---------------- 15,125.000 14,450,000 ============ ================
Note 7 - Notes, Commitments, and Contingencies Note Payable On July 14, 2005, XSUNX, Inc. entered into a Secured Convertible Debenture agreement with Cornell Capital Partners, LP in the amount of $400,000. The interest shall accrue on the outstanding principal balance hereof at an annual rate equal to twelve percent (12%.) This Debenture shall be convertible into shares of Common Stock at the option of the Holder, with a conversion price in effect on any Conversion Date shall be equal to ten cents ($.10), which may be adjusted pursuant to the other terms of this Debenture. On August 16, 2005, XSUNX, Inc. received an additional $450,000 from Cornell Capital Partners, LP with the same interest and conversion rights. The Debentures are secured by the assets of the Company and mature on the first anniversary of the date of issuance and bear interest at the annual rate of 12% in cash. Trademark Transfer Agreement: On May 6, 2004 a Trademark transfer agreement was signed with Western Gas and Electric Company of California. Western solely owns all rights and interest in and to the registered trademark consisting of printed words styled as "POWER GLASS' as more fully set forth herein ("Trademark") and desires to assign and transfer, subject to the terms and conditions set forth herein, all rights and interest in the Trademark to XsunX in exchange for the payment set forth in this Agreement. The purchase price for the Trademark shall be: (1) the sum of $10,000 if paid within one (1) year from the effective date; (2) the sum of $20,000 if paid after the conclusion of the first (1st) year but prior to the conclusion of the second (2nd) year after the effective date of this Agreement; (3) the sum of $35,000 if paid after the conclusion of the second (2nd) year but prior to the conclusion of the third (3rd) year after the effective date of this Agreement; or (4) the sum of $50,000 if paid after the conclusion of the third (3rd) year but prior to the conclusion of three (3) years and six (6) months after the effective date of this Agreement. If payment is not made prior to the conclusion of three (3) years and six (6) months after the effective date of this Agreement, XsunX shall re-assign the Trademark back to Western as set forth herein. At September 2005 the balance of $20,000 is included in Accounts Payable Funding Agreement On July 14, 2005, the Company entered into a Standby Equity Distribution Agreement (the "Distribution Agreement") with Cornell Capital Partners LP ("Cornell") providing for the sale and issuance to Cornell of up to $10,000,000 of Common Stock over a period of up to 24 months after the signing of the Distribution Agreement. Under the Distribution Agreement, the Company may sell to Cornell up to $250,000 in shares of its common stock (the "Common Stock") once every five trading days at a price of 96% of the lowest closing bid price (as reported by Bloomberg L.P.), of the Common Stock on the principal market where the Common Stock is traded for the five consecutive trading days following a notice by the Company to Cornell of its intention to sell shares. The Company will also pay a 5% commitment fee upon each sale of shares under the Distribution Agreement. Cornell has agreed not to short any of the shares of Common Stock In connection with the Distribution Agreement, the Company has issued to Cornell 2,544,031 shares of Common Stock as a commitment fee. It also issued to Newbridge Securities Corporation, a registered broker dealer, 65,232 shares of Common Stock as compensation for its services as the exclusive placement agent for the sale of the Common Stock under the Distribution Agreement. In August 2005 the Company filed a registration statement with the Securities and Exchange Commission pertaining to the Common Stock issuable upon sales under the Distribution Agreement. In December 2005 the Company withdrew the registration statement and terminated the Distribution Agreement with Cornell in lieu of obtaining alternate financing. F-12 Note 8 - Subsequent Events Expanded License and Warrants Expanded Use License stock warrant MVSystems, Inc.- As consideration for the grant of an Expanded Use License on October 12, 2005, granting XsunX additional benefits for use of licensed technologies and patents, XsunX granted MVS a warrant (the "Expanded Use License Stock Warrant") for the purchase of up to Seven Million (7,000,000) shares of common stock of XsunX, the warrant will expire five (5) years after the date of the grant and is subject to the following vesting provisions: (7) The Expanded Use License Stock Warrant allowed for the vesting of one million (1,000,000) warrants on the effective date of the agreements. (8) Another one million (1,000,000) warrants will vest upon the satisfactory completion of a Phase 4 development program for the development of technologies licensed under the Expanded Use License. (9) The balance of five million (5,000,000) warrants will vest upon the date the technologies licensed within the Expanded Use License are licensed to a third party in a bona fide arms-length commercial setting. Funding Agreement On December 12, 2005, XsunX, Inc. consummated a Securities Purchase Agreement dated December 12, 2005 with Cornell Capital Partners L.P. providing for the sale by the Company to Cornell of 10% secured convertible debentures in the aggregate principal amount of $5,000,000 (the "Debentures") of which $2,000,000 was advanced immediately. The second installment of $2,000,000 will be advanced immediately prior to the filing by the Company, with the Securities and Exchange Commission, of a Registration Statement. The last installment of $1,000,000 will be advanced three days prior to the date the Registration Statement is declared effective by the Commission. The Debenture is convertible into shares of Common Stock at the option of the Holder at a conversion price per share equal to the lesser of $0.38 or 95% of the lowest daily volume weighted average price of the Common Stock, as quoted by Bloomberg, LP, for the 30 trading days immediately preceding the date of conversion (the "Variable Market Price"). Unless waived by the Company, the Holders may not, together with their affiliates, convert more than an aggregate of $350,000 in any 30-day period of principal amount of the Debentures at the Variable Market Price. Cornell has agreed not to short any of the shares of Common Stock Note 9 - Financial Accounting Developments: Recently issued Accounting Pronouncements In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The Company has not issued any financial instruments with such characteristics. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" (FIN No. 46R), which addresses how a business enterprise should evaluate , whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", which was issued in January 2003. Companies are required to apply FIN 46R to variable interests in variable interest entities ("VIE") created after December 31, 2003. For variable interest in VIEs created before January 1, 2004 the interpretation is applied beginning January 1, 2005. For any VIEs that must be consolidated under FIN No. 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially are measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying value is not practicable, fair value at the date FIN No. 46R first applies may be used measure the assets, liabilities and non-controlling interest of the VIE. The Company does not have any interest in VIEs. F-13 In December 2004, the FASB issued SFAS No. 123R (revised 2004) "Share-Based Payment" which amends FASB Statement No. 123 and will be effective for public companies for interim or annual periods beginning June 15, 2005. The new statement will require entities to expense employee stock options and other share-based payments. The new standard may be adopted in one of three ways - the modified prospective transition method, a variation of the modified transition method or the modified retrospective transition method. The Company is to evaluate how it will adopt the standard and the evaluation the effect that the adoption of SFAS 123R will have on the financial position and results of operations. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4 previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight and rehandling costs may be so abnormal as to require treatment as current period charges". SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal". In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the prospectively and are effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for inventory costs incurred during fiscal years beginning after the date this Statement is issued. The adoption of SFAS No. 151 does not have an impact on the Company's financial position and results of operations. In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets, an amendment of APB Opinion No. 29. The guidance in APB opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchange of non-monetary assets should be measured on the fair value of the assets exchanges. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets that do not have commercial substance. A non-monetary has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary exchanges occurring in fiscal periods beginning June 15, 2005. The adoption of SFAS No. 153 is not expected to have an impact on the Company's financial position and results of operations. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and a correction of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company is currently evaluating the effect that the adoption of SFAS 154 will have on its results of operations and financial condition but does not expect it to have a material impact. In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, Determining the Amortization Period for Leasehold Improvements, which requires that leasehold improvements acquired in a business combination purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do not expect the provisions of this consensus to have a material impact on the financial position, results of operations or cash flows. END OF NOTES F-14 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: January 9, 2006 XsunX, INC. /s/ Tom Djokovich - --------------------------------- Tom Djokovich President DIRECTORS: /s/ Tom Djokovich - -------------------------------- /s/ Brian Altounian - -------------------------------- /s/ Thomas Anderson - -------------------------------- 40 EX-31 2 ex31.txt EXHIBIT 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT I, Tom Djokovich, certify that: (1) I have reviewed this annual of XsunX, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; (4) The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and (5) The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: January 9, 2006 /s/ Tom Djokovich - ---------------------------------- [Signature] President, Acting CFO, & Director - --------------------------------- [Title] EX-32 3 ex32.txt EXHIBIT 32 CERTIFICATION OF DISCLOSURE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of XsunX, Inc. Company (the "Company") on Form 10-KSB for the fiscal year ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"). I, Tom Djokovich, Acting Chief Executive Officer, of the Company, certify, pursuant to 18 USC section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) I am the certifying Officer and I have reviewed the report being filed; (2) Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; (3) Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of, and for, the periods presented in the report. (4) I and the other certifying officers are responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in paragraph (c) of this section) for the issuer and have: i. Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made know to them by others within those entities, particularly during the period in which the periodic reports are being prepared; ii. Evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report ("Evaluation Date"); and iii. Presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of September 30, 2005; (5) I and the other certifying officers have disclosed, based on their most recent evaluation, to the issuer's auditors and the audit committee of the Board of Directors (or persons fulfilling the equivalent function); i. All significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and ii. Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and (6) I and the other certifying officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: January 9, 2006 Officer: Acting CFO Name: Tom Djokovich /s/ Tom Djokovich ----------------------------- Position: Acting CFO and President EX-10.1 4 ex10-1.txt EXHIBIT 10.1 THE INTEREST IN THE SECURITIES CONTEMPLATED IN THIS EXPANDED AGREEMENT WILL BE ACQUIRED, IF AT ALL, FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE AFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EXPANDED USE LICENSE AGREEMENT THIS EXPANDED USE LICENSE AGREEMENT ("Expanded Agreement") is made effective as of 12th day of October, 2005 by and between XsunX, Inc., a Colorado Corporation ("XsunX"), and MVSystems, Inc., a Colorado Corporation ("MVS") and Arun Madan, an individual ("Dr. Madan"). XsunX, MVS, and Dr. Madan are sometimes herein referred to individually as a "party" and collectively as the "parties." R E C I T A L S A. WHEREAS, MVS, Dr. Madan and XsunX have previously entered into that certain Technology Sharing and License Agreement dated September 17, 2004 ("Technology Sharing and License Agreement"), for the purposes described therein, and the parties now wish to expand and define the scope and use of technology to include the development of opaque solar cell structures and manufacturing methods; and B. WHEREAS, MVS and Dr. Madan desire to expand and/or further define the use of licensed technology, know-how, and patents to XsunX for use in the development of opaque photovoltaic technologies and manufacturing methods; and C. WHEREAS, the parties desire to enter into this Expanded Agreement for the development and commercialization of opaque photovoltaic technologies; and NOW, THEREFORE, in consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows: 1. DEFINITIONS 1.1. "Act" means the Securities Act of 1933 promulgated by the United States Securities and Exchange Commission. 1.2. "Expanded Agreement" means this Expanded Use License Agreement, including the schedules and exhibits attached hereto, which are incorporated by reference herein. 1 1.3. "Commercial," "Commercialize," or "Commercialization of the 4 Terminal Patent" means the development of process related thereto to the point of obtaining a marketable product consisting of the core solar cell structure design and the manufacturing techniques deliverable in the form of a commercially scalable manufacturing process, and the actual realization thereupon of Ten Million Dollars ($10,000,000) cumulative revenue for the sales and licensure of such technologies and manufacturing process by five (5) years from the effective date of completion of such development. 1.4. "Derivative Works" mean works of the parties, including products or processes, associated with any subsequent research by any party, development, or combination of technologies of the parties after the Commencement Date, which are useful or specific to XsunX Expanded Field of Use or the Expanded Business of XsunX or which may otherwise become subject to the terms of the provisions set forth in this Expanded Agreement or those of the Technology Sharing and License Agreement. 1.5. "Expanded Use License" means that certain license set forth in Section 2.1 of this Expanded Agreement. 1.6. "Expanded Use License Stock Warrant" means that certain stock warrant contemplated at Section 4 of this Expanded Agreement. 1.7. "Expanded Use License Stock Warrant Shares" mean those shares of XsunX obtained upon the exercise of the License Stock Warrant, as set forth at Section 4 of this Expanded Agreement. 1.8. "XsunX Expanded Field of Use" The XsunX Expanded Field of Use pertains to the business of developing and commercializing semi-transparent and opaque solar cells and photovoltaic technologies, solar cell panels, and methods of manufacture. 1.9. "Expanded Business of XsunX" XsunX is in the business of developing, manufacturing, and marketing semi-transparent and opaque solar cells and photovoltaic technologies, solar cell panels, and methods of manufacture. 1.10. "Joint Licensing and Equipment Revenue Fees" means the fixed costs, percentages, mark-ups, and/or revenue sharing specifications as set forth in this Expanded Agreement. 1.11. "Opaque Solar Cell Development" means the development of opaque solar cell structures and manufacturing methods employing the techniques proposed within, but not limited to, U.S. Provisional Patent Application serial number 60/536,151 - - three terminal and four terminal solar cells, solar cell panels, and method of manufacture, and other technology, as set fort therein, a copy of which is attached hereto as Exhibit "H" and incorporated herein, the ("4 Terminal Patent"). The completed development and refinement of the 4 Terminal Patent, or any derivative works there from, and any other acquired or licensed technologies are intended to produced commercially marketable products and manufacturing processes of opaque solar cell devices. The development of the 4 Terminal Patent 2 will exclude the use of Copper-Indium-Gallium-Selenium ("CIGS") materials in solar cell structures so long as it pertains to services provided by MVS and the use of the MVS reel-to-reel cassette manufacturing system by XsunX in the Expanded Business of XsunX. 1.12. "Technology Sharing and License Agreement" means that certain Technology Sharing and License Agreement dated September 17, 2004, entered into by MVS, Dr. Madan and XsunX. 1.13. All other terms used herein which are not otherwise defined herein shall have the meaning set forth in the Technology Sharing and License Agreement. 2. LICENSE PROVISIONS 2.1. Grant of Expanded Use License. Subject to the terms and conditions of this Expanded Agreement, and subject to the terms and conditions of the Technology Sharing and License Agreement, and in exchange for the considerations set forth herein, MVS and Dr. Madan, jointly and severally, hereby grant to XsunX for the term of this Expanded Agreement, and XsunX accepts, an expanded use license of and to the Licensed Patents and Technology, with the right to sublicense, to import, make, have made, use, sell, offer for sale, have sold, and otherwise commercially exploit the Licensed subject matter of the Licensed Patents and Technology within the XsunX Expanded Field of Use, provided however that Dr. Madan and MVS retain the right to use the Licensed Patents and Technology themselves and to lend or transfer them to a university or non-profit research organization, and to commercially license or transfer the use of US Patent 6,488,777 B2, and US Patent 6,258,408 B1- Semiconductor vacuum deposition system and method having a reel-to reel substrate cassette, the ("Cassette Patent") so long as such use or transfer of any of the above does not defeat or diminish the economic benefit and commercial ability of such Licensed Patents and Technology that may be derived by XsunX within the XsunX Field of Use and the Expanded Business of XsunX. 2.2. Retained Rights. Notwithstanding the grant of the Expanded Use License herein, and pursuant to the provisions of this Expanded Agreement and the Technology Sharing and License Agreement, MVS and Dr. Madan shall retain the right to use the Licensed Patents and technology in the Business of MVS including the right to manufacture its machines and the reel-to reel technology, provided such use does not defeat or diminish the economic benefit and commercial ability of the technology transfer that may be derived by XsunX within the Xsunx Expanded Field of Use and the Expanded Business of XsunX. In addition XsunX is not licensed to provide this technology to any third party for uses outside of the Expanded Business of XsunX. 3 2.3. Expiration of Expanded Use License. The Expanded Use License granted herein shall, subject to expiration as set forth herein, be perpetual and self-renewing. Notwithstanding the foregoing, in the event that XsunX fails to Commercialize the 4 Terminal Patent within five (5) years from the effective date of completion of the development of the 4 Terminal Patent, the Expanded Use License granted above shall expire as to that technology or part thereof that was not Commercialized. 2.4. Intent and Scope of Expanded Use License. The Expanded Use License granted herein is intended to eliminate the five percent (5%) transmisivity limitation as specified within the Technology Sharing and License Agreement effective September 17, 2004 between the parties, and to allow the use of all technologies licensed, including any derivative works there from, to be utilized by XsunX within the XsunX Expanded Field of Use and in the development of the Expanded Business of XsunX as defined herein. 2.5. Derivative Works. All Derivative Works of the parties resulting from research or work funded by, or Confidential Information provided by, XsunX associated with any subsequent research by any party, development, or combination of technologies of the parties after the Commencement Date, which are useful or specific to the XsunX Expanded Field of Use or the Expanded Business of XsunX, shall become the property of XsunX, subject to the terms of separate joint licensing agreements between the parties intended to provide MVS use of such technology in applications not in direct or indirect competition with or adverse to XsunX in light of the XsunX Expanded Field of Use. 3. JOINT LICENSING AND EQUIPMENT REVENUE FEES 3.1. Obligations of MVS. MVS and Dr. Madan shall, subject to the specific provisions of any development proposal then approved by XsunX, MVS and Dr. Madan, and subject to the confidentiality provisions set forth within the Technology Sharing and License Agreement, share the technology referenced herein and therein with XsunX and provide research, development, consultation, materials, tools, instruments, and facility Services for the benefit of XsunX at Cost for the development of technologies pertinent to the Expanded Business of XsunX and for performance under this Expanded Agreement. Approval of any development proposal shall not be unreasonably withheld by MVS and Dr. Madan. 3.2. Joint Licensing and Equipment Revenue Fees. The parties agree to the provisioning of fixed costs and the sharing of revenues to and from the sale and licensure of equipment and technology resulting from the commercialization of the Licensed Patents and Technology under this Expanded Use License and the Technology Sharing and License Agreement as follows: 3.2.1. Opaque Solar Cell Technology License Revenue Sharing. Upon the successful completion of the development of the 4 Terminal Patent, which is intended to produce commercially marketable opaque solar cell structures and manufacturing methods, XsunX shall begin licensing efforts of the developed opaque technologies. If after twelve (12) months from the date of first 4 licensure to a third party in a bona fide arms-length commercial setting or relationship, the common stock of XsunX (the "Quoted Stock"), as quoted on a nationally recognized quotation system such as the NASDAQ: OTCBB quotation system, has not been quoted at a price of at least Four Dollars ($4.00) per share over a five (5) day trading period at any time during the preceding twelve (12) months then MVS shall be entitled to a twenty percent (20%) net of the net proceeds associated with the licensing revenues generated from the licensure of the developed opaque technologies until such time that the Quoted Stock achieves a Four Dollar ($4.00) per share quoted price over a five day trading period. Thereafter MVS shall not be entitled to proceeds associated with the licensing revenues. 