xsunx inc

Analyst: Victor Sula, Ph.D.Initial Report

October 12th, 2009

XsunX Inc. (OTCBB: XSNX) 1

Analyst: Victor Sula, Ph.D. Initial Report

October 12th, 2009

Company Introduction

XsunX Inc.65 EnterpriseAliso Viejo, CA 92656

Tel: 949-330-8060Fax: 949-330-8061 E-mail: [email protected]: www.xsunx.com

MARKET DATA

SymbolExchangeCurrent PricePrice targetRatingOutstanding SharesMarket Cap.Average 3M Volume

Source: Yahoo Finance, Analyst Estimates

XSNXOTC BB$0.118$2.90

Speculative Buy189.34 Mn$22.34 Mn

305,928

XsunX Inc. (OTCBB: XSNX) was formed in 2003 to develop and commercialize advanced, thin-film photovoltaic (TFPV) solar cell technologies and manufacturing processes. The Company is currently developing a breakthrough TFPV cross-industry technology that may utilize the excess manufacturing capacity of the hard disc drive (HDD) industry to mass-produce highly efficient, low cost solar cells. The Company estimates that at only 12% efficiency, which is well below the full potential of Copper Indium Gallium Selenide (CIGS), its per-watt production costs for solar modules could be as low as $0.80 per watt. XSNX expects to have working prototypes within 10 months.

The Company is capitalizing on the past commercialization experience of its technologists with CIGS using evaporation and combining this experience with smaller area deposition enabled by high-rate HDD equipment. The combination of the two may enable greatly enhanced solar conversion efficiency, as well as high yield and high throughput comparable to the HDD industry. XSNX estimates that converting one-half of the HDD industry, which currently produces 600 million hard disks per year, would be the equivalent of adding nearly 3 GW per year of solar production capacity.

The Company believes that, upon completion of its development, its new manufacturing technology for high efficiency flexible CIGS thin film solar cells will drive costs of solar energy production to unprecedented new lows, and enable XSNX to target market opportunities in multiple market segments including:

Replacing existing silicon wafers: XSNX’s technology offers an •

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alternative to costly and unpredictable silicon wafer costs. There is a vast market opportunity to replace aging technology.

Utility scale solar fields: Due to the modular building block aspects of using wafers, solar module size and • power output can be tailored to meet the needs of any size solar farm or application. Monolithic thin film technology has constraints that limit panel size.

BIPV products: High performance, thin-film flexible CIGS wafers can be designed into an array of building • products, including roofing materials, building facades and glass.

Residential and commercial rooftop markets: Unlike lower performance thin-film solutions, high performance • CIGS modules deliver the energy density necessary to make residential applications economical.

Consumer products: A growing array of consumer products from hand held devices to vehicles and gadgets • of all types have begun to integrate solar. Thin film CIGS wafers can be sized to meet the needs of these rapidly growing product segments.

CIGS thin-film photovoltaic technology is more efficient

XSNX is developing a thin-film PV cross-industry technology that utilizes sophisticated high-rate production tools from the hard disk drive industry, processes knowledge from the CIGS and thin film industry, mass- produces highly efficient, low cost solar cells. The Company’s approach is designed to bridge the gap between inexpensive thin-film and high-efficiency silicon wafer technologies, and to produce solar cells for a wide variety of applications. Its novel production approach will likely increase cell efficiency, improve production speeds and yields, and dramatically lower solar cell costs.

Huge market opportunity

Highly volatile oil prices, coupled with increasing concerns over CO2 emissions worldwide, have increased global demand for clean renewable energy sources such as solar power. Worldwide PV sales have grown 40% annually since 1997. The global PV industry generated revenues of $20.4 billion in 2007, according to SolarbuzzTM, an international solar energy research and consulting company1. PV sales are expected to reach $36 billion in 2010 and exceed $50 billion by 20202.