3.2.2. General Equipment and Processing Systems Manufacture, Sales, Licensure, and Services. XsunX and MVS shall each share a joint license for the sale and/or licensure of equipment and manufacturing systems, (the "Machines") associated with the delivery of technologies and processes related to the patents and products derived from the commercialization of technologies under this Expanded Use License and the Technology Sharing and License Agreement and shall each be entitled to the benefits of costs and revenue sharing as follows: a) In the event that XsunX completes a sale or licensure of Machines or services, and places an order with MVS for the manufacture of said Machines or the delivery of services such as design and consultation related to the manufacture of Machines and their delivery and incorporation into a manufacturing line or system incorporating the services and/or equipment of third party technologies, MVS shall be entitled to fees equaling Costs plus Ten Percent (10%). MVS shall continue to be entitled to Costs plus 10% for any additional Machine or service orders related to the addition to, expansion of, or new orders from or for the benefit of previous or existing customers and marketing contacts generated by XsunX. b) Under the Phase 3 and 4 development programs the parties have planned to build a first run production Machine for the purpose of proofing and demonstrating the technology, and selling this first Machine. The parties agree to a 50/50 split of the net proceeds of the sale of this Machine excluding production Costs and reasonable marketing expenses. c) In the event that MVS licenses, subject to XsunX approval, the design criteria for the manufacture of Machines to third party manufacturers then MVS shall be entitled to charge up to a ten percent (10%) royalty for such licensure on the wholesale cost of the Machines as determined by such third parties manufacturers or as determined in good faith between MVS and the third party manufacturer. MVS shall provide XsunX with twenty percent (20%) of any fees collected under any such third party manufacturing agreements. XsunX shall not unreasonably withhold any approvals necessary for the above licensing to occur and will be entitled 5 to review such licensing agreements to ensure that the Expanded Business of XsunX will not be diluted or diminished subject to MVS licensure of technology and Machine design. d) If XsunX refers a potential client to MVS for services other than those related to the technology sharing and commercialization efforts of the licensed patents and technology then XsunX shall be entitled to a royalty fee of three percent (3%) net of the net proceeds of the recognized revenue resulting from such referral. 4. WARRANT FOR PURCHASE OF SHARES 4.1. Expanded Use License Stock Warrant. As consideration for the grant of the Expanded Use License, XsunX shall, grant MVS a warrant ("Expanded Use License Stock Warrant") for the purchase of up to Seven Million (7,000,000) shares of common stock of XsunX (the "Expanded Use License Stock Warrant Shares"). The Expanded Use License Stock Warrant shall be in the form of that Warrant to Purchase Common Stock of XsunX, Inc. instrument attached hereto as Exhibit "I" and incorporated herein by this reference. The Expanded Use License Stock Warrant shall have a five (5) year exercise term and be subject to conditional vesting in accordance with the following provisions: 4.1.1. The Expanded Use License Stock Warrant shall become exercisable in the amount of 1,000,000 shares upon the effective date of this Expanded Agreement. 4.1.2. The Expanded Use License Stock Warrant shall become exercisable in the amount of 1,000,000 shares upon the satisfactory completion of Phase 4 under the MVS phase 4 development proposal attached hereto as Exhibit "J" and incorporated herein by this reference. 4.1.3. The Expanded Use License Stock Warrant shall become exercisable in the amount of 5,000,000 shares upon the date of first licensure of the 4 Terminal Patent, as defined within this Expanded Agreement, to a third party in a bona fide arms-length commercial setting or relationship. 5. CONFIDENTIAL INFORMATION 5.1. Use in Products. Notwithstanding anything contained herein to the contrary, XsunX may incorporate technology and principles derived from or related to the Licensed Patents and Technology, including the technology and principles derived from or related to the Expanded Use License, in its commercial and other products, within the XsunX Expanded Field of Use and the development of the Expanded Business of XsunX and the same shall not be deemed a violation of this Expanded Agreement the Technology Sharing and License Agreement or the confidentiality provisions contained therein. 6 6. SECURTIES COMPLIANCE 6.1. No Offer or Sale. This Expanded Agreement is not intended to be an offer for the sale or issuance of securities, whether pertaining to stock, options, warrants, or otherwise, unless the same is exempt from registration and qualification pursuant to an applicable exemption. The issuance of stock and warrants is expressly subject to compliance with all state and federal securities laws, rules and regulations by the parties. While XsunX does not consider this Expanded Agreement itself to be a securities or offer of any securities, whether pertaining to stock, options, warrants or otherwise, in the event that this letter is construed to be an offer, the parties acknowledge the following disclosure in accordance with Section 25102(a) of the California Corporations Code: The sale of the securities which are the subject of this expanded agreement has not been qualified with the Commissioner of Corporation of the State of California and the issuance of such securities or the payment or receipt of any part of the consideration therefore prior to such qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this expanded agreement are expressly conditions upon such qualification being obtained unless the sale is so exempt. 6.2. General Securities Compliance. Notwithstanding anything contained in this Expanded Agreement to the contrary, this Expanded Agreement, and the stock warrants discussed herein, shall be, and are, expressly subject to all SEC and securities, laws, rules, regulations and reporting and disclosure requirements, to the extent applicable to XsunX as a reporting company, the shares, and\or any party hereto, including, but not limited to, shareholder voting and proxy solicitation rules. All issuances, sales, transfers, or other dispositions of shares of XsunX shall be made in compliance with all applicable securities laws, rules and regulations, and pursuant to registration of securities under the Securities Act of 1933 ("Act") (and qualification under General Corporation Law of California) or pursuant to an exemption from registration under the Act (and qualification under General Corporation Law of California). Notwithstanding the foregoing, nothing in this Expanded Agreement shall obligate XsunX to seek registration or qualification of any of its shares, and, to the extent that any obligation hereunder cannot be performed without registration or qualification of any of its shares, such obligation shall be excused on the part of XsunX to the extent that XsunX provides other adequate consideration therefore. 6.3. Rule 144. MVS and Dr. Madan each acknowledge that the shares of XsunX may be subject to the restrictions on transfer set forth in Rule 144 of the Rules promulgated under the Act. Any and all offers, sales, transfer or other dispositions of shares of XsunX shall be made only in compliance with Rule 144. MVS and Dr. Madan shall each comply with all policies and procedures established by the APC with regard to Rule 144 matters. MVS and Dr. Madan each acknowledged that XsunX or its attorneys or transfer agent may require a restrictive legend 7 on the certificate or certificates representing the shares pursuant to the restrictions on transfer of the shares imposed by Rule 144. 7. MISCELLANEOUS. 7.1. Parties in Interest. Nothing in this Expanded Agreement, or any other agreement or document (including, without limitation, the Technology Sharing and License Agreement), whether express or implied, is intended to confer any rights or remedies under or by reason of this Expanded Agreement on any persons other than the parties to it and their respective successors and assigns, nor is anything in this Expanded Agreement intended to relieve or discharge the obligation or liability of any third party to this Expanded Agreement, nor shall any provision give any third person any right of subrogation or action over against any party to this Expanded Agreement. 7.2. Expenses. Each of the parties hereto shall, subject to the terms and conditions of this Expanded Agreement, be responsible for and pay that party's own expenses incident to the preparation of this Expanded Agreement and/or incurred by any party in the performance and consummation of the transaction contemplated hereby. 7.3. Survival. All representations and warranties contained herein shall remain in full force and effect, regardless of any investigation made by a party and shall survive the completion of an Offering and the expiration of the term of this Expanded Agreement. 7.4. Entire Agreement. This Expanded Agreement, along with the Technology Sharing and License Agreement, including all exhibits to such agreements, comprises the entire agreement between the parties and supersedes all prior or contemporaneous understandings and agreements between the parties with respect to the subject matter hereof. This Expanded Agreement may not be amended or modified except in a writing signed by both MVS and XsunX as to matters involving only MVS and XsunX and in a writing signed by both Dr. Madan and XsunX as to matters involving only Dr. Madan and XsunX. 7.5. Coordination. This Expanded Agreement is entered into pursuant to and in light of the Technology Sharing Agreement, and unless specifically addressed or further defined herein, it is the intent of the parties that the terms of the Technology Sharing and License Agreement shall control over this Expanded Agreement. This Expanded Agreement is intended to constitute an amendment of the Technology Sharing and License Agreement as to the subject matter contained and addressed herein. Notwithstanding anything contained herein or in the Technology Sharing Agreement to the contrary, any breach of or under the Technology Sharing and License Agreement shall constitute a breach of and under this Expanded Agreement and any breach of or under this Expanded Agreement shall constitute a breach of and under the Technology Sharing and License Agreement. The terms and 8 conditions of the Technology Sharing and License Agreement are specifically incorporated herein by this reference to the extent that the same do not conflict with the terms and conditions of this Expanded Agreement and the Technology Sharing and License Agreement is amended and modified to include the matters addressed herein. 7.6. Notices. Any and all notices, demands, requests, or other communications required or permitted by this Expanded Agreement or by law to be served on, given to, or delivered to any party hereto by any other party to this Expanded Agreement shall be in writing and shall be deemed duly served, given, or delivered when personally received by the party or to an officer of the party, or in lieu of such personal delivery, when received by United States mail, first-class postage prepaid addressed to the parties hereto at such addresses as may be provided by the parties hereto from time to time for such purposes. 7.7. Authorization. The parties hereto represent and warrant that they are duly authorized to execute this Expanded Agreement on behalf of such party and the persons executing this Expanded Agreement represent and warrant that such persons are duly authorized by the entity that they are signing on behalf of to execute and deliver this Expanded Agreement on behalf of such party. 7.8. Subject Headings. The subject headings of the paragraphs of this Expanded Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 7.9. Assignment. This Expanded Agreement is personal in nature and may not be assigned by any party without the express prior written consent of all of the parties. Upon the express prior written consent to assignment by all parties, this Expanded Agreement shall be binding upon and shall inure to the benefit of the parties to it and their respective heirs, legal representatives, successors, and assigns. 7.10. Attorneys' Fees and Costs. If any legal action or any arbitration or other proceeding is brought by either party for the enforcement or interpretation of this Expanded Agreement, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Expanded Agreement, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Expanded Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled pursuant to such legal action. 7.11. Further Acts. The parties hereto shall cooperate with each other and acknowledge, execute, deliver, and file such additional documents or instruments and perform such further acts as may be reasonably necessary to affect the purpose and intent of the Agreement, including, but not limited to, the making of filings with the United States Patent and Trademark Office. 7.12. Severability. The provisions of this Expanded Agreement are severable and, if any clause or provision shall be held invalid or unenforceable in whole or in part, in any jurisdiction, then such invalidity or unenforceability shall effect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner effect such clause or provisions in any other jurisdiction, and in respect of the jurisdictions in which such clause or provision is 9 effected, the parties agree to substitute therefore a provision which most closely approximates the relative rights and obligations intended by the parties. 7.13. Counterparts. This Expanded Agreement may be signed in counterparts with the same effect as if the signatories hereto and thereto were upon the same instrument. 7.14. Time of Essence. Time is of the essence of this Expanded Agreement. 7.15. Governing Law. This Expanded Agreement shall be governed by the laws of the State of Colorado, without reference to its choice-of-law or conflict of law rules. THIS EXPANDED AGREEMENT is made effective as of the date set forth above. XSUNX: XsunX, Inc., a Colorado corporation By: /s/ Tom M. Djokovich -------------------------------- Tom M. Djokovich, President MVS: MVSystems, Inc., a Colorado corporation By: /s/ Dr. Arun Madan --------------------------------- Dr. Arun Madan, President EXHIBIT H FORM OF 4 TERMINAL PATENT EXHIBIT I FORM OF EXPANDED USE LICENSE STOCK WARRANT EXHIBIT J FORM OF MVS PHASE 4 DEVELOPMENT PROPOSAL EX-10.2 5 ex10-2.txt Exhibit 10.2 Warrant Grant # 10-2004 - ----------------------- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE. EXPANDED USE LICENSE STOCK WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC. This Expanded Use License Stock Warrant ("Warrant") is issued as consideration for the grant of an Expanded Use License pursuant to that certain Expanded Use License Agreement effective as of October 12, 2005 as set forth at Paragraph 16 hereof . This Warrant certifies that MVSystems, Inc. (the "Holder") for value received, is entitled to purchase from Xsunx, Inc. (the "Company") Seven Million (7,000,000) shares of the Company's Common Stock (the "Common Stock") for a per share exercise price equal to $ .25 (the "Per Share Exercise Price"). This right may be exercised subject to the conditional vesting provisions of Paragraph 1 below, and upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant, properly endorsed, with the Notice of Exercise and Subscription Form attached hereto duly filled in and signed, if applicable, and upon payment in cash or other form of good and immediately available funds reasonably satisfactory to the Company of the aggregate Per Share Exercise Price for the full number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. 1. RIGHT TO EXERCISE Subject to the Vesting Schedule 1.1. below and the other conditions set forth in this Agreement, all or part of this Warrant may be exercised prior to its expiration from the date hereof up to and including 5:00 p.m. (Denver City time) on October 12, 2010 (the "Expiration Date")at the time or times set forth herein. 1.1 Vesting Schedule. (i) This Warrant shall become exercisable in the amount of 1,000,000 shares upon the effective date of this Agreement. (ii) This Warrant shall become exercisable in the amount of 1,000,000 shares upon the satisfactory completion, as reasonably determined by the XsunX Board of Directors, of Phase 4 under the phase 4 development proposal. (iii) Upon the satisfactory completion of Phase 4 as described above this Warrant shall then become exercisable in the amount of 5,000,000 shares upon the date of first licensure of the 4 Terminal Patent, as definded within the Expanded Use License Agreement, to a third party in a bonafide arms-length commercial setting or relationship. 2. ISSUANCE OF CERTIFICATES. Certificates for the shares of Common Stock acquired upon exercise of this Warrant, together with any other securities or property to which the Holder is entitled upon such exercise, will be delivered to the Holder by the Company at the Company's expense within a reasonable time after this Warrant has been so exercised and payment of the full Per Share Exercise Price has been delivered to the Company as set forth above and such funds have been confirmed to the account of the Company. The Company will deliver authorization instructions to its share transfer agent for the issuance of the above referenced Common Stock within three (3) business days of satisfaction of the above requirements. Each stock certificate so delivered will be in such denominations of Common Stock as may be requested by the Holder and will be registered in the name of the Holder. In case of a purchase of less than all the shares that may be purchased under this Warrant, the Company will cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under this Warrant to the Holder within a reasonable time after surrender of this Warrant. 3. SHARES FULLY-PAID, NONASSESSABLE, ETC. All shares of Common Stock issued upon exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully-paid and nonassessable and free of all taxes, liens and charges with respect to the issue thereof. The Company will use reasonable commercial efforts to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of Common Stock as from time to time are sufficient to effect the full exercise of this Warrant. If at any time the number of authorized but unissued shares of Common Stock are not sufficient to effect the exercise of this Warrant, the Company will use reasonable commercial efforts to take such corporate action as may, in the opinion of its counsel, be reasonably necessary to increase its authorized but unissued shares of Common Stock to such number of shares as are sufficient for such purpose. 4. NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of the Company's Common Stock is greater than the Per Share Exercise Price (at the date of calculation as set forth below), in lieu of 2 exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company, together with the properly endorsed Notice of Exercise and Subscription Form and notice of such election, in which event the Company will issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------- A Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Per Share Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, fair market value of one share of Common Stock will be the average of the closing bid prices of the Company's shares of Common Stock as quoted on the New York Stock Exchange (the "NYSE") (or on such other United States stock exchange or public trading market on which the shares of the Company trade if, at the time of the election, they are not trading on the NYSE), for the five (5) consecutive trading days immediately preceding the date of the date the completed, executed Notice of Exercise and Subscription Form is received, or (ii) in the absence of an established market or public marketability for the Stock due to trading restrictions, the fair market value shall be determined in good faith by the Administrator and such determination shall be conclusive and binding on all persons. 5. ADJUSTMENTS. 5.1 Adjustment for Stock Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Common Stock, the Per Share Exercise Price in effect immediately before that subdivision will be proportionately decreased and the number of remaining shares that can be purchased under this warrant shall be proportionatly increased to effect the same subdivision of warrants as with the outstanding Common Stock. Conversely, if the Company at any time or from time to time during the term of this Warrant combines the outstanding shares of Common Stock into a smaller number of shares, the Per Share Exercise Price in effect immediately before the combination will be proportionately increased and the number of remaining shares that can be purchased under this warrant shall be proportionatly decreased to effect the same subdivision of warrants as with the outstanding Common Stock. Any adjustment under this Section 5.1 will become effective at the close of business on the date the subdivision or combination becomes effective. 3 5.2 Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time during the term of this Warrant the Common Stock issuable upon the exercise of this Warrant is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), the Holder will have the right thereafter to exercise this Warrant for the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change into which the shares of Common Stock issuable upon exercise of this Warrant immediately prior to such recapitalization, reclassification or change could have been converted, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. 5.3 Reorganizations. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), as a part of such capital reorganization, provision will be made so that the Holder will thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon exercise of this Warrant would have been entitled on such capitalization reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. 6. OBLIGATION TO SELL. Notwithstanding anything herein to the contrary, if at any time following Holder's acquisition of Shares hereunder, stockholders of the Company owning 51% or more of the shares of the Company (on a fully diluted basis) (the "Control Sellers") enter into an agreement (including any agreement in principal) to transfer all of their shares to any person or group of persons who are not affiliated with the Control Sellers, such Control Sellers may require each stockholder who is not a Control Seller (a "Non-Control Seller") to sell all of their shares to such person or group of persons at a price and on terms and conditions the same as those on which such Control Sellers have agreed to sell their shares, other than terms and conditions relating to the performance or non-performance of services. For the purposes of the preceding sentence, an affiliate of a Control Seller is a person who controls, which is controlled by, or which is under common control with, the Control Seller. 7. STOCKHOLDERS AGREEMENT As a condition to the transfer of Stock pursuant to this Warrant, the Company, in its sole and absolute discretion, may require the Holder to execute and become a party to any agreement by and among the Company and a material number of its stockholders which exists on or after the effective date of this Warrant (the "Stockholders Agreement"). If the Holder becomes a party to a Stockholders Agreement, in addition to the terms of this Warrant, the terms and conditions of Stockholders Agreement shall govern Holders's rights in and to the Stock; and if there is any conflict between the provisions of the Stockholders Agreement and this Warrant, the provisions of the Stockholders Agreement shall be controlling. Notwithstanding anything to the contrary in this Section 7, if 4 the Stockholders Agreement contains any provisions which would violate Colorado corporate law if applied to the participant, the terms of this Warrant shall govern the participant's rights with respect to such provisions. 8. TAXES. The Company shall not become obligated for or pay any taxes imposed upon the Holders by reason of the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. Notwithstanding the foregoing, the Company may withhold from any shares of Common Stock to be issued upon exercise of this Warrant such amounts as may be reasonably required to satisfy any backup withholding or other withholding obligation of the Company with regard to the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. 9. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant will be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest will be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant has been exercised. 10. TRANSFER OR ASSIGNMENT OF Warrant Except as provided herein, the Holder may not assign, sell or transfer the Warrant, in whole or in part. The Company may however, in its sole discretion permit the transfer or assignment of this Warrant and all rights hereunder subject to any other written agreement between the Holder and the Company and compliance with applicable Federal and state securities laws and the restrictions. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. Any notice required by the provisions of this Warrant will be in writing and will be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, 6 return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices will be addressed to the Holder at the address of the Holder appearing on the books of the Company. Notice shall be addressed to the Company at: XsunX, Inc Att: President 65 Enterprise Aliso Viejo, CA 92656 Fax: (949) 330-8061 With copy to (which copy shall not constitute notice): Michael A. Littman, Attorney 7609 Ralston Road Arvada, CO 80002 Fax: (303) 431-1567 13. LOST WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant, and upon receipt of an indemnity, surety, undertaking or security reasonably satisfactory to the Company (and in the case of any such mutilation upon surrender and cancellation of the original mutilated Warrant), the Company shall, in accordance with applicable law, make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. The Company may, as a condition precedent to making or delivering a new Warrant, reasonably require that the Holder make and deliver to the Company an affidavit or declaration made under penalty of perjury, as to the loss, theft, destruction, or mutilation of this Warrant. 14. FRACTIONAL SHARES. No fractional shares of Common Stock will be issued upon exercise of this Warrant. If the conversion would result in the issuance of any fractional share, the Company may, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the closing bid price of the Company's Common Stock on the date of conversion. 15. NO REGISTRATION RIGHTS The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Warrant to comply with any law. 16. RESTRICTIONS ON TRANSFER 16.1 Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Warrant have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company, at its discretion, may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the 7 judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law. 16.2 Market Stand-Off. In the event of an underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Act, including the Company's initial public offering (a "Public Offering"), the Holder shall not transfer for value any shares of Stock without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration statement as may be requested by the Company or such underwriters (the "Market Stand-Off"). The Market Stand-off shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Warrant until the end of the applicable stand-off period. 16.3 Investment Intent at Grant. The Holder represents and agrees that the Shares to be acquired upon exercising this Warrant will be acquired for investment, and not with a view to the sale or distribution thereof. 16.4 Investment Intent at Exercise. In the event that the sale of Shares under this Warrant is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Holder shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. 16.5 Rule 144. Holder acknowledges and understands that the Shares may be subject to transfer and sale restrictions imposed pursuant to SEC Rule 144 of the Rules promulgated under the Securities Act of 1933 ("Act") and the regulations promulgated thereunder. Holder shall comply with Rule 144 and with all policies and procedures established by the Company with regard to Rule 144 matters. Holder acknowledged that in the event that the sale of Shares under this Warrant is not registered under the Securities Act the Company or its attorneys or transfer agent will require a restrictive legend on the certificate or certificates representing restrictions on transfer of the Shares imposed by Rule 144. 16.6 Legends. All certificates evidencing Shares purchased under this Warrant in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED 8 WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 16.7 Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Warrant no longer is required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend. 16.8 Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 16 shall be conclusive and binding on the Holder and all other persons. 17. Technology Sharing and License Agreement This Warrant is issued pursuant to that certain Expanded Use License Agreement effective October 12, 2004. The terms of the Expanded Use License Agreement shall control over any conflicting terms in this Warrant. Any breach under the Expanded Use License Agreement shall constitue a breach under this Warrant and allows the Company to terminate this Warrant in whole or in part. 18. GOVERNING LAW; VENUE. This Warrant will be construed and enforced in accordance with, and the rights of the parties will be governed by, the laws of the State of Colorado without regard to conflict of laws principles. Venue in any action arising by reason of this Warrant shall lie exclusively in Orange County, California. [See Attached Signature Page] This Warrant is made effective as of October 12, 2005. COMPANY: Xsunx, Inc., a Colorado corporation By: /s/ Tom M. Djokovich ------------------------------- Name: Tom M. Djokovich Title: Chief Executive Officer HOLDER: MVSystems, Inc., a Colorado Corporation By: ________________________________ Name: Title: ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Tax Identification] EXHIBIT TO WARRANT SUBSCRIPTION FORM AND NOTICE OF EXERCISE Xsunx, Inc. Date: Attn: President 65 Enterprise Aliso Viejo, CA 92656 Ladies and Gentlemen: The undersigned, the holder of the enclosed Warrant, hereby irrevocably elects to exercise the purchase rights represented by the Warrant and to purchase thereunder __________ shares of Common Stock of XSUNX, INC. (the "Company"), and herewith encloses payment of $___________ and/or ___________ shares of the Company's common stock, (the "Purchase Price") in full payment of the Purchase Price of such shares being purchased. Exercise of the Warrant shall not be deemed effective unless and until good and immediately available funds in the full amount of the Purchase Price have been confirmed in the account of the Company. The original Warrant shall be presented with this Subscription Form and Notice of Exercise. The Company may, in its discretion, withhold a portion of some or all of the exercised shares or other amounts for the payment of taxes or other items. Holder represents that Holder is not subject to any backup withholding requirements. Holder acknowledges that the shares of stock of the Company issued upon exercise will not be entitled to any dividend declared upon such stock prior to the effective date of exercise of the Warrant. Holder hereby constitutes this Subscription Form and Notice of Exercise as an assignment, deposit tender, and transfer in blank of the Warrant as set forth therein. Holder hereby irrevocably constitutes and appoints the secretary of the Company as Holder's attorney in fact to issue shares upon the exercise of the Warrant and reflect the same on the books and records of the Company, cancel the Warrant, issue a new Warrant, if applicable, and perform any necessary act on behalf of Holder, with full power substitution. Very truly yours, ------------------------------------- By: _________________________________ Title: ______________________________ EX-10.3 6 ex10-3.txt Exhibit 10.3 Warrant Grant # 06-2005 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE. CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC. This Consultancy and Advisory Warrant ("Warrant") is issued as compensation for Dr. John J. Moore's advice and consultation efforts in the furtherance of XsunX, Inc. business objectives pursuant to the terms of such engagement as set forth in that certain Consultancy and Advisory Agreement as set forth at Paragraph 17 hereof . This Warrant certifies that Dr. John J. Moore (the "Holder") for value received, is entitled to purchase from Xsunx, Inc. (the "Company") Two Hundred and Fifty Thousand (250,000) shares of the Company's Common Stock (the "Common Stock") for a per share exercise price equal to $ .20 (the "Per Share Exercise Price"). This right may be exercised subject to the conditional vesting provisions of Paragraph 1 below, and upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant, properly endorsed, with the Notice of Exercise and Subscription Form attached hereto duly filled in and signed, if applicable, and upon payment in cash or other form of good and immediately available funds reasonably satisfactory to the Company of the aggregate Per Share Exercise Price for the full number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. 1. RIGHT TO EXERCISE Subject to the Vesting Schedule 1.1. below and the other conditions set forth in this Agreement, all or part of this Warrant may be exercised prior to its expiration from the date hereof up to and including 5:00 p.m. (Los Angeles city time) on March 9, 2008 (the "Expiration Date")at the time or times set forth herein. 1.1 Vesting Schedule. (i) This Warrant shall become exercisable in the amount of 50,000 shares upon the effective date of that certain Consultancy and Advisory Agreement as set forth at Paragraph 17 hereof. Thereafter, this Warrant shall become exercisable at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of engagement by XsunX, Inc. of Dr. John J. Moore. 2. ISSUANCE OF CERTIFICATES. Certificates for the shares of Common Stock acquired upon exercise of this Warrant, together with any other securities or property to which the Holder is entitled upon such exercise, will be delivered to the Holder by the Company at the Company's expense within a reasonable time after this Warrant has been so exercised and payment of the full Per Share Exercise Price has been delivered to the Company as set forth above and such funds have been confirmed to the account of the Company. The Company will deliver authorization instructions to its share transfer agent for the issuance of the above referenced Common Stock within three (3) business days of satisfaction of the above requirements. Each stock certificate so delivered will be in such denominations of Common Stock as may be requested by the Holder and will be registered in the name of the Holder. In case of a purchase of less than all the shares that may be purchased under this Warrant, the Company will cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under this Warrant to the Holder within a reasonable time after surrender of this Warrant. 3. SHARES FULLY-PAID, NONASSESSABLE, ETC. All shares of Common Stock issued upon exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully-paid and nonassessable and free of all taxes, liens and charges with respect to the issue thereof. The Company will use reasonable commercial efforts to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of Common Stock as from time to time are sufficient to effect the full exercise of this Warrant. If at any time the number of authorized but unissued shares of Common Stock are not sufficient to effect the exercise of this Warrant, the Company will use reasonable commercial efforts to take such corporate action as may, in the opinion of its counsel, be reasonably necessary to increase its authorized but unissued shares of Common Stock to such number of shares as are sufficient for such purpose. 4. NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of the Company's Common Stock is greater than the Per Share Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company, together with the properly endorsed Notice of Exercise and Subscription Form and notice of such election, in which event the Company will issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------- A 2 Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Per Share Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, fair market value of one share of Common Stock will be the average of the closing bid prices of the Company's shares of Common Stock as quoted on the New York Stock Exchange (the "NYSE") (or on such other United States stock exchange or public trading market on which the shares of the Company trade if, at the time of the election, they are not trading on the NYSE), for the five (5) consecutive trading days immediately preceding the date of the date the completed, executed Notice of Exercise and Subscription Form is received, or (ii) in the absence of an established market or public marketability for the Stock due to trading restrictions, the fair market value shall be determined in good faith by the Administrator and such determination shall be conclusive and binding on all persons. 5. ADJUSTMENTS. 5.1 Adjustment for Stock Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Common Stock, the Per Share Exercise Price in effect immediately before that subdivision will be proportionately decreased and the number of remaining shares that can be purchased under this warrant shall be proportionatly increased to effect the same subdivision of warrants as with the outstanding Common Stock. Conversely, if the Company at any time or from time to time during the term of this Warrant combines the outstanding shares of Common Stock into a smaller number of shares, the Per Share Exercise Price in effect immediately before the combination will be proportionately increased and the number of remaining shares that can be purchased under this warrant shall be proportionatly decreased to effect the same subdivision of warrants as with the outstanding Common Stock. Any adjustment under this Section 5.1 will become effective at the close of business on the date the subdivision or combination becomes effective. 5.2 Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time during the term of this Warrant the Common Stock issuable upon the exercise of this Warrant is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), the Holder will have the right thereafter to exercise this Warrant for the kind and amount of stock and other securities and property 3 receivable upon such recapitalization, reclassification or other change into which the shares of Common Stock issuable upon exercise of this Warrant immediately prior to such recapitalization, reclassification or change could have been converted, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. 5.3 Reorganizations. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), as a part of such capital reorganization, provision will be made so that the Holder will thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon exercise of this Warrant would have been entitled on such capitalization reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. 6. OBLIGATION TO SELL. Notwithstanding anything herein to the contrary, if at any time following Holder's acquisition of Shares hereunder, stockholders of the Company owning 51% or more of the shares of the Company (on a fully diluted basis) (the "Control Sellers") enter into an agreement (including any agreement in principal) to transfer all of their shares to any person or group of persons who are not affiliated with the Control Sellers, such Control Sellers may require each stockholder who is not a Control Seller (a "Non-Control Seller") to sell all of their shares to such person or group of persons at a price and on terms and conditions the same as those on which such Control Sellers have agreed to sell their shares, other than terms and conditions relating to the performance or non-performance of services. For the purposes of the preceding sentence, an affiliate of a Control Seller is a person who controls, which is controlled by, or which is under common control with, the Control Seller. 7. STOCKHOLDERS AGREEMENT As a condition to the transfer of Stock pursuant to this Warrant, the Company, in its sole and absolute discretion, may require the Holder to execute and become a party to any agreement by and among the Company and a material number of its stockholders which exists on or after the effective date of this Warrant (the "Stockholders Agreement"). If the Holder becomes a party to a Stockholders Agreement, in addition to the terms of this Warrant, the terms and conditions of Stockholders Agreement shall govern Holders's rights in and to the Stock; and if there is any conflict between the provisions of the Stockholders Agreement and this Warrant, the provisions of the Stockholders Agreement shall be controlling. Notwithstanding anything to the contrary in this Section 7, if the Stockholders Agreement contains any provisions which would violate Colorado corporate law if applied to the participant, the terms of this Warrant shall govern the participant's rights with respect to such provisions. 8. TAXES. The Company shall not become obligated for or pay any taxes imposed upon the Holders by reason of the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. Notwithstanding the foregoing, the Company may withhold from any shares of Common Stock to be issued upon exercise of this Warrant such amounts as may be reasonably required to satisfy any backup 4 withholding or other withholding obligation of the Company with regard to the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. 9. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant will be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest will be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant has been exercised. 10. TRANSFER OR ASSIGNMENT OF Warrant Except as provided herein, the Holder may not assign, sell or transfer the Warrant, in whole or in part. The Company may however, in its sole discretion permit the transfer or assignment of this Warrant and all rights hereunder subject to any other written agreement between the Holder and the Company and compliance with applicable Federal and state securities laws and the restrictions. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. Any notice required by the provisions of this Warrant will be in writing and will be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices will be addressed to the Holder at the address of the Holder appearing on the books of the Company. Notice shall be addressed to the Company at: XsunX, Inc Att: President 65 Enterprise Aliso Viejo, CA 92656 Fax: (949) 330-8061 5 With copy to (which copy shall not constitute notice): Michael A. Littman, Attorney 7609 Ralston Road Arvada, CO 80002 Fax: (303) 431-1567 13. LOST WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant, and upon receipt of an indemnity, surety, undertaking or security reasonably satisfactory to the Company (and in the case of any such mutilation upon surrender and cancellation of the original mutilated Warrant), the Company shall, in accordance with applicable law, make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. The Company may, as a condition precedent to making or delivering a new Warrant, reasonably require that the Holder make and deliver to the Company an affidavit or declaration made under penalty of perjury, as to the loss, theft, destruction, or mutilation of this Warrant. 14. FRACTIONAL SHARES. No fractional shares of Common Stock will be issued upon exercise of this Warrant. If the conversion would result in the issuance of any fractional share, the Company may, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the closing bid price of the Company's Common Stock on the date of conversion. 15. NO REGISTRATION RIGHTS The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Warrant to comply with any law. 16. RESTRICTIONS ON TRANSFER 16.1 Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Warrant have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company, at its discretion, may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law. 16.2 Market Stand-Off. In the event of an underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Act, including the Company's initial public offering (a "Public Offering"), the Holder shall not transfer for value any shares of Stock without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration statement as may be requested by the Company or such underwriters (the "Market 6 Stand-Off"). The Market Stand-off shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Warrant until the end of the applicable stand-off period. 16.3 Investment Intent at Grant. The Holder represents and agrees that the Shares to be acquired upon exercising this Warrant will be acquired for investment, and not with a view to the sale or distribution thereof. 16.4 Investment Intent at Exercise. In the event that the sale of Shares under this Warrant is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Holder shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. 16.5 Rule 144. Holder acknowledges and understands that the Shares may be subject to transfer and sale restrictions imposed pursuant to SEC Rule 144 of the Rules promulgated under the Securities Act of 1933 ("Act") and the regulations promulgated thereunder. Holder shall comply with Rule 144 and with all policies and procedures established by the Company with regard to Rule 144 matters. Holder acknowledged that in the event that the sale of Shares under this Warrant is not registered under the Securities Act the Company or its attorneys or transfer agent will require a restrictive legend on the certificate or certificates representing restrictions on transfer of the Shares imposed by Rule 144. 16.6 Legends. All certificates evidencing Shares purchased under this Warrant in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 16.7 Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Warrant no longer is required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend. 7 16.8 Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 16 shall be conclusive and binding on the Holder and all other persons. 