World solar PV installations hit a record high of 5.55 GW in 2008, representing growth of 110% over the previous year. The slowdown in real economic growth, the credit crisis, and a variety of other factors have slowed PV market growth in 2009. Experts forecast installations of up to 7 GW in 2009. The solar panel market is expected to pick up

Investment Highlights

1. www.itar-tass.com/eng/level2.html?NewsID=12654502&PageNum=02. www.bine.info/pdf/infoplus/SunScreenII.pdf


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again in 2010, growing 48% to 10.5GW of newly installed PV capacity. By 2013, the worldwide PV installations market could reach 22 GW, implying 32% compound annual growth from 2008 to 20133.

An end-to-end process for delivering CIGS thin solar films

The Company is developing a complete process for delivering high efficiency, low-cost front-end thin-film solar cell manufacturing systems coupled with customized backend solar module assembly and packaging systems that deliver low cost products based on CIGS solar thin films. CIGS is emerging as the next generation solar technology, which is more efficient and lower cost than silicon. Market research firm Greentech Media estimates CIGS production capacity will expand 86% annually from 264 megawatts in 2009 to 1.7 GW in 2012. The U.S. Department of Energy’s National Renewable Energy Lab recently achieved a 19.9% conversion efficiency for CIGS, the highest among currently used PV materials.

CIGS solar cells also offer a broader range of applications than other thin-film solar technologies. They can be used in solar farms, in BIPV (building integrated PV), flat and pitched roofs, rooftop shingles and in portable devices.

Mass production of thin film solar cells could drive costs below $1 per watt

The mass production of individual, high performance, flexible solar cells – like solar building blocks – could allow solar power to compete effectively with other power sources by driving costs below $1 per watt. At that price point, solar PV becomes competitive with coal-fired electricity. The average price for a PV module, excluding installation and other system costs, has dropped from almost $100 per watt in 1975 to less than $4 per watt currently4. With expanding polysilicon supplies, average PV prices are projected to drop to $2 per watt by 2010. With thin-film PV, production costs may decline to $1 per watt in 2010.

Meaningful revenue stream by 2012

The Company is leveraging its process knowledge of CIGS thin film to develop and adapt CIGS manufacturing processes to HDD equipment and then build an initial CIGS solar cell pilot line with solar module production capabilities that can be used for marketing purposes and continued process improvement. XSNX’s aim is to establish joint ventures with larger companies and generate revenues through licensing fees and manufacturing royalties.

XSNX anticipates establishing multiple joint-venture manufacturing agreements over the next three years. Management believes that the versatility of a high performance, low cost replacement or substitute for silicon, and other less adaptable thin-film technologies, will create market opportunities for its hybrid CIGS technology that will attract numerous joint venture manufacturing partners addressing multiple market segments.

3. www.epia.org/index.php?id=18. Global Market Outlook until 2013.4. www.earthpolicy.org/Indicators/Solar/2007_data.htm#fig7


October 12th, 2009


Strong research and development capabilities

XSNX recently announced that it has established on-site research and development capabilities with Intevac Inc., a recognized leader in the HDD equipment industry. With access to world class facilities and industry proven HDD processing equipment, XSNX thin film CIGS technologists and manufacturing experts are working to create a unique process of leveraging small area deposition (approximately 5X5-inch squares), material control, and material transport technologies from the hard disk drive industry for use in the production of thin film CIGS solar cells.

The Company is combining expertise and technological improvements derived from the sophisticated hard disc drive manufacturing industry with its own experience in thin film. XSNX researchers have nearly 15 years of thin film and CIGS experience and a track record of success in technology development, equipment design and production of several million square feet of CIGS products in commercial production settings. The Company’s chief technology officer has worked side-by-side with leading researchers at NREL and in fact shares an R&D 100 award with NREL staff for efforts related to CIGS technology development.

In its September 2009 newsletter, XSNX noted that its development projects are progressing on schedule and that the Company began testing the designs for thermal evaporation sources in September. This work included evaporating metal to form layers of the CIGS solar device, analyzing results and establishing deposition rates for both the evaporation source and sputtering tools that XSNX intends to adapt to the HDD equipment.