17. Consultancy, Advisory and Technology Sharing and License Agreements This Warrant is issued pursuant to those certain Consultancy and Advisory Agreement effective March 8, 2005. The terms of the Consultancy and Advisory Agreement shall control over any conflicting terms in this Warrant. Any breach under the Consultancy and Advisory Agreement shall constitue a breach under this Warrant and allows the Company to terminate this Warrant in whole or in part. 18. GOVERNING LAW; VENUE. This Warrant will be construed and enforced in accordance with, and the rights of the parties will be governed by, the laws of the State of California without regard to conflict of laws principles. Venue in any action arising by reason of this Warrant shall lie exclusively in Orange County, California. [See Attached Signature Page] 8 This Warrant is made effective as of the 8th day of March, 2005. COMPANY: Xsunx, Inc., a Colorado corporation By: ________________________________ Name: Tom M. Djokovich Title: Chief Executive Officer HOLDER: Dr. John J. Moore By: ________________________________ Name: Title: ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Tax Identification] EXHIBIT TO WARRANT SUBSCRIPTION FORM AND NOTICE OF EXERCISE Xsunx, Inc. Date: Attn: President 65 Enterprise Aliso Viejo, CA 92656 Ladies and Gentlemen: The undersigned, the holder of the enclosed Warrant, hereby irrevocably elects to exercise the purchase rights represented by the Warrant and to purchase thereunder __________ shares of Common Stock of XSUNX, INC. (the "Company"), and herewith encloses payment of $___________ and/or ___________ shares of the Company's common stock, (the "Purchase Price") in full payment of the Purchase Price of such shares being purchased. Exercise of the Warrant shall not be deemed effective unless and until good and immediately available funds in the full amount of the Purchase Price have been confirmed in the account of the Company. The original Warrant shall be presented with this Subscription Form and Notice of Exercise. The Company may, in its discretion, withhold a portion of some or all of the exercised shares or other amounts for the payment of taxes or other items. Holder represents that Holder is not subject to any backup withholding requirements. Holder acknowledges that the shares of stock of the Company issued upon exercise will not be entitled to any dividend declared upon such stock prior to the effective date of exercise of the Warrant. Holder hereby constitutes this Subscription Form and Notice of Exercise as an assignment, deposit tender, and transfer in blank of the Warrant as set forth therein. Holder hereby irrevocably constitutes and appoints the secretary of the Company as Holder's attorney in fact to issue shares upon the exercise of the Warrant and reflect the same on the books and records of the Company, cancel the Warrant, issue a new Warrant, if applicable, and perform any necessary act on behalf of Holder, with full power substitution. Very truly yours, ------------------------------------ By: ________________________________ Title: _____________________________ EX-10.4 7 ex10-4.txt EXHIBIT 10.4 Warrant Grant # 04-2004 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE. CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC. This Consultancy and Advisory Warrant ("Warrant") is issued as compensation for Dr. Richard E. Rocheleau's advice and consultation efforts in the furtherance of XsunX, Inc. business objectives pursuant to the terms of such engagement as set forth in that certain Consultancy and Advisory Agreement as set forth at Paragraph 17 hereof . This Warrant certifies that Dr. Richard E. Rocheleau (the "Holder") for value received, is entitled to purchase from Xsunx, Inc. (the "Company") Two Hundred and Fifty Thousand (250,000) shares of the Company's Common Stock (the "Common Stock") for a per share exercise price equal to $ .20 (the "Per Share Exercise Price"). This right may be exercised subject to the conditional vesting provisions of Paragraph 1 below, and upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant, properly endorsed, with the Notice of Exercise and Subscription Form attached hereto duly filled in and signed, if applicable, and upon payment in cash or other form of good and immediately available funds reasonably satisfactory to the Company of the aggregate Per Share Exercise Price for the full number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. 1. RIGHT TO EXERCISE Subject to the Vesting Schedule 1.1. below and the other conditions set forth in this Agreement, all or part of this Warrant may be exercised prior to its expiration from the date hereof up to and including 5:00 p.m. (Los Angeles city time) on January 19, 2008 (the "Expiration Date")at the time or times set forth herein. 1.1 Vesting Schedule. (i) This Warrant shall become exercisable in the amount of 50,000 shares upon the effective date of that certain Consultancy and Advisory Agreement as set forth at Paragraph 17 hereof. Thereafter, this Warrant shall become exercisable at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of engagement by XsunX, Inc. of Dr. Richard E. Rocheleau. 2. ISSUANCE OF CERTIFICATES. Certificates for the shares of Common Stock acquired upon exercise of this Warrant, together with any other securities or property to which the Holder is entitled upon such exercise, will be delivered to the Holder by the Company at the Company's expense within a reasonable time after this Warrant has been so exercised and payment of the full Per Share Exercise Price has been delivered to the Company as set forth above and such funds have been confirmed to the account of the Company. The Company will deliver authorization instructions to its share transfer agent for the issuance of the above referenced Common Stock within three (3) business days of satisfaction of the above requirements. Each stock certificate so delivered will be in such denominations of Common Stock as may be requested by the Holder and will be registered in the name of the Holder. In case of a purchase of less than all the shares that may be purchased under this Warrant, the Company will cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under this Warrant to the Holder within a reasonable time after surrender of this Warrant. 3. SHARES FULLY-PAID, NONASSESSABLE, ETC. All shares of Common Stock issued upon exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully-paid and nonassessable and free of all taxes, liens and charges with respect to the issue thereof. The Company will use reasonable commercial efforts to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of Common Stock as from time to time are sufficient to effect the full exercise of this Warrant. If at any time the number of authorized but unissued shares of Common Stock are not sufficient to effect the exercise of this Warrant, the Company will use reasonable commercial efforts to take such corporate action as may, in the opinion of its counsel, be reasonably necessary to increase its authorized but unissued shares of Common Stock to such number of shares as are sufficient for such purpose. 4. NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of the Company's Common Stock is greater than the Per Share Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company, together with the properly endorsed Notice of Exercise and Subscription Form and notice of such election, in which event the Company will issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------- A 2 Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Per Share Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, fair market value of one share of Common Stock will be the average of the closing bid prices of the Company's shares of Common Stock as quoted on the New York Stock Exchange (the "NYSE") (or on such other United States stock exchange or public trading market on which the shares of the Company trade if, at the time of the election, they are not trading on the NYSE), for the five (5) consecutive trading days immediately preceding the date of the date the completed, executed Notice of Exercise and Subscription Form is received, or (ii) in the absence of an established market or public marketability for the Stock due to trading restrictions, the fair market value shall be determined in good faith by the Administrator and such determination shall be conclusive and binding on all persons. 5. ADJUSTMENTS. 5.1 Adjustment for Stock Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Common Stock, the Per Share Exercise Price in effect immediately before that subdivision will be proportionately decreased and the number of remaining shares that can be purchased under this warrant shall be proportionatly increased to effect the same subdivision of warrants as with the outstanding Common Stock. Conversely, if the Company at any time or from time to time during the term of this Warrant combines the outstanding shares of Common Stock into a smaller number of shares, the Per Share Exercise Price in effect immediately before the combination will be proportionately increased and the number of remaining shares that can be purchased under this warrant shall be proportionatly decreased to effect the same subdivision of warrants as with the outstanding Common Stock. Any adjustment under this Section 5.1 will become effective at the close of business on the date the subdivision or combination becomes effective. 5.2 Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time during the term of this Warrant the Common Stock issuable upon the exercise of this Warrant is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), the Holder will have the right thereafter to exercise this Warrant for the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change into which the shares of Common Stock issuable upon exercise of this Warrant 3 immediately prior to such recapitalization, reclassification or change could have been converted, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. 5.3 Reorganizations. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), as a part of such capital reorganization, provision will be made so that the Holder will thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon exercise of this Warrant would have been entitled on such capitalization reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. 6. OBLIGATION TO SELL. Notwithstanding anything herein to the contrary, if at any time following Holder's acquisition of Shares hereunder, stockholders of the Company owning 51% or more of the shares of the Company (on a fully diluted basis) (the "Control Sellers") enter into an agreement (including any agreement in principal) to transfer all of their shares to any person or group of persons who are not affiliated with the Control Sellers, such Control Sellers may require each stockholder who is not a Control Seller (a "Non-Control Seller") to sell all of their shares to such person or group of persons at a price and on terms and conditions the same as those on which such Control Sellers have agreed to sell their shares, other than terms and conditions relating to the performance or non-performance of services. For the purposes of the preceding sentence, an affiliate of a Control Seller is a person who controls, which is controlled by, or which is under common control with, the Control Seller. 7. STOCKHOLDERS AGREEMENT As a condition to the transfer of Stock pursuant to this Warrant, the Company, in its sole and absolute discretion, may require the Holder to execute and become a party to any agreement by and among the Company and a material number of its stockholders which exists on or after the effective date of this Warrant (the "Stockholders Agreement"). If the Holder becomes a party to a Stockholders Agreement, in addition to the terms of this Warrant, the terms and conditions of Stockholders Agreement shall govern Holders's rights in and to the Stock; and if there is any conflict between the provisions of the Stockholders Agreement and this Warrant, the provisions of the Stockholders Agreement shall be controlling. Notwithstanding anything to the contrary in this Section 7, if the Stockholders Agreement contains any provisions which would violate Colorado corporate law if applied to the participant, the terms of this Warrant shall govern the participant's rights with respect to such provisions. 8. TAXES. The Company shall not become obligated for or pay any taxes imposed upon the Holders by reason of the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. Notwithstanding the foregoing, the Company may withhold from any shares of Common Stock to be issued upon exercise of this 4 Warrant such amounts as may be reasonably required to satisfy any backup withholding or other withholding obligation of the Company with regard to the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. 9. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant will be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest will be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant has been exercised. 10. TRANSFER OR ASSIGNMENT OF WARRANT Except as provided herein, the Holder may not assign, sell or transfer the Warrant, in whole or in part. The Company may however, in its sole discretion permit the transfer or assignment of this Warrant and all rights hereunder subject to any other written agreement between the Holder and the Company and compliance with applicable Federal and state securities laws and the restrictions. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. Any notice required by the provisions of this Warrant will be in writing and will be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices will be addressed to the Holder at the address of the Holder appearing on the books of the Company. Notice shall be addressed to the Company at: XsunX, Inc Att: President 65 Enterprise Aliso Viejo, CA 92656 Fax: (949) 330-8061 5 With copy to (which copy shall not constitute notice): Michael A. Littman, Attorney 7609 Ralston Road Arvada, CO 80002 Fax: (303) 431-1567 13. LOST WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant, and upon receipt of an indemnity, surety, undertaking or security reasonably satisfactory to the Company (and in the case of any such mutilation upon surrender and cancellation of the original mutilated Warrant), the Company shall, in accordance with applicable law, make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. The Company may, as a condition precedent to making or delivering a new Warrant, reasonably require that the Holder make and deliver to the Company an affidavit or declaration made under penalty of perjury, as to the loss, theft, destruction, or mutilation of this Warrant. 14. FRACTIONAL SHARES. No fractional shares of Common Stock will be issued upon exercise of this Warrant. If the conversion would result in the issuance of any fractional share, the Company may, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the closing bid price of the Company's Common Stock on the date of conversion. 15. NO REGISTRATION RIGHTS The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Warrant to comply with any law. 16. RESTRICTIONS ON TRANSFER 16.1 Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Warrant have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company, at its discretion, may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law. 16.2 Market Stand-Off. In the event of an underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Act, including the Company's initial public offering (a "Public Offering"), the Holder shall not transfer for value any shares of Stock without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration 6 statement as may be requested by the Company or such underwriters (the "Market Stand-Off"). The Market Stand-off shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Warrant until the end of the applicable stand-off period. 16.3 Investment Intent at Grant. The Holder represents and agrees that the Shares to be acquired upon exercising this Warrant will be acquired for investment, and not with a view to the sale or distribution thereof. 16.4 Investment Intent at Exercise. In the event that the sale of Shares under this Warrant is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Holder shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. 16.5 Rule 144. Holder acknowledges and understands that the Shares may be subject to transfer and sale restrictions imposed pursuant to SEC Rule 144 of the Rules promulgated under the Securities Act of 1933 ("Act") and the regulations promulgated thereunder. Holder shall comply with Rule 144 and with all policies and procedures established by the Company with regard to Rule 144 matters. Holder acknowledged that in the event that the sale of Shares under this Warrant is not registered under the Securities Act the Company or its attorneys or transfer agent will require a restrictive legend on the certificate or certificates representing restrictions on transfer of the Shares imposed by Rule 144. 16.6 Legends. All certificates evidencing Shares purchased under this Warrant in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 16.7 Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Warrant no longer is required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend. 7 16.8 Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 16 shall be conclusive and binding on the Holder and all other persons. 17. Consultancy, Advisory and Technology Sharing and License Agreements This Warrant is issued pursuant to those certain Consultancy and Advisory Agreement effective January 19, 2005. The terms of the Consultancy and Advisory Agreement shall control over any conflicting terms in this Warrant. Any breach under the Consultancy and Advisory Agreement shall constitue a breach under this Warrant and allows the Company to terminate this Warrant in whole or in part. 18. GOVERNING LAW; VENUE. This Warrant will be construed and enforced in accordance with, and the rights of the parties will be governed by, the laws of the State of California without regard to conflict of laws principles. Venue in any action arising by reason of this Warrant shall lie exclusively in Orange County, California. [See Attached Signature Page] 8 This Warrant is made effective as of the 19th day of January, 2005. COMPANY: Xsunx, Inc., a Colorado corporation By: ________________________________ Name: Tom M. Djokovich Title: Chief Executive Officer HOLDER: Dr. Richard E. Rocheleau By: ________________________________ Name: Title: ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Tax Identification] EXHIBIT TO WARRANT SUBSCRIPTION FORM AND NOTICE OF EXERCISE Xsunx, Inc. Date: Attn: President 65 Enterprise Aliso Viejo, CA 92656 Ladies and Gentlemen: The undersigned, the holder of the enclosed Warrant, hereby irrevocably elects to exercise the purchase rights represented by the Warrant and to purchase thereunder __________ shares of Common Stock of XSUNX, INC. (the "Company"), and herewith encloses payment of $___________ and/or ___________ shares of the Company's common stock, (the "Purchase Price") in full payment of the Purchase Price of such shares being purchased. Exercise of the Warrant shall not be deemed effective unless and until good and immediately available funds in the full amount of the Purchase Price have been confirmed in the account of the Company. The original Warrant shall be presented with this Subscription Form and Notice of Exercise. The Company may, in its discretion, withhold a portion of some or all of the exercised shares or other amounts for the payment of taxes or other items. Holder represents that Holder is not subject to any backup withholding requirements. Holder acknowledges that the shares of stock of the Company issued upon exercise will not be entitled to any dividend declared upon such stock prior to the effective date of exercise of the Warrant. Holder hereby constitutes this Subscription Form and Notice of Exercise as an assignment, deposit tender, and transfer in blank of the Warrant as set forth therein. Holder hereby irrevocably constitutes and appoints the secretary of the Company as Holder's attorney in fact to issue shares upon the exercise of the Warrant and reflect the same on the books and records of the Company, cancel the Warrant, issue a new Warrant, if applicable, and perform any necessary act on behalf of Holder, with full power substitution. Very truly yours, ------------------------------------- By: __________________________________ Title: _______________________________ EX-10.5 8 ex10-5.txt EXHIBIT 10.5 Warrant Grant # 05-2005 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE. CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC. This Consultancy and Advisory Warrant ("Warrant") is issued as compensation for Dr. Arokia Nathan's advice and consultation efforts in the furtherance of XsunX, Inc. business objectives pursuant to the terms of such engagement as set forth in that certain Consultancy and Advisory Agreement as set forth at Paragraph 17 hereof . This Warrant certifies that Dr. Arokia Nathan (the "Holder") for value received, is entitled to purchase from Xsunx, Inc. (the "Company") Two Hundred and Fifty Thousand (250,000) shares of the Company's Common Stock (the "Common Stock") for a per share exercise price equal to $ .20 (the "Per Share Exercise Price"). This right may be exercised subject to the conditional vesting provisions of Paragraph 1 below, and upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant, properly endorsed, with the Notice of Exercise and Subscription Form attached hereto duly filled in and signed, if applicable, and upon payment in cash or other form of good and immediately available funds reasonably satisfactory to the Company of the aggregate Per Share Exercise Price for the full number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. 1. RIGHT TO EXERCISE Subject to the Vesting Schedule 1.1. below and the other conditions set forth in this Agreement, all or part of this Warrant may be exercised prior to its expiration from the date hereof up to and including 5:00 p.m. (Los Angeles city time) on January 19, 2008 (the "Expiration Date")at the time or times set forth herein. 1.1 Vesting Schedule. (i) This Warrant shall become exercisable in the amount of 50,000 shares upon the effective date of that certain Consultancy and Advisory Agreement as set forth at Paragraph 17 hereof. Thereafter, this Warrant shall become exercisable at the rate of 25,000 Shares per calendar quarter, or any apportioned amount thereof, during the term of engagement by XsunX, Inc. of Dr. Arokia Nathan. 2. ISSUANCE OF CERTIFICATES. Certificates for the shares of Common Stock acquired upon exercise of this Warrant, together with any other securities or property to which the Holder is entitled upon such exercise, will be delivered to the Holder by the Company at the Company's expense within a reasonable time after this Warrant has been so exercised and payment of the full Per Share Exercise Price has been delivered to the Company as set forth above and such funds have been confirmed to the account of the Company. The Company will deliver authorization instructions to its share transfer agent for the issuance of the above referenced Common Stock within three (3) business days of satisfaction of the above requirements. Each stock certificate so delivered will be in such denominations of Common Stock as may be requested by the Holder and will be registered in the name of the Holder. In case of a purchase of less than all the shares that may be purchased under this Warrant, the Company will cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under this Warrant to the Holder within a reasonable time after surrender of this Warrant. 3. SHARES FULLY-PAID, NONASSESSABLE, ETC. All shares of Common Stock issued upon exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully-paid and nonassessable and free of all taxes, liens and charges with respect to the issue thereof. The Company will use reasonable commercial efforts to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of Common Stock as from time to time are sufficient to effect the full exercise of this Warrant. If at any time the number of authorized but unissued shares of Common Stock are not sufficient to effect the exercise of this Warrant, the Company will use reasonable commercial efforts to take such corporate action as may, in the opinion of its counsel, be reasonably necessary to increase its authorized but unissued shares of Common Stock to such number of shares as are sufficient for such purpose. 4. NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of the Company's Common Stock is greater than the Per Share Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company, together with the properly endorsed Notice of Exercise and Subscription Form and notice of such election, in which event the Company will issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------- A 2 Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Per Share Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, fair market value of one share of Common Stock will be the average of the closing bid prices of the Company's shares of Common Stock as quoted on the New York Stock Exchange (the "NYSE") (or on such other United States stock exchange or public trading market on which the shares of the Company trade if, at the time of the election, they are not trading on the NYSE), for the five (5) consecutive trading days immediately preceding the date of the date the completed, executed Notice of Exercise and Subscription Form is received, or (ii) in the absence of an established market or public marketability for the Stock due to trading restrictions, the fair market value shall be determined in good faith by the Administrator and such determination shall be conclusive and binding on all persons. 5. ADJUSTMENTS. 5.1 Adjustment for Stock Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Common Stock, the Per Share Exercise Price in effect immediately before that subdivision will be proportionately decreased and the number of remaining shares that can be purchased under this warrant shall be proportionatly increased to effect the same subdivision of warrants as with the outstanding Common Stock. Conversely, if the Company at any time or from time to time during the term of this Warrant combines the outstanding shares of Common Stock into a smaller number of shares, the Per Share Exercise Price in effect immediately before the combination will be proportionately increased and the number of remaining shares that can be purchased under this warrant shall be proportionatly decreased to effect the same subdivision of warrants as with the outstanding Common Stock. Any adjustment under this Section 5.1 will become effective at the close of business on the date the subdivision or combination becomes effective. 5.2 Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time during the term of this Warrant the Common Stock issuable upon the exercise of this Warrant is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), the Holder will have the right thereafter to exercise this 3 Warrant for the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change into which the shares of Common Stock issuable upon exercise of this Warrant immediately prior to such recapitalization, reclassification or change could have been converted, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. 5.3 Reorganizations. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange provided for elsewhere in this Section 5), as a part of such capital reorganization, provision will be made so that the Holder will thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon exercise of this Warrant would have been entitled on such capitalization reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. 6. OBLIGATION TO SELL. Notwithstanding anything herein to the contrary, if at any time following Holder's acquisition of Shares hereunder, stockholders of the Company owning 51% or more of the shares of the Company (on a fully diluted basis) (the "Control Sellers") enter into an agreement (including any agreement in principal) to transfer all of their shares to any person or group of persons who are not affiliated with the Control Sellers, such Control Sellers may require each stockholder who is not a Control Seller (a "Non-Control Seller") to sell all of their shares to such person or group of persons at a price and on terms and conditions the same as those on which such Control Sellers have agreed to sell their shares, other than terms and conditions relating to the performance or non-performance of services. For the purposes of the preceding sentence, an affiliate of a Control Seller is a person who controls, which is controlled by, or which is under common control with, the Control Seller. 7. STOCKHOLDERS AGREEMENT As a condition to the transfer of Stock pursuant to this Warrant, the Company, in its sole and absolute discretion, may require the Holder to execute and become a party to any agreement by and among the Company and a material number of its stockholders which exists on or after the effective date of this Warrant (the "Stockholders Agreement"). If the Holder becomes a party to a Stockholders Agreement, in addition to the terms of this Warrant, the terms and conditions of Stockholders Agreement shall govern Holders's rights in and to the Stock; and if there is any conflict between the provisions of the Stockholders Agreement and this Warrant, the provisions of the Stockholders Agreement shall be controlling. Notwithstanding anything to the contrary in this Section 7, if the Stockholders Agreement contains any provisions which would violate Colorado corporate law if applied to the participant, the terms of this Warrant shall govern the participant's rights with respect to such provisions. 8. TAXES. The Company shall not become obligated for or pay any taxes imposed upon the Holders by reason of the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. Notwithstanding the foregoing, the Company may 4 withhold from any shares of Common Stock to be issued upon exercise of this Warrant such amounts as may be reasonably required to satisfy any backup withholding or other withholding obligation of the Company with regard to the issuance of this Warrant or the exercise hereof or otherwise in connection with the shares of Common Stock to be issued upon exercise of this Warrant. 9. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant will be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest will be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant has been exercised. 10. TRANSFER OR ASSIGNMENT OF Warrant Except as provided herein, the Holder may not assign, sell or transfer the Warrant, in whole or in part. The Company may however, in its sole discretion permit the transfer or assignment of this Warrant and all rights hereunder subject to any other written agreement between the Holder and the Company and compliance with applicable Federal and state securities laws and the restrictions. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. Any notice required by the provisions of this Warrant will be in writing and will be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices will be addressed to the Holder at the address of the Holder appearing on the books of the Company. Notice shall be addressed to the Company at: XsunX, Inc Att: President 65 Enterprise Aliso Viejo, CA 92656 Fax: (949) 330-8061 5 With copy to (which copy shall not constitute notice): Michael A. Littman, Attorney 7609 Ralston Road Arvada, CO 80002 Fax: (303) 431-1567 13. LOST WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant, and upon receipt of an indemnity, surety, undertaking or security reasonably satisfactory to the Company (and in the case of any such mutilation upon surrender and cancellation of the original mutilated Warrant), the Company shall, in accordance with applicable law, make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. The Company may, as a condition precedent to making or delivering a new Warrant, reasonably require that the Holder make and deliver to the Company an affidavit or declaration made under penalty of perjury, as to the loss, theft, destruction, or mutilation of this Warrant. 14. FRACTIONAL SHARES. No fractional shares of Common Stock will be issued upon exercise of this Warrant. If the conversion would result in the issuance of any fractional share, the Company may, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the closing bid price of the Company's Common Stock on the date of conversion. 15. NO REGISTRATION RIGHTS The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Warrant to comply with any law. 16. RESTRICTIONS ON TRANSFER 16.1 Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Warrant have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company, at its discretion, may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law. 16.2 Market Stand-Off. In the event of an underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Act, including the Company's initial public offering (a "Public Offering"), the Holder shall not transfer for value any shares of Stock without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration 6 statement as may be requested by the Company or such underwriters (the "Market Stand-Off"). The Market Stand-off shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Warrant until the end of the applicable stand-off period. 16.3 Investment Intent at Grant. The Holder represents and agrees that the Shares to be acquired upon exercising this Warrant will be acquired for investment, and not with a view to the sale or distribution thereof. 16.4 Investment Intent at Exercise. In the event that the sale of Shares under this Warrant is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Holder shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. 16.5 Rule 144. Holder acknowledges and understands that the Shares may be subject to transfer and sale restrictions imposed pursuant to SEC Rule 144 of the Rules promulgated under the Securities Act of 1933 ("Act") and the regulations promulgated thereunder. Holder shall comply with Rule 144 and with all policies and procedures established by the Company with regard to Rule 144 matters. Holder acknowledged that in the event that the sale of Shares under this Warrant is not registered under the Securities Act the Company or its attorneys or transfer agent will require a restrictive legend on the certificate or certificates representing restrictions on transfer of the Shares imposed by Rule 144. 16.6 Legends. All certificates evidencing Shares purchased under this Warrant in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 16.7 Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Warrant no longer is required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend. 7 16.8 Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 16 shall be conclusive and binding on the Holder and all other persons. 17. Consultancy, Advisory and Technology Sharing and License Agreements This Warrant is issued pursuant to those certain Consultancy and Advisory Agreement effective January 19, 2005. The terms of the Consultancy and Advisory Agreement shall control over any conflicting terms in this Warrant. Any breach under the Consultancy and Advisory Agreement shall constitue a breach under this Warrant and allows the Company to terminate this Warrant in whole or in part. 18. GOVERNING LAW; VENUE. This Warrant will be construed and enforced in accordance with, and the rights of the parties will be governed by, the laws of the State of California without regard to conflict of laws principles. Venue in any action arising by reason of this Warrant shall lie exclusively in Orange County, California. [See Attached Signature Page] This Warrant is made effective as of the 19th day of January, 2005. COMPANY: Xsunx, Inc., a Colorado corporation By: ________________________________ Name: Tom M. Djokovich Title: Chief Executive Officer HOLDER: Dr. Arokia Nathan By: ________________________________ Name: Title: ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Address] ------------------------------------ [Tax Identification] EXHIBIT TO WARRANT SUBSCRIPTION FORM AND NOTICE OF EXERCISE Xsunx, Inc. Date: Attn: President 65 Enterprise Aliso Viejo, CA 92656 Ladies and Gentlemen: The undersigned, the holder of the enclosed Warrant, hereby irrevocably elects to exercise the purchase rights represented by the Warrant and to purchase thereunder __________ shares of Common Stock of XSUNX, INC. (the "Company"), and herewith encloses payment of $___________ and/or ___________ shares of the Company's common stock, (the "Purchase Price") in full payment of the Purchase Price of such shares being purchased. Exercise of the Warrant shall not be deemed effective unless and until good and immediately available funds in the full amount of the Purchase Price have been confirmed in the account of the Company. The original Warrant shall be presented with this Subscription Form and Notice of Exercise. The Company may, in its discretion, withhold a portion of some or all of the exercised shares or other amounts for the payment of taxes or other items. Holder represents that Holder is not subject to any backup withholding requirements. Holder acknowledges that the shares of stock of the Company issued upon exercise will not be entitled to any dividend declared upon such stock prior to the effective date of exercise of the Warrant. Holder hereby constitutes this Subscription Form and Notice of Exercise as an assignment, deposit tender, and transfer in blank of the Warrant as set forth therein. Holder hereby irrevocably constitutes and appoints the secretary of the Company as Holder's attorney in fact to issue shares upon the exercise of the Warrant and reflect the same on the books and records of the Company, cancel the Warrant, issue a new Warrant, if applicable, and perform any necessary act on behalf of Holder, with full power substitution. Very truly yours, ------------------------------------- By: _________________________________ Title: ______________________________ EX-10.6 9 ex10-6.txt EXHIBIT 10.6 CONSULTING AND ADVISORY AGREEMENT THIS CONSULTING AGREEMENT ("Agreement"), made effective as of the 8th day of March 2005, is entered into by and between Xsunx, Inc., a Colorado corporation ("Company"), and Dr. John J. Moore, an individual ("Consultant"). The Company and Consultant are sometimes herein referred to individually as a "party" and collectively as the "parties". R E C I T A L S WHEREAS, Consultant has developed an expertise in the areas of metallurgical and material engineering, physical (PVD) and chemical (CVD) vapor deposition of thin films and coatings; synthesis and processing of advanced ceramic, intermetallic and composite materials using plasma and combustion synthesis techniques; synthesis, processing and properties of biomaterials; and powder metallurgy processing of advanced materials, photovoltaics and electronic materials, and thin-film amorphous silicon structures and other technology related to amorphous silicon and related alloys which is of interest to the Company; WHEREAS, Consultant currently holds the positions of Trustees' Professor and Head of Department of Metallurgical and Materials Engineering at the Colorado School of Mines in Golden Colorado ("CSM"), and Director of the interdisciplinary graduate program in Materials Science and Director of the Advanced Coatings and Surface Engineering Laboratory, ACSEL, at CSM. Consultant is engaged in research in other related fields and shall also continue to be employed by CSM; and WHEREAS, the Company desires to obtain the services of Consultant and Consultant desires to provide the Company with consultancy and advisory services as contemplated pursuant to the terms and conditions contained herein; and WHEREAS, the undersigned parties desire to formalize such consultancy relationship; NOW, THEREFORE, in consideration of the promises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement agree as follows: 1. Definitions 1.1 "XsunX Field of Use" means the business of developing, commercializing and licensing processes for the manufacture of semi-transparent (greater than 5% transparency) solar cells or photovoltaic glazing technologies. 1.2 "Business of XsunX" means the business of developing, commercializing and licensing processes for the manufacture of semi-transparent photovoltaic glazing technologies. The Company intends that its current and future processes for the manufacture of semi-transparent solar cells and photovoltaic glazing technologies will have marketable opportunities for applications on transparent and semi-transparent substrates for use in the architectural, industrial and residential building industries, and, in the transportation and manufacturing industries for use in such areas as automotive and building materials integrated photovoltaics. 2. Engagement of Services. The Company hereby engages Consultant as an independent contractor to provide consulting and advisory services as set forth herein. All such consulting and services shall be performed in accordance with the terms and conditions contained herein. Consultant shall report to the Chairman of the Scientific Advisory Board, or in his absence, the Chief Executive Officer of the Company. Consultant hereby accepts such engagement in accordance with such terms and conditions. 3. Services of Consultant. Consultant shall, in its sole discretion, provide consultancy and advisory services as a member of the XsunX Scientific Advisory Board under the title of Scientific Advisor. Notwithstanding the foregoing title Consultant shall remain an independent contractor. Consultant shall provide such services incident thereto as may be necessary from time to time which services shall include, without limitation, providing the Company with his best efforts and technical expertise in advising the Company in the areas of research & development, process development, planning, third party technical and resource requirements, analysis of research and development data, and the management of developing intellectual assets pertaining to the Business of XsunX and the XsunX Field of Use. Consultant is not a corporate officer or director of XsunX and will not be represented as such. 3.1. Consultant shall provide such other related services as may be requested of Consultant by the Company and as are not inconsistent with the provisions of this Agreement. Consultant agrees to devote Consultant's best efforts, skills, and technical expertise to the business of the Company, to do Consultant's utmost to further enhance and develop the interests and welfare of the Company, and to devote necessary time and attention to the business of the Company, while recognizing Consultant's duties to CSM. 3.2. Consultant shall truthfully and accurately make, maintain and preserve all records and reports that the Company may, from time to time, request or require, and shall fully account for all money, records, equipment, materials or other property belonging to the Company of which Consultant may have custody and shall pay over and deliver same promptly whenever and however Consultant may be directed to do so. 3.3. Consultant shall make available to the Company any and all information of which Consultant has knowledge that is relevant to the Company's business, but is not otherwise prohibited from disclosing, and make all suggestions and recommendations which Consultant believes will be of benefit to the Company. 3.4. Consultant shall, at his own cost, prepare for and attend such meetings as may be reasonably requested by the Company, provided, however, that the Company shall pay for the reasonable travel and lodging costs incurred by 2 Consultant in regard to the foregoing. The Company may request at least one meeting per calendar quarter for the purpose of discussion of the development matters referenced hereinabove, and the conformance or variance of the foregoing to or with the Business of XsunX. 4. Duty to CSM. The parties recognize that Consultant is and shall remain employed by CSM, and that as an employee of CSM, Consultant shall devote time and effort to the business of CSM. Notwithstanding the same, Consultant shall conform Consultants' conduct to the fiduciary duties of confidentiality and loyalty owed to the Company. In that regard, Consultant shall inform the Company at the earliest opportunity at such time as Consultant may perceive a potential conflict of interest with regard to Consultant's duties to CSM and Consultant's duties to the Company. Consultant shall not make any unauthorized disclosure of the confidential information of CSM to the Company. Consultant shall not make any unauthorized disclosure of the confidential information of the Company to CSM (or any other party not permitted to receive such information). 5. Compensation. For and in consideration of the performance by Consultant of the services, terms, conditions, covenants and promises herein recited, the Company agrees and promises to pay to Consultant at the times and in the manner herein stated and as set forth below: 5.1. As the principal consideration of the services to be performed by Consultant hereunder during the term of this Agreement, Consultant shall receive from the Company a grant of a Consultancy and Advisory Warrant for the purchase of up to Two Hundred and Fifty Thousand (250,000) shares of common voting stock of the Company. Such warrant will vest in accordance with the vesting provisions set for within an appropriate warrant agreement ("Warrant Instrument"). Except as otherwise set forth herein, the warrant shall constitute the sole compensation of Consultant hereunder. Such compensation may sometimes be herein referred to as Consultant's "Base Compensation". 5.2. The Company shall reimburse Consultant, from time to time, upon Consultant's submission of expense account and supporting documents as required by the Internal Revenue Service, for all reasonable out of town travel, entertainment, and other ordinary, reasonable and necessary business expenses incurred by Consultant as part of and in connection with the direct performance of duties specified herein. 6. Relationship of the Parties 6.1 Legal Status. Consultant shall be an independent contractor of the Company in accordance with the provisions of Sections 2750.5 and 3353 of the California Labor Code, or any other corresponding provision of the Colorado or Canadian Statutes, and not an employee, agent, or partner. It is expressly declared that such independent contractor status is bona fide and not a subterfuge to avoid employee status. This Agreement shall not create an employer-employee relationship and shall not constitute a hiring of such nature by either party. 6.2. Items Furnished to Consultant. Unless expressly agreed in writing otherwise by the parties, the Company shall not provide any telephone equipment 3 or services, office equipment, stationery, secretarial or office support services or other items or services for the benefit of Consultant. Consultant shall, at its own expense, provide and make arrangement for all equipment, stationery, secretarial and office support services. 6.3. Consent of Company. Consultant shall have no right or authority at any time to make any contract or binding promise of any nature on behalf of the Company, whether oral or written, without the express prior written consent of the Company. 6.4. Manner of Performing Services. Consultant shall retain all discretion and judgment in regard to the manner and means of carrying out its duties hereunder subject, however, to the reasonable requests of the Company. Consultant shall have the right to control and discretion as to the manner of performance of its services hereunder in that the result of the work and not the means by which it is accomplished shall be the primary factor for which the parties have bargained hereunder in accordance with Sections 2750.5 and 3353 of the California Labor Code or any corresponding provision in the Colorado or Canadian Statutes. Consultant's obligations for performance of services hereunder shall be limited to the completion of the consultation and services described above in accordance with the Business of XsunX and the XsunX Field of Use. Consultant shall have no obligation to work any particular hours or days or any particular number of hours or days. The Company shall have no right to control or direct the details, manner or means by which Consultant accomplishes the results of the services performed hereunder. 