Seasoned management team

The Company’s management team has decades of experience in developing and commercializing thin-film solar energy technologies. President/CEO Tom Djokovich has more than 30 years experience in the high-tech and building industries. He is a seasoned executive who has successfully attracted millions of dollars of investment capital to his companies. XSNX COO Joseph Grimes has more than eight years direct experience in thin-film technology and manufacturing. Chief Technology Officer Robert Wendt has more than 20 years experience in thin-film solar technologies, most recently directing several areas, including copper indium gallium dislelenide (CIGS) technology development, equipment design and integration, facilities design and construction, engineering, production and operations, for Global Solar Energy Inc., a major producer of CIGS thin-film PVs. Marcus Padgett, the Company’s senior quality & reliability engineer, has more than 25 years experience in new product and process quality planning, control, and improvement, and in product reliability testing and validation.

The Company’s goal is to provide a low-cost (less than $1 per watt) solution to the industry by developing a new thin-film copper indium gallium (di)selenide (CIGS) manufacturing technology. XSNX’s approach is to capitalize on past commercialization experience of CIGS using proven evaporation processing techniques and to combine this experience with smaller area deposition within high rate hard disk drive (HDD) equipment. The Company expects that the combination of these two principals will lead to solar conversion efficiency approaching that achieved in laboratories as well as high yields and high throughput common in the HDD industry, which provide the basis for breakthrough efficiencies and lower costs. Additionally, the Company foresees an opportunity to offer this technology to the HDD manufacturing industry as an alternative use for its excess, or antiquated, manufacturing capacity, which can be switched over to mass-produce low-cost solar cells. XSNX plans to create a complete end-to-end process that delivers low cost front end thin-film solar cell

Business Model


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manufacturing systems, customized backend solar module assembly, and packaging systems that deliver low cost products based on the use of the CIGS solar thin-film absorber.

The Company is working with a leading producer of hard disc drive manufacturing equipment, Intevac Inc., to create a unique, proprietary process that allows small area deposition (approximately 5X5 inch squares), material control, and material transport technologies from the disk drive industry to be used in the production of thin film CIGS solar cells. With nearly 40 million HDD discs produced every month on Intevac equipment, XSNX benefits from Intevac’s years of technological innovations and industry leading technology. The Company has established an on-site presence at the Intevac facilities for the duration of the initial development and equipment adaptation phases.

XSNX also plans to establish a Creative Research and Development Agreement (CRADA) with the U.S. National Renewable Energy Laboratories (NREL). It plans to work with NREL to validate the properties and suitability of each of the CIGS cell layers it produces. In addition to commercialization assistance, NREL may provide third-party validation of XSNX’s integrated CIGS solar cell efficiencies and the quality and suitability of each of the individual CIGS device layers.

The Company’s September 2009 progress newsletter noted that development progress has been consistent with XSNX’s work plan, and that it began successfully testing the designs for thermal evaporation sources in September. This work included evaporating metal to form layers of the CIGS solar device, analyzing results, and establishing deposition rates for both the evaporation source and sputtering tools that XSNX intends to adapt to the HDD equipment over the next nine to 10 months.

Target market

XSNX’s management believes that high efficiency flexible CIGS solar cells provide an immense opportunity to establish JV manufacturing relationships in multiple market segments. The Company sees flexible high efficiency solar cells as a type of solar building block that can be used in a wide variety of applications including:

Replacing existing silicon wafers: XSNX’s technology offers an alternative to costly and unpredictable silicon • wafer costs. There is a vast market opportunity to replace aging technology.

Utility scale solar fields: Due to the modular building • block aspects of using wafers, solar module size and power output can be tailored to meet the needs of any size solar farm or application. Monolithic thin-film technology has constraints that limit panel size.

BIPV products: High performance, thin film flexible • CIGS wafers can be designed into an array of building products, including roofing materials, building facades and glass.

Residential and commercial rooftop markets: Unlike • lower performance thin-film solutions, high performance CIGS modules deliver the energy density necessary to make residential applications economical.


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Consumer products: A growing array of consumer products from hand held devices to vehicles and gadgets of • all types have begun to integrate solar. Thin film CIGS wafers can be sized to meet the needs of these rapidly growing product segments.

Various laboratories and companies have developed many types of deposition technologies that combine materials to create the CIGS layer, but a process called evaporation has shown the highest solar energy conversion efficiencies at nearly 19%. Evaporation source design must incorporate complex factors such as material compatibility to avoid detrimental chemical reactions, accommodating thermal expansion mismatch between dissimilar materials, evaporated metal uniformity as a function of the distance between the source and substrate, and extremely accurate temperature control.