6.5. Payment of Taxes. Consultant shall be responsible for and pay Consultant's own self-employment taxes, estimated tax liabilities, business equipment or personal property taxes and other similar obligations, whether federal, state or local. The Company shall not pay or withhold any FICA, SDI, federal or state income tax or unemployment insurance or tax or any other amounts because the relationship of the parties hereto is not that of employer-employee, but that of independent contractor. Consultant shall be solely responsible for the payment of all taxes, withholdings and other amounts due in regard to Consultant's own employees. 6.6. Employees of Consultant. Consultant may subcontract with and/or employ such parties upon such terms and conditions as it may deem proper or necessary. 7. Warranties and Indemnification 7.1. Warranties. Consultant warrants and represents that the services of Consultant's subcontractors or employees shall be performed in full compliance with the terms and conditions of this Agreement, and, that all services performed hereunder shall be performed in accordance with all federal, state and local laws, rules or regulations. 7.2. Indemnification by Consultant. Consultant shall indemnify, defend and hold the Company and the property of the Company, free and harmless from any and all claims, losses, damages, injuries, and liabilities, including the Company's reasonable attorney fees and costs (the Company may choose its own counsel when defended hereunder), arising from or in any way connected with the 4 performance of services under this Agreement or any other act or omission by Consultant, its agents, subcontractors, or employees. 7.3. Indemnification by the Company. The Company shall indemnify, defend and hold Consultant and the property of Consultant, free and harmless from any and all claims, losses, damages, injuries, and liabilities, including Consultant's reasonable attorney fees and costs, arising from or in any way connected with any act or omission on the part of the Company, its constituent partners, agents, subcontractors, or employees. 8. Term. Consultant's engagement pursuant to this Agreement shall be for a period of two (2) years and shall commence upon the date of execution hereof (the "Commencement Date") and shall continue to and including March 8, 2007 (the "Termination Date") unless earlier terminated in accordance with the provisions of Paragraph 8 of this Agreement; provided further that the term of this Agreement may be extended by the mutual agreement of the parties hereto. 9. Termination. Notwithstanding any other provision of this Agreement to the contrary, either party may terminate this Agreement at any time upon ninety (90) days prior written notice to the other. This Agreement may also be terminated by the Company, at its option, at any time during the term of this Agreement without notice, for good cause. Termination for good cause shall include, but not be limited to, any of the following: 9.1. The commission by Consultant of an act of fraud or other act materially evidencing bad faith or dishonesty; 9.2. The misappropriation by Consultant of any funds or property or other rights of the Company; 9.3. The suspension or removal or termination of Consultant by or at the request or requirement of any governmental authority having jurisdiction over the Company; 9.4. The breach by Consultant of any material terms of this Agree- ment or any other agreement between Consultant on the one hand and the Company, or any affiliate of the Company, on the other hand, including, but not limited to, the Technology Agreement; 9.5. Upon the death of the Consultant. 10. Confidentiality. All information derived or provided to Consultant under the terms and specific to the performance of this Agreement, including lists and databases, and any part of such lists, databases, or information, pertaining to customers, merchants, salespersons, financial records, computer software programs, strategic plans, contracts, agreements, literature, manuals, brochures, books, records, correspondence, computer programs, software, source codes, computations, data files, algorithms, techniques, processes, designs, specifications, drawings, charts, plans, schematics, computer disks, magnetic tapes, books, files, records, reports, documents, Instruments, agreements, contracts, correspondence, letters, memoranda, financial, accounting, sales, 5 purchase and consultant data, capital structure information, corporate organizational information, identities, names and address of, and any information pertaining to, shareholders, directors, officers, consultants, contractors, vendors, suppliers, customers, clients, lenders, financing and business participants, and all persons associated with the Company, information pertaining to business models, business plans, projections, assumptions and analyses, particular projects, and all other data and information and similar items relating to the business of the Company and all other data and information and similar items relating to the Company of whatever kind or nature and whether or not prepared or compiled by the Company and all other materials furnished or made available to Consultant by the Company or any of its affiliates (as hereinafter defined) relating to the business conducted by the Company ("Confidential Information"), is and are proprietary and confidential and are and shall remain the sole property of the Company. Affiliate as used in this section shall mean the Company, any entity in which Company owns a majority ownership (directly or indirectly), or any entity which owns a majority ownership of Company (directly or indirectly). Consultant acknowledges that the Confidential Information derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and that this confidentiality provision constitutes efforts that are reasonable under the circumstances to maintain the secrecy thereof. Consultant further acknowledges that the Confidential Information constitutes trade secrets pursuant to California Civil Code ss.3426.1. Consultant shall not, directly or indirectly, at any time during or after termination of consultant use or reveal, divulge, disclose, disseminate, distribute, license, sell, transfer, assign or otherwise make known, directly or indirectly, the Confidential Information to any person or entity not expressly authorized by the Company to receive such Confidential Information. 10.1 Consultant shall exercise the highest degree of care and discretion in accordance with the duty of Consultant hereunder to prevent improper use or disclosure of the Confidential Information and will retain all such Confidential Information in trust in a fiduciary capacity unless: (i) such use or disclosure has been authorized in writing by the Company through an officer or director, or (ii) is required to be disclosed by law, a court of competent jurisdiction or a governmental or regulatory agency. Further, Consultant shall return and deliver all such materials, including all copies, remnants, or derivatives thereof to the Company upon the termination of consultant with the Company or at any other time upon request by the Company. 11. Patents and Inventions. Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs, and processes ("Inventions") which Consultant hereafter during the period Consultant is retained by the Company under this Agreement or otherwise and for three (3) years thereafter may own, conceive of, or develop shall belong to the Company to the extent that the same: (1) relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company; (2) result from any work performed by Consultant for the Company; or (3) have otherwise been developed by Consultant using the 6 Company's equipment, supplies, facilities, or trade secret information. As soon as Consultant owns, conceives of, or develops any such Invention, Consultant agrees immediately to communicate such fact in writing to the Secretary of the Company, and without further compensation, but at the Company's expense, immediately upon request of the Company, Consultant shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks, and assignments thereof) and perform any and all acts as the Company may reasonably request in order (a) to vest in the Company all Consultant's right, title, and interest in and to such Inventions, free and clear of liens, mortgages, security interests, pledges, charges, and encumbrances arising from the acts of Consultant and (b), if patentable or copyrightable, to obtain patents or copyrights (including extensions and renewals) therefore in any and all countries in such name as the Company shall determine. Notwithstanding the foregoing, pursuant to Section 2872 of the California Labor Code, this Agreement shall not apply to any Invention which qualifies fully under the provisions of Section 2870 of the California Labor Code. Consultant acknowledges receipt of a copy of 2870 of the California Labor Code. 11.1 Derivative Works. All derivative works of the parties resulting from research or work funded by, or Confidential Information provided by, the Company associated with any subsequent research by any party, development, or combination of technologies of the parties after the Commencement Date, which are useful or specific to the XsunX Field of Use or the Business of XsunX, shall become the property of the Company. 12. Assignment. The obligations of Consultant under this Agreement are unique and may not be assigned. 13. Securities Compliance. No Offer or Sale. This Agreement is not intended to be an offer for the sale or issuance of securities, whether pertaining to stock, options, or otherwise, unless the same is exempt from registration and qualification pursuant to an applicable exemption. The issuance of stock and warrants is expressly subject to compliance with all state and federal securities laws, rules and regulations by the parties. While the Company does not consider this Agreement itself to be a securities or offer of any securities, whether pertaining to stock, warrants, or otherwise, in the event that this letter is construed to be an offer, the parties acknowledge the following disclosure in accordance with Section 25102(a) of the California Corporations Code: The sale of the securities which are the subject of this agreement has not been qualified with the Commissioner of Corporation of the State of California and the issuance of such securities or the payment or receipt of any part of the consideration therefore prior to such qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this agreement are expressly conditions upon such qualification being obtained unless the sale is so exempt. 13.1 General Securities Compliance. Notwithstanding anything contained in this Agreement to the contrary, this Agreement, and the stock warrants discussed herein, shall be, and are, expressly subject to all SEC and 7 securities, laws, rules, regulations and reporting and disclosure requirements, to the extent applicable to the Company as a reporting company, the shares, and\or any party hereto, including, but not limited to, shareholder voting and proxy solicitation rules. All issuances, sales, transfers, or other dispositions of shares of the Company shall be made in compliance with all applicable securities laws, rules and regulations, and pursuant to registration of securities under the Securities Act of 1933 ("Act") (and qualification under General Corporation Law of California) or pursuant to an exemption from registration under the Act (and qualification under General Corporation Law of California). Notwithstanding the foregoing, nothing in this Agreement shall obligate the Company to seek registration or qualification of any of its shares, and, to the extent that any obligation hereunder cannot be performed without registration or qualification of any of its shares, such obligation shall be excused on the part of the Company to the extent that the Company provides other adequate consideration therefore. 14. Rule 144. Consultant acknowledges that the shares of the Company may be subject to the restrictions on transfer set forth in Rule 144 of the Rules promulgated under the Act. Any and all offers, sales, transfer or other dispositions of shares of the Company shall be made only in compliance with Rule 144. Consultant agrees to comply with all policies and procedures established by the Company with regard to Rule 144 matters. Consultant acknowledges that the Company or its attorneys or transfer agent may require a restrictive legend on the certificate or certificates representing the shares pursuant to the restrictions on transfer of the shares imposed by Rule 144. 15. Amendments. This Agreement may be amended only in writing executed by Consultant and Company and approved in writing by the majority vote of the Board of Directors of the Company. 16. Effect of Headings. The subject headings of the paragraphs and subparagraphs of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 17. Parties in Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to any party to this Contract, nor shall any provision give any third person any right of subrogation or action over against any party to this Agreement. 18. Recovery of Litigation Costs. If any legal action or any arbitration or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover as an element of their damages, reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which they may be entitled. 8 19. Gender; Number. Whenever the context of this Contract requires, the masculine gender includes the feminine or neuter gender, and the singular number includes the plural. 20. Time of Essence. Time shall be of the essence in all things per- taining to the performance of this Agreement unless waived in writing by the undersigned parties. 21. Authority. The parties to this Agreement warrant and represent that they have the power and authority to enter into this Agreement in the names, titles and capacitates herein stated and on behalf of any entities, persons or firms represented or purported to be represented by each respective party. 22. Waiver. A Waiver by either party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to a waiver of such terms of condition for the future, or of any subsequent breach thereof, or of any other term and condition of this Agreement. All waivers must be made in writing executed by the waiving party. 23. Entire Agreement. This Agreement constitutes the entire agreement between the parties respecting the subject matter hereof, and there are no representations, warranties, agreements or commitments between the parties hereto except as set forth herein; provided that the terms of any Option or Award may be set forth in a Grant Instrument, which shall be read in conjunction with this Agreement. This Agreement shall control over any and all provisions or guidelines contained in any Consultant Manual, Consultant Handbook, Company Policy Manual or other similar document. Consultant expressly acknowledges that no Consultant Manual, Consultant Handbook, Company Policy Manual or other similar document is or shall become a contract between the Company and Consultant. 24. Notices. Any notice, request, demand or other communication permitted to be given hereunder shall be in writing and shall be deemed to be duly given when personally delivered to an Consultant officer of the Company or to Consultant, as the case may be, or when deposited in the United States mail, by certified or registered mail, return receipt requested, postage prepaid, at the respective addresses of the Company and Consultant as shown on the signature page hereto. Either party may change by notice the address to which notices are to be sent. 25. Severability. If any provision of this Agreement shall, for any reason, be held unenforceable, such provision shall be severed from the contract. The invalidity of such specific provision, however, shall not affect the enforceability of any other provision herein, and the remaining provision shall remain in full force and effect. 26. Choice of Law and Venue. This Agreement shall, to the fullest extent allowed by law, be construed, interpreted and enforced in accordance with the laws of the State of Colorado, without regard to or application of conflict 9 of law rules, and the venue in regard to any disputes arising hereunder shall, to the fullest extent allowed by law, be in Orange County, California. 27. Press Releases. Any press release, company disclosures and advertisement made by the Company relating to Consultant shall be subject to the approval of Consultant prior to public release. Consultant will not unreasonably withhold such approval and agrees to respond to such requests for approval within two (2) business days. IN WITNESS WHEREOF, this Agreement is made effective by Consultant and the Company on the date set first forth above. COMPANY: CONSULTANT: Xsunx, Inc., Dr. John J. Moore a Colorado corporation By:_________________________ By: ____________________________ Tom M. Djokovich, as CEO Dr. John J. Moore, as Consultant 10 EX-10.7 10 ex10-7.txt EXHIBIT 10.7 CONSULTING AND ADVISORY AGREEMENT THIS CONSULTING AGREEMENT ("Agreement"), made effective as of the 19th day of January 2005, is entered into by and between Xsunx, Inc., a Colorado corporation ("Company"), and Dr. Arokia Nathan, an individual ("Consultant"). The Company and Consultant are sometimes herein referred to individually as a "party" and collectively as the "parties". R E C I T A L S WHEREAS, Consultant has developed an expertise in the areas of chemical engineering, chemical vapor deposition (CVD) and enhanced CVD techniques for thin film synthesis, chemical reactor engineering analysis of physical and chemical vapor deposition processes, photovoltaics and electronic materials, and thin-film amorphous silicon structures and other technology related to amorphous silicon and related alloys which is of interest to the Company; WHEREAS, Consultant is a research professor at the University of Waterloo at Waterloo, Ontario ("UW") and is engaged in research in other related fields and shall also continue to be employed by UW; and WHEREAS, the Company desires to obtain the services of Consultant and Consultant desires to provide the Company with consultancy and advisory services as contemplated pursuant to the terms and conditions contained herein; and WHEREAS, the undersigned parties desire to formalize such consultancy relationship; NOW, THEREFORE, in consideration of the promises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement agree as follows: 1. Definitions 1.1 "XsunX Field of Use" means the business of developing, commercializing and licensing processes for the manufacture of semi-transparent (greater than 5% transparency) solar cells or photovoltaic glazing technologies. 1.2 "Business of XsunX" means the business of developing, commercializing and licensing processes for the manufacture of semi-transparent photovoltaic glazing technologies. The Company intends that its current and future processes for the manufacture of semi-transparent solar cells and photovoltaic glazing technologies will have marketable opportunities for applications on transparent and semi-transparent substrates for use in the architectural, industrial and residential building industries, and, in the transportation and manufacturing industries for use in such areas as automotive and building materials integrated photovoltaics. 2. Engagement of Services. The Company hereby engages Consultant as an independent contractor to provide consulting and advisory services as set forth herein. All such consulting and services shall be performed in accordance with the terms and conditions contained herein. Consultant shall report to the Chairman of the Scientific Advisory Board, or in his absence, the Chief Executive Officer of the Company. Consultant hereby accepts such engagement in accordance with such terms and conditions. 3. Services of Consultant. Consultant shall, in its sole discretion, provide consultancy and advisory services as a member of the XsunX Scientific Advisory Board under the title of Scientific Advisor. Notwithstanding the foregoing title Consultant shall remain an independent contractor. Consultant shall provide such services incident thereto as may be necessary from time to time which services shall include, without limitation, providing the Company with his best efforts and technical expertise in advising the Company in the areas of research & development, process development, planning, third party technical and resource requirements, analysis of research and development data, and the management of developing intellectual assets pertaining to the Business of XsunX and the XsunX Field of Use. Consultant is not a corporate officer or director of XsunX and will not be represented as such. 3.1. Consultant shall provide such other related services as may be requested of Consultant by the Company and as are not inconsistent with the provisions of this Agreement. Consultant agrees to devote Consultant's best efforts, skills, and technical expertise to the business of the Company, to do Consultant's utmost to further enhance and develop the interests and welfare of the Company, and to devote necessary time and attention to the business of the Company, while recognizing Consultant's duties to UW. 3.2. Consultant shall truthfully and accurately make, maintain and preserve all records and reports that the Company may, from time to time, request or require, and shall fully account for all money, records, equipment, materials or other property belonging to the Company of which Consultant may have custody and shall pay over and deliver same promptly whenever and however Consultant may be directed to do so. 3.3. Consultant shall make available to the Company any and all information of which Consultant has knowledge that is relevant to the Company's business, but is not otherwise prohibited from disclosing, and make all suggestions and recommendations which Consultant believes will be of benefit to the Company. 3.4. Consultant shall, at his own cost, prepare for and attend such meetings as may be reasonably requested by the Company, provided, however, that the Company shall pay for the reasonable travel and lodging costs incurred by Consultant in regard to the foregoing. The Company may request at least one meeting per calendar quarter for the purpose of discussion of the development matters referenced hereinabove, and the conformance or variance of the foregoing to or with the Business of XsunX. 4. Duty to UW. The parties recognize that Consultant is and shall remain employed by UW, and that as an employee of UW, Consultant shall devote 2 time and effort to the business of UW. Notwithstanding the same, Consultant shall conform Consultants' conduct to the fiduciary duties of confidentiality and loyalty owed to the Company. In that regard, Consultant shall inform the Company at the earliest opportunity at such time as Consultant may perceive a potential conflict of interest with regard to Consultant's duties to UW and Consultant's duties to the Company. Consultant shall not make any unauthorized disclosure of the confidential information of UW to the Company. Consultant shall not make any unauthorized disclosure of the confidential information of the Company to UW (or any other party not permitted to receive such information). 