Another process that is used to manufacture the CIGS thin-film device is sputtering. “Sputtering” is the process for depositing a thin film of material onto a surface in a vacuum. The process physically removes portions of a coating material called the target, and deposits a thin, firmly bonded film onto an adjacent surface called the substrate. Bonding is triggered by bombarding the surface of the sputtering target with gaseous ions under high voltage acceleration. As these ions collide with the target, atoms (or occasionally entire molecules) of the target material are ejected and propelled against the substrate where they form a very tight bond. The resulting coating is held firmly to the surface by mechanical forces, although in some cases an alloy or chemical bond may result5.

Using this process, PV device efficiencies greater than 12% have been achieved. The Mo layer is deposited on the glass by DC magnetron sputtering. This process is carried out in a multi-chamber, in-line sputtering system. After laser patterning of the Mo, the glass substrate is transferred to another in-line vacuum system where extensive use is made of sources capable of downward evaporation. Three custom-designed sources are employed to supply Cu, In, Ga and Se needed to form the Cu (In,Ga)Se2 compound. During this process, the glass is heated. After deposition of the CdS (or other junction-forming material) and scribing of the CIGS, a second in-line sputtering system is used to deposit highly conducting zinc oxide as the top transparent electrode. This electrode is then patterned by scribing, and the plate is ready for testing6.

Using sputtering technologies alone, it is possible to manufacture all of the layers necessary to make a CIGS device. However, industry research has shown that sputtering by itself does not achieve the same efficiency

Technology

XsunX Process Flow

Source: Company presentation

Back Contact Absorber Buffer Front ContactSputter:

ZnO / ITOWet Bath:

CdS+Evaporation:Cu, In, Ga, Se

Sputter: Mo

5. http://thefraserdomain.typepad.com/energy/2005/08/thin_film_pv_so.html6. www.solarthinfilms.com/active/en/home/products__services/turnkey_pv_thinfilm_factories/cigs_manufacturing_process.html


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milestones as sputtering used in combination with evaporation techniques to make the CIGS device.

XSNX’s intent is to adapt process recipes for the deposition of the non-solar absorbing layers to sputtering tools previously developed by Intevac. These sputtering tools have proven their usefulness in years of industrial use and XSNX has found these tools to be highly adaptable to its needs and well suited for use in the solar field. Separately, and with a focus on establishing what XSNX believes to be the basis for achieving higher conversion efficiencies, the Company is developing thermal evaporation source technology to produce the CIGS core solar absorber. XSNX plans to adapt these designs to Intevac equipment, leveraging numerous existing system features with the goal of reducing costs and time to market. XSNX is not aware of any competitor in the market today who is using or adapting HDD equipment in this hybrid manner for CIGS PV manufacturing.

CIGS photovoltaic

The CIGS PV effect was first discovered in the 1970s. Since then, government and university labs have dramatically advanced the understanding and efficiency of CIGS material, achieving 19.9% conversion efficiency at the Department of Energy’s National Renewable Energy Lab.

CIGS is a direct band-gap semiconductor (in contrast to crystalline silicon, which is an indirect band-gap semiconductor). This difference is crucial, as it allows CIGS films to generate far more electricity per unit of material. A CIGS film as thin as one micron produces a photoelectric effect equal to that of a crystalline silicon wafer 200-300 microns thick. A CIGS solar cell is composed of multiple layers of thin-film materials that form a battery-like structure when combined. However, unlike a battery that stores energy, this structure converts sunlight to electrical energy. Central to the operation of the cell is a composite of copper indium gallium (di) selenide, which forms the CIGS PV layers.

Amorphous Silicon Triple Junction (a-Si)Cadmium Telluride (CdTe)Copper Indium Gallium Selenide (CIGS)

12.3%16.5%19.9%

Highest Lab Cell EfficiencyMaterial

Material Comparisons

Source: Department of Energy’s National Renewable Energy Lab


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XSNX’s new technology may produce a replacement for silicon wafers – roughly 80% of solar panels are silicon-based – at half the cost. The Company’s CIGS wafers could be integrated into solar panels, adapted to a variety of building materials and even used in consumer products.

Once completed, the system will initially produce individual 125 mm format (about 5” square) wafers or solar cells, eventually scaling to 156 mm and 215 mm formats (about 6” and 8” squares). These wafers are similar in size to silicon wafers used in nearly all solar modules manufactured today. The small system footprint allows for increased MW production per factory square foot. Modular 10 MW cell production systems may require as little as 4,500 square feet of manufacturing space. A 100 MW line could be installed in the same space required for a 25 MW thin-film amorphous silicon production line.

Transparentfront contact

Cu(In,Ga)Se2(1.4-2.5 um)

Mo (0.3-0.4 um)Glass substrate

ZnO:AI (0.3-0.4 um)ZnO ( 0.1 um)Cds ( 0.05 um)

Cross-section of a CIGS thin-film solar cell

Source: http://en.wikipedia.org/wiki/Copper_indium_gallium_selenide

Products


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System architecture is derived from proven hard disc drive deposition systems that account for the production of more than 600 million disks per year – equivalent to nearly 3 GW per year of solar cells. XSNX notes that seven of the eight systems necessary for manufacturing CIGS solar cell require only minimal process adaptation, while the eighth system leverages the proven commercial stability of an existing high rate production tool, which is being modified for XSNX’s process.

The XSNX process will mass-produce 5-inch cigs “wafers” similar in size to traditional silicon cells.

Multi-industry/application solution:

XSNX’s production system and technology is being developed to produce either just solar cells or complete solar modules offering opportunities for manufacturers:

Seeking to provide a low cost per watt replacement for Poly-Si or c-Si silicon wafers to solar module • assemblers;

Or building integrated photovoltaic (BIPV) products that require the use of small flexible solar cells that can • be adapted for use in a multitude of different shaped and sized solar BIPV products;

Existing semi-conductor and hard disc drive companies seeking ways to put idle floor space or systems to • work in the green economy; and

hin-film solar module manufacturers looking to break the barriers to the production of large area, low cost, • high efficiency thin-film solar modules capable of delivering better value than silicon module solutions.

125mm Thin-Film CIGS Cell 125mm Poly Silicon Cell

Source: Company size reference presentation


October 12th, 2009


Energy demand

Electricity consumption is strongly influenced by economic and population growth in the world’s developing economies. According to the United Nations, the world’s population will increase from around 6.5 billion people today to 8.3 billion people in 2030.7 Energy demand will also increase substantially with demand for electricity forecast to double from 17,408 TWh to 33,750 TWh by 2030, according to the Energy Information Administration8. The U.S. Department of Energy predicts world energy consumption will grow 71% by 2030.

Solar energy industry trends

The solar industry has grown 48% annually since 2001. Solar radiation, along with secondary solar resources such as hydroelectricity and biomass, wind and wave power, account for more than 99.9% of the available flow of the earth’s renewable energy. The world has a renewable usable energy flux that exceeds 120 petawatts (PW) (8,000 times 2005 total usage), dwarfing all non-renewable resources. Solar energy offers a clean, safe alternative to energy produced from coal, oil or natural gas. Despite these advantages, solar energy currently accounts for only 0.04% of the world’s energy usage.

The high volatility of oil prices, coupled with increasing concerns over CO2 emissions worldwide, has led to the evolution of renewable energy concepts over the past few years. With growing demand for clean energy sources, the manufacturing and deployment of solar PV cells and arrays have expanded dramatically in recent years. The global PV industry has been propelled by the consistent efforts and investment from European countries, followed by Japan and the U.S.9.

World solar PV market installations were a record high of 5.55 gigawatts (GW) in 2008, representing growth of 110% over the previous year. Europe accounted for 82% of world demand in 2008. According to EPIA, Spain accounted for almost half of new installations, topping 2.5 GW. However, that star has already faded with the Spanish imposing a 500 MW cap on future installations. Spain’s 285% growth pushed Germany, which added 1.5GW in 2008, into second place in the market ranking, while the U.S. advanced to number three. Rapid growth in Korea positioned it as the fourth largest market, closely followed by Italy and Japan10. Other countries in the Asia-Pacific region, such as China and Taiwan, have gained significant traction in recent years. China, for instance, produced more than 2 GW of solar cells during 2008, and is projected to drive 50% annual solar growth over the next few years.