5. Compensation. For and in consideration of the performance by Consultant of the services, terms, conditions, covenants and promises herein recited, the Company agrees and promises to pay to Consultant at the times and in the manner herein stated and as set forth below: 5.1. As the principal consideration of the services to be performed by Consultant hereunder during the term of this Agreement, Consultant shall receive from the Company a grant of a Consultancy and Advisory Warrant for the purchase of up to Two Hundred and Fifty Thousand (250,000) shares of common voting stock of the Company. Such warrant will vest in accordance with the vesting provisions set for within an appropriate warrant agreement ("Warrant Instrument"). Except as otherwise set forth herein, the warrant shall constitute the sole compensation of Consultant hereunder. Such compensation may sometimes be herein referred to as Consultant's "Base Compensation". 5.2. The Company shall reimburse Consultant, from time to time, upon Consultant's submission of expense account and supporting documents as required by the Internal Revenue Service, for all reasonable out of town travel, entertainment, and other ordinary, reasonable and necessary business expenses incurred by Consultant as part of and in connection with the direct performance of duties specified herein. 6. Relationship of the Parties 6.1 Legal Status. Consultant shall be an independent contractor of the Company in accordance with the provisions of Sections 2750.5 and 3353 of the California Labor Code, or any other corresponding provision of the Colorado or Canadian Statutes, and not an employee, agent, or partner. It is expressly declared that such independent contractor status is bona fide and not a subterfuge to avoid employee status. This Agreement shall not create an employer-employee relationship and shall not constitute a hiring of such nature by either party. 6.2. Items Furnished to Consultant. Unless expressly agreed in writing otherwise by the parties, the Company shall not provide any telephone equipment or services, office equipment, stationery, secretarial or office support services or other items or services for the benefit of Consultant. Consultant shall, at its own expense, provide and make arrangement for all equipment, stationery, secretarial and office support services. 3 6.3. Consent of Company. Consultant shall have no right or authority at any time to make any contract or binding promise of any nature on behalf of the Company, whether oral or written, without the express prior written consent of the Company. 6.4. Manner of Performing Services. Consultant shall retain all discretion and judgment in regard to the manner and means of carrying out its duties hereunder subject, however, to the reasonable requests of the Company. Consultant shall have the right to control and discretion as to the manner of performance of its services hereunder in that the result of the work and not the means by which it is accomplished shall be the primary factor for which the parties have bargained hereunder in accordance with Sections 2750.5 and 3353 of the California Labor Code or any corresponding provision in the Colorado or Canadian Statutes. Consultant's obligations for performance of services hereunder shall be limited to the completion of the consultation and services described above in accordance with the Business of XsunX and the XsunX Field of Use. Consultant shall have no obligation to work any particular hours or days or any particular number of hours or days. The Company shall have no right to control or direct the details, manner or means by which Consultant accomplishes the results of the services performed hereunder. 6.5. Payment of Taxes. Consultant shall be responsible for and pay Consultant's own self-employment taxes, estimated tax liabilities, business equipment or personal property taxes and other similar obligations, whether federal, state or local. The Company shall not pay or withhold any FICA, SDI, federal or state income tax or unemployment insurance or tax or any other amounts because the relationship of the parties hereto is not that of employer-employee, but that of independent contractor. Consultant shall be solely responsible for the payment of all taxes, withholdings and other amounts due in regard to Consultant's own employees. 6.6. Employees of Consultant. Consultant may subcontract with and/or employ such parties upon such terms and conditions as it may deem proper or necessary. 7. Warranties and Indemnification 7.1. Warranties. Consultant warrants and represents that the services of Consultant's subcontractors or employees shall be performed in full compliance with the terms and conditions of this Agreement, and, that all services performed hereunder shall be performed in accordance with all federal, state and local laws, rules or regulations. 7.2. Indemnification by Consultant. Consultant shall indemnify, defend and hold the Company and the property of the Company, free and harmless from any and all claims, losses, damages, injuries, and liabilities, including the Company's reasonable attorney fees and costs (the Company may choose its own counsel when defended hereunder), arising from or in any way connected with the performance of services under this Agreement or any other act or omission by Consultant, its agents, subcontractors, or employees. 7.3. Indemnification by the Company. The Company shall indemnify, defend and hold Consultant and the property of Consultant, free and harmless 4 from any and all claims, losses, damages, injuries, and liabilities, including Consultant's reasonable attorney fees and costs, arising from or in any way connected with any act or omission on the part of the Company, its constituent partners, agents, subcontractors, or employees. 8. Term. Consultant's engagement pursuant to this Agreement shall be for a period of two (2) years and shall commence upon the date of execution hereof (the "Commencement Date") and shall continue to and including January 19th, 2007 (the "Termination Date") unless earlier terminated in accordance with the provisions of Paragraph 8 of this Agreement; provided further that the term of this Agreement may be extended by the mutual agreement of the parties hereto. 9. Termination. Notwithstanding any other provision of this Agreement to the contrary, either party may terminate this Agreement at any time upon ninety (90) days prior written notice to the other. This Agreement may also be terminated by the Company, at its option, at any time during the term of this Agreement without notice, for good cause. Termination for good cause shall include, but not be limited to, any of the following: 9.1. The commission by Consultant of an act of fraud or other act materially evidencing bad faith or dishonesty; 9.2. The misappropriation by Consultant of any funds or property or other rights of the Company; 9.3. The suspension or removal or termination of Consultant by or at the request or requirement of any governmental authority having jurisdiction over the Company; 9.4. The breach by Consultant of any material terms of this Agreement or any other agreement between Consultant on the one hand and the Company, or any affiliate of the Company, on the other hand, including, but not limited to, the Technology Agreement; 9.5. Upon the death of the Consultant. 10. Confidentiality. All information derived or provided to Consultant under the terms and specific to the performance of this Agreement, including lists and databases, and any part of such lists, databases, or information, pertaining to customers, merchants, salespersons, financial records, computer software programs, strategic plans, contracts, agreements, literature, manuals, brochures, books, records, correspondence, computer programs, software, source codes, computations, data files, algorithms, techniques, processes, designs, specifications, drawings, charts, plans, schematics, computer disks, magnetic tapes, books, files, records, reports, documents, Instruments, agreements, contracts, correspondence, letters, memoranda, financial, accounting, sales, purchase and consultant data, capital structure information, corporate organizational information, identities, names and address of, and any information pertaining to, shareholders, directors, officers, consultants, 5 contractors, vendors, suppliers, customers, clients, lenders, financing and business participants, and all persons associated with the Company, information pertaining to business models, business plans, projections, assumptions and analyses, particular projects, and all other data and information and similar items relating to the business of the Company and all other data and information and similar items relating to the Company of whatever kind or nature and whether or not prepared or compiled by the Company and all other materials furnished or made available to Consultant by the Company or any of its affiliates (as hereinafter defined) relating to the business conducted by the Company ("Confidential Information"), is and are proprietary and confidential and are and shall remain the sole property of the Company. Affiliate as used in this section shall mean the Company, any entity in which Company owns a majority ownership (directly or indirectly), or any entity which owns a majority ownership of Company (directly or indirectly). Consultant acknowledges that the Confidential Information derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and that this confidentiality provision constitutes efforts that are reasonable under the circumstances to maintain the secrecy thereof. Consultant further acknowledges that the Confidential Information constitutes trade secrets pursuant to California Civil Code ss.3426.1. Consultant shall not, directly or indirectly, at any time during or after termination of consultant use or reveal, divulge, disclose, disseminate, distribute, license, sell, transfer, assign or otherwise make known, directly or indirectly, the Confidential Information to any person or entity not expressly authorized by the Company to receive such Confidential Information. 10.1 Consultant shall exercise the highest degree of care and discretion in accordance with the duty of Consultant hereunder to prevent improper use or disclosure of the Confidential Information and will retain all such Confidential Information in trust in a fiduciary capacity unless: (i) such use or disclosure has been authorized in writing by the Company through an officer or director, or (ii) is required to be disclosed by law, a court of competent jurisdiction or a governmental or regulatory agency. Further, Consultant shall return and deliver all such materials, including all copies, remnants, or derivatives thereof to the Company upon the termination of consultant with the Company or at any other time upon request by the Company. 11. Patents and Inventions. Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs, and processes ("Inventions") which Consultant hereafter during the period Consultant is retained by the Company under this Agreement or otherwise and for three (3) years thereafter may own, conceive of, or develop shall belong to the Company to the extent that the same: (1) relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company; (2) result from any work performed by Consultant for the Company; or (3) have otherwise been developed by Consultant using the Company's equipment, supplies, facilities, or trade secret information. As soon as Consultant owns, conceives of, or develops any such Invention, Consultant agrees immediately to communicate such fact in writing to the Secretary of the Company, and without further compensation, but at the Company's expense, immediately upon request of the Company, Consultant shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks, and assignments thereof) and perform any and all acts as the Company may reasonably request in order (a) to vest in the Company all Consultant's 6 right, title, and interest in and to such Inventions, free and clear of liens, mortgages, security interests, pledges, charges, and encumbrances arising from the acts of Consultant and (b), if patentable or copyrightable, to obtain patents or copyrights (including extensions and renewals) therefore in any and all countries in such name as the Company shall determine. Notwithstanding the foregoing, pursuant to Section 2872 of the California Labor Code, this Agreement shall not apply to any Invention which qualifies fully under the provisions of Section 2870 of the California Labor Code. Consultant acknowledges receipt of a copy of 2870 of the California Labor Code. 11.1 Derivative Works. All derivative works of the parties resulting from research or work funded by, or Confidential Information provided by, the Company associated with any subsequent research by any party, development, or combination of technologies of the parties after the Commencement Date, which are useful or specific to the XsunX Field of Use or the Business of XsunX, shall become the property of the Company. 12. Assignment. The obligations of Consultant under this Agreement are unique and may not be assigned. 13. Securities Compliance. No Offer or Sale. This Agreement is not intended to be an offer for the sale or issuance of securities, whether pertaining to stock, options, or otherwise, unless the same is exempt from registration and qualification pursuant to an applicable exemption. The issuance of stock and warrants is expressly subject to compliance with all state and federal securities laws, rules and regulations by the parties. While the Company does not consider this Agreement itself to be a securities or offer of any securities, whether pertaining to stock, warrants, or otherwise, in the event that this letter is construed to be an offer, the parties acknowledge the following disclosure in accordance with Section 25102(a) of the California Corporations Code: The sale of the securities which are the subject of this agreement has not been qualified with the Commissioner of Corporation of the State of California and the issuance of such securities or the payment or receipt of any part of the consideration therefore prior to such qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this agreement are expressly conditions upon such qualification being obtained unless the sale is so exempt. 13.1 General Securities Compliance. Notwithstanding anything contained in this Agreement to the contrary, this Agreement, and the stock warrants discussed herein, shall be, and are, expressly subject to all SEC and securities, laws, rules, regulations and reporting and disclosure requirements, to the extent applicable to the Company as a reporting company, the shares, and\or any party hereto, including, but not limited to, shareholder voting and 7 proxy solicitation rules. All issuances, sales, transfers, or other dispositions of shares of the Company shall be made in compliance with all applicable securities laws, rules and regulations, and pursuant to registration of securities under the Securities Act of 1933 ("Act") (and qualification under General Corporation Law of California) or pursuant to an exemption from registration under the Act (and qualification under General Corporation Law of California). Notwithstanding the foregoing, nothing in this Agreement shall obligate the Company to seek registration or qualification of any of its shares, and, to the extent that any obligation hereunder cannot be performed without registration or qualification of any of its shares, such obligation shall be excused on the part of the Company to the extent that the Company provides other adequate consideration therefore. 14. Rule 144. Consultant acknowledges that the shares of the Company may be subject to the restrictions on transfer set forth in Rule 144 of the Rules promulgated under the Act. Any and all offers, sales, transfer or other dispositions of shares of the Company shall be made only in compliance with Rule 144. Consultant agrees to comply with all policies and procedures established by the Company with regard to Rule 144 matters. Consultant acknowledges that the Company or its attorneys or transfer agent may require a restrictive legend on the certificate or certificates representing the shares pursuant to the restrictions on transfer of the shares imposed by Rule 144. 15. Amendments. This Agreement may be amended only in writing executed by Consultant and Company and approved in writing by the majority vote of the Board of Directors of the Company. 16. Effect of Headings. The subject headings of the paragraphs and subparagraphs of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 17. Parties in Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to any party to this Contract, nor shall any provision give any third person any right of subrogation or action over against any party to this Agreement. 18. Recovery of Litigation Costs. If any legal action or any arbitration or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover as an element of their damages, reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which they may be entitled. 19. Gender; Number. Whenever the context of this Contract requires, the masculine gender includes the feminine or neuter gender, and the singular number includes the plural. 8 20. Time of Essence. Time shall be of the essence in all things pertaining to the performance of this Agreement unless waived in writing by the undersigned parties. 21. Authority. The parties to this Agreement warrant and represent that they have the power and authority to enter into this Agreement in the names, titles and capacitates herein stated and on behalf of any entities, persons or firms represented or purported to be represented by each respective party. 22. Waiver. A Waiver by either party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to a waiver of such terms of condition for the future, or of any subsequent breach thereof, or of any other term and condition of this Agreement. All waivers must be made in writing executed by the waiving party. 23. Entire Agreement. This Agreement constitutes the entire agreement between the parties respecting the subject matter hereof, and there are no representations, warranties, agreements or commitments between the parties hereto except as set forth herein; provided that the terms of any Option or Award may be set forth in a Grant Instrument, which shall be read in conjunction with this Agreement. This Agreement shall control over any and all provisions or guidelines contained in any Consultant Manual, Consultant Handbook, Company Policy Manual or other similar document. Consultant expressly acknowledges that no Consultant Manual, Consultant Handbook, Company Policy Manual or other similar document is or shall become a contract between the Company and Consultant. 24. Notices. Any notice, request, demand or other communication permitted to be given hereunder shall be in writing and shall be deemed to be duly given when personally delivered to an Consultant officer of the Company or to Consultant, as the case may be, or when deposited in the United States mail, by certified or registered mail, return receipt requested, postage prepaid, at the respective addresses of the Company and Consultant as shown on the signature page hereto. Either party may change by notice the address to which notices are to be sent. 25. Severability. If any provision of this Agreement shall, for any reason, be held unenforceable, such provision shall be severed from the contract. The invalidity of such specific provision, however, shall not affect the enforceability of any other provision herein, and the remaining provision shall remain in full force and effect. 26. Choice of Law and Venue. This Agreement shall, to the fullest extent allowed by law, be construed, interpreted and enforced in accordance with the laws of the State of Colorado, without regard to or application of conflict of law rules, and the venue in regard to any disputes arising hereunder shall, to the fullest extent allowed by law, be in Orange County, California. 9 27. Press Releases. Any press release, company disclosures and advertisement made by the Company relating to Consultant shall be subject to the approval of Consultant prior to public release. Consultant will not unreasonably withhold such approval and agrees to respond to such requests for approval within two (2) business days. IN WITNESS WHEREOF, this Agreement is made effective by Consultant and the Company on the date set first forth above. COMPANY: CONSULTANT: Xsunx, Inc., Dr. Arokia Nathan a Colorado corporation By:_________________________ By: ____________________________ Tom M. Djokovich, as CEO Dr. Arokia Nathan, as Consultant 10 EX-10.8 11 ex10-8.txt EXHIBIT 10.8 CONSULTING AND ADVISORY AGREEMENT THIS CONSULTING AGREEMENT ("Agreement"), made effective as of the 19th day of January 2005, is entered into by and between Xsunx, Inc., a Colorado corporation ("Company"), and Dr. Richard E. Rocheleau, an individual ("Consultant"). The Company and Consultant are sometimes herein referred to individually as a "party" and collectively as the "parties". R E C I T A L S WHEREAS, Consultant has developed an expertise in the areas of chemical engineering, chemical vapor deposition (CVD) and enhanced CVD techniques for thin film synthesis, chemical reactor engineering analysis of physical and chemical vapor deposition processes, photovoltaics and electronic materials, and thin-film amorphous silicon structures and other technology related to amorphous silicon and related alloys which is of interest to the Company; WHEREAS, Consultant is a research professor at the Hawaii Natural Energy Institute School of Ocean And Earth Science And Technology, University of Hawaii at Manoa ("HNEI") and is engaged in research in other related fields and shall also continue to be employed as the Director of HNEI; and WHEREAS, the Company desires to obtain the services of Consultant and Consultant desires to provide the Company with consultancy and advisory services as contemplated pursuant to the terms and conditions contained herein; and WHEREAS, the undersigned parties desire to formalize such consultancy relationship; NOW, THEREFORE, in consideration of the promises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement agree as follows: 1. Definitions 1.1 "XsunX Field of Use" means the business of developing, commercializing and licensing processes for the manufacture of semi-transparent (greater than 5% transparency) solar cells or photovoltaic glazing technologies. 1.2 "Business of XsunX" means the business of developing, commercializing and licensing processes for the manufacture of semi-transparent photovoltaic glazing technologies. The Company intends that its current and future processes for the manufacture of semi-transparent solar cells and photovoltaic glazing technologies will have marketable opportunities for applications on transparent and semi-transparent substrates for use in the architectural, industrial and residential building industries, and, in the transportation and manufacturing industries for use in such areas as automotive and building materials integrated photovoltaics. 2. Engagement of Services. The Company hereby engages Consultant as an independent contractor to provide consulting and advisory services as set forth herein. All such consulting and services shall be performed in accordance with the terms and conditions contained herein. Consultant shall report to the Chairman of the Scientific Advisory Board, or in his absence, the Chief Executive Officer of the Company. Consultant hereby accepts such engagement in accordance with such terms and conditions. 