Industry Outlook

7. www.fao.org/english/newsroom/news/2002/7833-en.html8. http://news.cnet.com/8301-11128_3-9939715-54.html9. www.asdreports.com/shopexd.asp?id=225410. www.pv-tech.org/news/_a/eipa_photovoltaics_market_topped_5.5gw_in_2008_129_growth_y-on-y/


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Worldwide PV sales have grown 40% annually since 1997. The global PV industry generated revenues of $20.4 billion in 2007, according to SolarbuzzTM, an international solar energy research and consulting company11. Sales are expected to reach $36 billion in 2010 and exceed $50 billion by 2020.12 In dollar terms, the weighted 2008 average global factory gate crystalline module price increased by a modest 3% over 2007, notwithstanding the significant fall in prices in the fourth quarter of 2008. Preliminary first quarter 2009 data shows a price decline of up to 24% (manufacturer dependent) compared to the 2008 global weighted average13.

11. www.itar-tass.com/eng/level2.html?NewsID=12654502&PageNum=012. www.bine.info/pdf/infoplus/SunScreenII.pdf13. www.solarbuzz.com/Marketbuzz2009-intro.htm

Top 10 PV markets in 2008, GW

Source: www.solarbuzz.com/Marketbuzz2009-intro.htm

Worldwide Photovoltaic Sales, $ billion

Source: www.bine.info/pdf/infoplus/SunScreenII.pdf


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Experts believe the market could hit 7 GW in 2009. Growth in the solar panel market is expected to pick up again in 2010, expanding 48% to 10.5 GW of newly installed PV capacity. The PV sector is hoping markets such as the U.S., Germany, France and Italy will drive demand with favorable policy frameworks expected to further accelerate PV deployment in these countries14. In 2013, the worldwide PV market could reach 22 GW if appropriate policies are in place, implying 32% annual growth through 2013. The conservative estimate is a 12 GW market and 17% annual growth through 201315.

U.S. PV trends

According to EPIA, the U.S. will emerge as one of the top PV markets worldwide by 2013. The extension of the Investment Tax Credit (ITC), the continuation of existing state-level support programs (i.e. California), the emergence of local support schemes (first FiT in Gainesville), the immense potential of U.S. territory, and strong commitment of President Obama to renewable energy are all factors that point to a multi-GW U.S. market in 2010. The performance of the U.S. PV market in 2009 will depend mainly on project financing. In support of President Obama’s pledge to double renewable energy production within three years, the House accepted an $825 billion package, with $54 billion dedicated to developing renewable energy technologies and improving U.S. energy efficiency. The nation’s solar cell and solar panel manufacturing capacity is likely to grow 50% annually between 2008 and 2012, according to GTM Research. U.S. market demand for solar panels could grow from 342 MW in 2008 to 2.13 GW in 201216.

Production Capacity

Silicon remains the basic material used in the production of solar cells based on crystalline technology, which accounts for more than 90% of the world market. In 2006, for the first time ever, more than half of polysilicon production went into PVs instead of computer chips. Due to strong continuous growth in the global PV market and a slower process for establishing new silicon production facilities, polysilicon supply has become a major bottleneck for the PV industry. Polysilicon supply to the solar industry grew by 127% in megawatt terms, sufficient to substantially ease supply limitations in 2008. U.S. polysilicon production accounted for 43% of the world supply. Average global wafering capacity grew to 8.30 GW (up 81%).

Global Annual PV Market (GW)

Source: www. epia.org

14. www.reuters.com/article/pressRelease/idUS150492+18-Aug-2009+BW2009081815. www.epia.org/index.php?id=18. Global Market Outlook until 2013.16. www.greentechmedia.com/articles/read/boom-time-ahead-for-u.s.-solar-manufacturing-says-analyst/


October 12th, 2009


While the bulk of PV installations use crystalline silicon modules, thin film is about 10% of the market. The thin-film sector, which includes amorphous silicon, cadmium telluride (CdTe), and copper indium gallium diselenide (CIGS), will represent less than 20% of the market in 2010. Its share could grow to 30% by 2013. Commercial thin-film installations use cadmium telluride (CdTe) cells, although strong demand is anticipated for CIGS cells because of the better match of their response to the solar spectrum. CIGS has proven to be an extremely difficult materials system. Its manufacture and behavior has not yet been mastered as evidenced by the handful of CIGS firms in commercial production. There are only three CIGS solar panel/tube producing companies now: Solyndra, Nanosolar and Global Solar.