3. Services of Consultant. Consultant shall, in its sole discretion, provide consultancy and advisory services as a member of the XsunX Scientific Advisory Board under the title of Scientific Advisor. Notwithstanding the foregoing title Consultant shall remain an independent contractor. Consultant shall provide such services incident thereto as may be necessary from time to time which services shall include, without limitation, providing the Company with his best efforts and technical expertise in advising the Company in the areas of research & development, process development, planning, third party technical and resource requirements, analysis of research and development data, and the management of developing intellectual assets pertaining to the Business of XsunX and the XsunX Field of Use. Consultant is not a corporate officer or director of XsunX and will not be represented as such. 3.1. Consultant shall provide such other related services as may be requested of Consultant by the Company and as are not inconsistent with the provisions of this Agreement. Consultant agrees to devote Consultant's best efforts, skills, and technical expertise to the business of the Company, to do Consultant's utmost to further enhance and develop the interests and welfare of the Company, and to devote necessary time and attention to the business of the Company, while recognizing Consultant's duties to HNEI. 3.2. Consultant shall truthfully and accurately make, maintain and preserve all records and reports that the Company may, from time to time, request or require, and shall fully account for all money, records, equipment, materials or other property belonging to the Company of which Consultant may have custody and shall pay over and deliver same promptly whenever and however Consultant may be directed to do so. 3.3. Consultant shall make available to the Company any and all information of which Consultant has knowledge that is relevant to the Company's business, but is not otherwise prohibited from disclosing, and make all suggestions and recommendations which Consultant believes will be of benefit to the Company. 3.4. Consultant shall, at his own cost, prepare for and attend such meetings as may be reasonably requested by the Company, provided, however, that the Company shall pay for the reasonable travel and lodging costs incurred by Consultant in regard to the foregoing. The Company may request at least one meeting per calendar quarter for the purpose of discussion of the development matters referenced hereinabove, and the conformance or variance of the foregoing to or with the Business of XsunX. 4. Duty to HNEI. The parties recognize that Consultant is and shall remain employed by HNEI and that as an employee of HNEI, Consultant shall devote 2 time and effort to the business of HNEI. Notwithstanding the same, Consultant shall conform Consultants' conduct to the fiduciary duties of confidentiality and loyalty owed to the Company. In that regard, Consultant shall inform the Company at the earliest opportunity at such time as Consultant may perceive a potential conflict of interest with regard to Consultant's duties to HNEI and Consultant's duties to the Company. Consultant shall not make any unauthorized disclosure of the confidential information of HNEI to the Company. Consultant shall not make any unauthorized disclosure of the confidential information of the Company to HNEI (or any other party not permitted to receive such information). 5. Compensation. For and in consideration of the performance by Consultant of the services, terms, conditions, covenants and promises herein recited, the Company agrees and promises to pay to Consultant at the times and in the manner herein stated and as set forth below: 5.1. As the principal consideration of the services to be performed by Consultant hereunder during the term of this Agreement, Consultant shall receive from the Company a grant of a Consultancy and Advisory Warrant for the purchase of up to Two Hundred and Fifty Thousand (250,000) shares of common voting stock of the Company. Such warrant will vest in accordance with the vesting provisions set for within an appropriate warrant agreement ("Warrant Instrument"). Except as otherwise set forth herein, the warrant shall constitute the sole compensation of Consultant hereunder. Such compensation may sometimes be herein referred to as Consultant's "Base Compensation". 5.2. The Company shall reimburse Consultant, from time to time, upon Consultant's submission of expense account and supporting documents as required by the Internal Revenue Service, for all reasonable out of town travel, entertainment, and other ordinary, reasonable and necessary business expenses incurred by Consultant as part of and in connection with the direct performance of duties specified herein. 6. Relationship of the Parties 6.1 Legal Status. Consultant shall be an independent contractor of the Company in accordance with the provisions of Sections 2750.5 and 3353 of the California Labor Code, or any other corresponding provision of the Colorado or Hawaii Revised Statutes, and not an employee, agent, or partner. It is expressly declared that such independent contractor status is bona fide and not a subterfuge to avoid employee status. This Agreement shall not create an employer-employee relationship and shall not constitute a hiring of such nature by either party. 6.2. Items Furnished to Consultant. Unless expressly agreed in writing otherwise by the parties, the Company shall not provide any telephone equipment or services, office equipment, stationery, secretarial or office support services or other items or services for the benefit of Consultant. Consultant shall, at its own expense, provide and make arrangement for all equipment, stationery, secretarial and office support services. 3 6.3. Consent of Company. Consultant shall have no right or authority at any time to make any contract or binding promise of any nature on behalf of the Company, whether oral or written, without the express prior written consent of the Company. 6.4. Manner of Performing Services. Consultant shall retain all discretion and judgment in regard to the manner and means of carrying out its duties hereunder subject, however, to the reasonable requests of the Company. Consultant shall have the right to control and discretion as to the manner of performance of its services hereunder in that the result of the work and not the means by which it is accomplished shall be the primary factor for which the parties have bargained hereunder in accordance with Sections 2750.5 and 3353 of the California Labor Code or any corresponding provision in the Colorado or Hawaii Revised Statutes. Consultant's obligations for performance of services hereunder shall be limited to the completion of the consultation and services described above in accordance with the Business of XsunX and the XsunX Field of Use. Consultant shall have no obligation to work any particular hours or days or any particular number of hours or days. The Company shall have no right to control or direct the details, manner or means by which Consultant accomplishes the results of the services performed hereunder. 6.5. Payment of Taxes. Consultant shall be responsible for and pay Consultant's own self-employment taxes, estimated tax liabilities, business equipment or personal property taxes and other similar obligations, whether federal, state or local. The Company shall not pay or withhold any FICA, SDI, federal or state income tax or unemployment insurance or tax or any other amounts because the relationship of the parties hereto is not that of employer-employee, but that of independent contractor. Consultant shall be solely responsible for the payment of all taxes, withholdings and other amounts due in regard to Consultant's own employees. 6.6. Employees of Consultant. Consultant may subcontract with and/or employ such parties upon such terms and conditions as it may deem proper or necessary. 7. Warranties and Indemnification 7.1. Warranties. Consultant warrants and represents that the services of Consultant's subcontractors or employees shall be performed in full compliance with the terms and conditions of this Agreement, and, that all services performed hereunder shall be performed in accordance with all federal, state and local laws, rules or regulations. 7.2. Indemnification by Consultant. Consultant shall indemnify, defend and hold the Company and the property of the Company, free and harmless from any and all claims, losses, damages, injuries, and liabilities, including the Company's reasonable attorney fees and costs (the Company may choose its own counsel when defended hereunder), arising from or in any way connected with the performance of services under this Agreement or any other act or omission by Consultant, its agents, subcontractors, or employees. 7.3. Indemnification by the Company. The Company shall indemnify, defend and hold Consultant and the property of Consultant, free and harmless from any and all claims, losses, damages, injuries, and liabilities, including 4 Consultant's reasonable attorney fees and costs, arising from or in any way connected with any act or omission on the part of the Company, its constituent partners, agents, subcontractors, or employees. 8. Term. Consultant's engagement pursuant to this Agreement shall be for a period of two (2) years and shall commence upon the date of execution hereof (the "Commencement Date") and shall continue to and including January 19th, 2007 (the "Termination Date") unless earlier terminated in accordance with the provisions of Paragraph 8 of this Agreement; provided further that the term of this Agreement may be extended by the mutual agreement of the parties hereto. 9. Termination. Notwithstanding any other provision of this Agreement to the contrary, either party may terminate this Agreement at any time upon ninety (90) days prior written notice to the other. This Agreement may also be terminated by the Company, at its option, at any time during the term of this Agreement without notice, for good cause. Termination for good cause shall include, but not be limited to, any of the following: 9.1. The commission by Consultant of an act of fraud or other act materially evidencing bad faith or dishonesty; 9.2. The misappropriation by Consultant of any funds or property or other rights of the Company; 9.3. The suspension or removal or termination of Consultant by or at the request or requirement of any governmental authority having jurisdiction over the Company; 9.4. The breach by Consultant of any material terms of this Agreement or any other agreement between Consultant on the one hand and the Company, or any affiliate of the Company, on the other hand, including, but not limited to, the Technology Agreement; 9.5. Upon the death of the Consultant. 10. Confidentiality. All information derived or provided to Consultant under the terms and specific to the performance of this Agreement, including lists and databases, and any part of such lists, databases, or information, pertaining to customers, merchants, salespersons, financial records, computer software programs, strategic plans, contracts, agreements, literature, manuals, brochures, books, records, correspondence, computer programs, software, source codes, computations, data files, algorithms, techniques, processes, designs, specifications, drawings, charts, plans, schematics, computer disks, magnetic tapes, books, files, records, reports, documents, Instruments, agreements, contracts, correspondence, letters, memoranda, financial, accounting, sales, purchase and consultant data, capital structure information, corporate organizational information, identities, names and address of, and any information pertaining to, shareholders, directors, officers, consultants, contractors, vendors, suppliers, customers, clients, lenders, financing and business participants, and all persons associated with the Company, information pertaining to business models, business plans, projections, assumptions and 5 analyses, particular projects, and all other data and information and similar items relating to the business of the Company and all other data and information and similar items relating to the Company of whatever kind or nature and whether or not prepared or compiled by the Company and all other materials furnished or made available to Consultant by the Company or any of its affiliates (as hereinafter defined) relating to the business conducted by the Company ("Confidential Information"), is and are proprietary and confidential and are and shall remain the sole property of the Company. Affiliate as used in this section shall mean the Company, any entity in which Company owns a majority ownership (directly or indirectly), or any entity which owns a majority ownership of Company (directly or indirectly). Consultant acknowledges that the Confidential Information derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and that this confidentiality provision constitutes efforts that are reasonable under the circumstances to maintain the secrecy thereof. Consultant further acknowledges that the Confidential Information constitutes trade secrets pursuant to California Civil Code ss.3426.1. Consultant shall not, directly or indirectly, at any time during or after termination of consultant use or reveal, divulge, disclose, disseminate, distribute, license, sell, transfer, assign or otherwise make known, directly or indirectly, the Confidential Information to any person or entity not expressly authorized by the Company to receive such Confidential Information. 10.1 Consultant shall exercise the highest degree of care and discretion in accordance with the duty of Consultant hereunder to prevent improper use or disclosure of the Confidential Information and will retain all such Confidential Information in trust in a fiduciary capacity unless: (i) such use or disclosure has been authorized in writing by the Company through an officer or director, or (ii) is required to be disclosed by law, a court of competent jurisdiction or a governmental or regulatory agency. Further, Consultant shall return and deliver all such materials, including all copies, remnants, or derivatives thereof to the Company upon the termination of consultant with the Company or at any other time upon request by the Company. 11. Patents and Inventions. Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs, and processes ("Inventions") which Consultant hereafter during the period Consultant is retained by the Company under this Agreement or otherwise and for three (3) years thereafter may own, conceive of, or develop shall belong to the Company to the extent that the same: (1) relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company; (2) result from any work performed by Consultant for the Company; or (3) have otherwise been developed by Consultant using the Company's equipment, supplies, facilities, or trade secret information. As soon as Consultant owns, conceives of, or develops any such Invention, Consultant agrees immediately to communicate such fact in writing to the Secretary of the Company, and without further compensation, but at the Company's expense, immediately upon request of the Company, Consultant shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks, and assignments thereof) and perform any and all acts as the Company may reasonably request in order (a) to vest in the Company all Consultant's right, title, and interest in and to such Inventions, free and clear of liens, 6 mortgages, security interests, pledges, charges, and encumbrances arising from the acts of Consultant and (b), if patentable or copyrightable, to obtain patents or copyrights (including extensions and renewals) therefore in any and all countries in such name as the Company shall determine. Notwithstanding the foregoing, pursuant to Section 2872 of the California Labor Code, this Agreement shall not apply to any Invention which qualifies fully under the provisions of Section 2870 of the California Labor Code. Consultant acknowledges receipt of a copy of 2870 of the California Labor Code. 11.1 Derivative Works. All derivative works of the parties resulting from research or work funded by, or Confidential Information provided by, the Company associated with any subsequent research by any party, development, or combination of technologies of the parties after the Commencement Date, which are useful or specific to the XsunX Field of Use or the Business of XsunX, shall become the property of the Company. 12. Assignment. The obligations of Consultant under this Agreement are unique and may not be assigned. 13. Securities Compliance. No Offer or Sale. This Agreement is not intended to be an offer for the sale or issuance of securities, whether pertaining to stock, options, or otherwise, unless the same is exempt from registration and qualification pursuant to an applicable exemption. The issuance of stock and warrants is expressly subject to compliance with all state and federal securities laws, rules and regulations by the parties. While the Company does not consider this Agreement itself to be a securities or offer of any securities, whether pertaining to stock, warrants, or otherwise, in the event that this letter is construed to be an offer, the parties acknowledge the 7 following disclosure in accordance with Section 25102(a) of the California Corporations Code: The sale of the securities which are the subject of this agreement has not been qualified with the Commissioner of Corporation of the State of California and the issuance of such securities or the payment or receipt of any part of the consideration therefore prior to such qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this agreement are expressly conditions upon such qualification being obtained unless the sale is so exempt. 13.1 General Securities Compliance. Notwithstanding anything contained in this Agreement to the contrary, this Agreement, and the stock warrants discussed herein, shall be, and are, expressly subject to all SEC and securities, laws, rules, regulations and reporting and disclosure requirements, to the extent applicable to the Company as a reporting company, the shares, and\or any party hereto, including, but not limited to, shareholder voting and proxy solicitation rules. All issuances, sales, transfers, or other dispositions of shares of the Company shall be made in compliance with all applicable securities laws, rules and regulations, and pursuant to registration of securities under the Securities Act of 1933 ("Act") (and qualification under General Corporation Law of California) or pursuant to an exemption from registration under the Act (and qualification under General Corporation Law of California). Notwithstanding the foregoing, nothing in this Agreement shall obligate the Company to seek registration or qualification of any of its shares, and, to the extent that any obligation hereunder cannot be performed without registration or qualification of any of its shares, such obligation shall be excused on the part of the Company to the extent that the Company provides other adequate consideration therefore. 14. Rule 144. Consultant acknowledges that the shares of the Company may be subject to the restrictions on transfer set forth in Rule 144 of the Rules promulgated under the Act. Any and all offers, sales, transfer or other dispositions of shares of the Company shall be made only in compliance with Rule 144. Consultant agrees to comply with all policies and procedures established by the Company with regard to Rule 144 matters. Consultant acknowledges that the Company or its attorneys or transfer agent may require a restrictive legend on the certificate or certificates representing the shares pursuant to the restrictions on transfer of the shares imposed by Rule 144. 15. Amendments. This Agreement may be amended only in writing executed by Consultant and Company and approved in writing by the majority vote of the Board of Directors of the Company. 16. Effect of Headings. The subject headings of the paragraphs and subparagraphs of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 17. Parties in Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to any party to this Contract, nor shall any provision give any third person any right of subrogation or action over against any party to this Agreement. 18. Recovery of Litigation Costs. If any legal action or any arbitration or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover as an element of their damages, reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which they may be entitled. 19. Gender; Number. Whenever the context of this Contract requires, the masculine gender includes the feminine or neuter gender, and the singular number includes the plural. 8 20. Time of Essence. Time shall be of the essence in all things pertaining to the performance of this Agreement unless waived in writing by the undersigned parties. 21. Authority. The parties to this Agreement warrant and represent that they have the power and authority to enter into this Agreement in the names, titles and capacitates herein stated and on behalf of any entities, persons or firms represented or purported to be represented by each respective party. 22. Waiver. A Waiver by either party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to a waiver of such terms of condition for the future, or of any subsequent breach thereof, or of any other term and condition of this Agreement. All waivers must be made in writing executed by the waiving party. 23. Entire Agreement. This Agreement constitutes the entire agreement between the parties respecting the subject matter hereof, and there are no representations, warranties, agreements or commitments between the parties hereto except as set forth herein; provided that the terms of any Option or Award may be set forth in a Grant Instrument, which shall be read in conjunction with this Agreement. This Agreement shall control over any and all provisions or guidelines contained in any Consultant Manual, Consultant Handbook, Company Policy Manual or other similar document. Consultant expressly acknowledges that no Consultant Manual, Consultant Handbook, Company Policy Manual or other similar document is or shall become a contract between the Company and Consultant. 24. Notices. Any notice, request, demand or other communication permitted to be given hereunder shall be in writing and shall be deemed to be duly given when personally delivered to an Consultant officer of the Company or to Consultant, as the case may be, or when deposited in the United States mail, by certified or registered mail, return receipt requested, postage prepaid, at the respective addresses of the Company and Consultant as shown on the signature page hereto. Either party may change by notice the address to which notices are to be sent. 25. Severability. If any provision of this Agreement shall, for any reason, be held unenforceable, such provision shall be severed from the contract. The invalidity of such specific provision, however, shall not affect the enforceability of any other provision herein, and the remaining provision shall remain in full force and effect. 26. Choice of Law and Venue. This Agreement shall, to the fullest extent allowed by law, be construed, interpreted and enforced in accordance with the laws of the State of Colorado, without regard to or application of conflict of law rules, and the venue in regard to any disputes arising hereunder shall, to the fullest extent allowed by law, be in Orange County, California. 9 27. Press Releases. Any press release, company disclosures and advertisement made by the Company relating to Consultant shall be subject to the approval of Consultant prior to public release. Consultant will not unreasonably withhold such approval and agrees to respond to such requests for approval within two (2) business days. IN WITNESS WHEREOF, this Agreement is made effective by Consultant and the Company on the date set first forth above. COMPANY: CONSULTANT: Xsunx, Inc., Dr. Richard E. Rocheleau a Colorado corporation By:_________________________ By: ____________________________ Tom M. Djokovich, as CEO Dr. Richard E. Rocheleau, as Consultant 10 -----END PRIVACY-ENHANCED MESSAGE-----