This polysilicon shortage, which has limited the growth of crystalline technologies in the last few years, has offered a great opportunity for the PV Thin Film industry to grow and establish thin film as a major PV technology solution. Thin film represented less than 5% of total production capacity in 2005, with around 90 MW, but its share is likely increase to 20% in 2010 and 25% in 2013 with about 9 GW. A NanoMarkets report projects the thin-film PV market will grow from $2.4 billion in 2008 to more than $12 billion in 2013. The market is set to almost double by 2015, reaching $22 billion17.

The average price for a PV module, excluding installation and other system costs, has dropped from almost $100 per watt in 1975 to less than $4 per watt currently18. With expanding polysilicon supplies, average PV prices are projected to drop to $2 per watt by 2010. For thin-film PV, production costs are expected to decline to $1 per watt in 2010, at which point solar PV will become competitive with coal-fired electricity.

Production Capacity Outlook – Crystalline technologies vs. Thin Film

Source: www.epia.org/index.php?id=18. Global Market Outlook until 2013.

17. www.pv-tech.org/news/_a/thin_film_pv_revenues_to_exceed_12_billion_in_2013/18. www.earthpolicy.org/Indicators/Solar/2007_data.htm#fig7


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XSNX is still in an early development stage and has yet to generate meaningful revenues from product sales. The Company’s efforts have been focused on building its portfolio of intellectual properties and refining its technology.

During the three months ended June 30, 2009, the Company wrote down the value of manufacturing equipment it does not expect to utilize under its new plan of operations. This impairment resulted in an expense of $5,240,000 and the elimination of associated accounts payable of $260,000. This is a non-cash expense item for the quarter ended June 30, 2009.

The net loss for the nine months ended June 30, 2009, was $7,997,992 as compared to a net loss of $2,414,186 for the same period in 2008. The higher net loss was mainly due to assets impairment, lower interest income, increased rent, research and development and other expenses.

Liquidity and capital resources

The Company’s cash declined to $0.6 million in June 2009 from $2.4 million in September 2008. XSNX had net working capital of $0.5 million, down from $3.3 million at September 30, 2008. Cash flow used in operating activities during the nine-month period ended June 30, 2009, was $1.2 million as compared to a use of cash of $1.9 million for the same period of 2008.

The Company has minimal current liabilities, no long-term debt and stockholders’ equity of $2.4 million. Since its inception, XSNX has accumulated losses of approximately $29.1 million.

Financial Analysis

Total RevenueTotal Operating ExpensesSelling, General and Admin. ExpenseDepreciationImpairment of AssetOption / Warrant ExpenseOperating incomeTotal Other (Income) ExpenseNet (Loss)Diluted EPS

-901,340709,125

23,893-

168,322(901,340)

(47,012)(854,328)

(0.005)

-2,574,3262,021,837

47,523-

504,966(2,574,326)

(160,140)(2,414,186)

(0.014)

-6,074,508

555,60340,337

5,240,000238,568

(6,074,508)4,846

(6,079,354)(0.032)

-8,292,5172,541,722

117,7265,240,000

393,069(8,292,517)

(294,525)(7,997,992)

(0.042)

n/m573.9%-21.6%68.8%

n/m41.7%

n/mn/mn/mn/m

n/m222.1%

25.7%147.7%

n/m-22.2%

n/mn/mn/mn/m

% Chg % ChgQ3 FY 2009 9 months FY 2008

9 monthsFY 2009 Q3 FY 2008

Income statement, $

Source: SEC Filings


October 12th, 2009


During the nine months ended June 30, 2009, the Company’s capital needs were met from working capital and $600,000 in cash raised through the issuance of common stock to Fusion Capital Fund II LLC.

The Company entered into a financing arrangement with Fusion Capital Fund II LLC pursuant to which it has the right over a 25-month period to receive $80,000 every two business days under such financing arrangement unless its stock price equals or exceeds $0.30, in which case XSNX can sell greater amounts to Fusion Capital as the price of its common stock increases; Fusion Capital doesn’t have the right or isn’t obligated to purchase any shares of the Company’s common stock on any business day that the market price is less than $0.20. As of August 6, 2009, the Company’s stock was trading at approximately $0.12 and therefore, the Company is not presently able to draw down on this financing arrangement.

The Company has sold approximately 18,347,581 shares to Fusion Capital for total proceeds of $5,800,000. These shares were sold at prices ranging from $0.405 to $0.20 per share.

Outlook

XSNX anticipates establishing multiple joint-venture manufacturing agreements over the next three years. Management believes that the versatility of a high performance low cost replacement or substitute for silicon, and other less adaptable thin-film technologies, will create market opportunities for its hybrid CIGS technology that will attract numerous joint venture manufacturing partners addressing multiple market segments. These manufacturing agreements will provide the basis for significant future licensing and royalty revenues.

Comparative analysis

We based our valuation on comparative analysis, selecting solar energy companies, engaged in the design, development, manufacture and marketing of PV products worldwide.

Total current assets, includingCash and equivalentsNet fixed assetsTotal other assetsTOTAL ASSETS

Total current liabilitiesTotal stockholders’ equity, includingAccumulated deficit

3,818,2042,389,218

276,1865,830,4459,924,835

496,9109,427,925

2,033,010603,354226,556

1,731,3153,990,881

1,556,8792,434,002

30-Sep-08 30-Jun-09

Selected balance sheet data, $

Source: SEC Filings

Valuation


October 12th, 2009


DayStar Technologies Inc. Suntech Power Holdings Co. Ltd. JA Solar Holdings Co. Ltd. Solarfun Power Holdings Co. Ltd. First Solar Inc. Canadian Solar Inc. Median

XSUNX Inc.

DSTISTP

JASOSOLFFSLRCSIQ

XSNX

0.5815.74

3.865.87

136.6116.36

0.118

19 2,590

623 316

11,560 584

22.3

n/a74.95

n/mn/m

18.8213.6318.82

n/m27.6119.3015.0518.3411.0518.34

n/a1.811.630.625.841.051.63

0.511.451.020.524.700.760.89

TickerSymbol

Company nameSeptember 9, 2009

Price $

P/E P/SMarketCap. $ Mn 2008 20082009E 2009E

Peer comparison

Source: Yahoo Finance

Other PV companies trade at Price/Sales multiples ranging from a low of 0.51 times sales for DayStar Technologies to a high of 4.70 times sales for First Solar. The peer group companies currently trade at a median forward 0.89 times Price/Sales multiple, reflecting lower oil prices and difficult conditions in the global financial markets. PV offerings become more competitive as oil prices increase.

We are initiating coverage of XSNX with a Speculative Buy rating and a $2.90, price target, based on a 0.75 forward Price/Sales multiple and our expectation that the Company will establish multiple joint-venture manufacturing agreements over the next three years that provide the basis for significant future license and royalty revenues. We also adjust our target to reflect our expectation of a 50% increase in the share count due to future equity sales. We strongly advise prospective investors to consider the risk factors mentioned below since the Company faces many challenges in achieving its revenue growth goals.


October 12th, 2009


Development-stage company without meaningful revenues

XSNX is a development stage company and has yet to generate significant revenues. Net losses for the nine months ended June 30, 2009, and 2008 were $7,997,992 and $2,414,186, respectively. Net cash used in operations was $1,176,898 and $1,896,206 for the nine months ended June 30, 2009, and 2008, respectively. Since its inception through June 30, 2009, the Company has accumulated a deficit of $29,073,061. There is no assurance that the Company can achieve or sustain profitability in the future.

External financing required to continue operations

XSNX must obtain significant additional financing to continue to operate the business and make capital expenditures to complete the development of its newly announced thin-film manufacturing technology. Financing may be unavailable to the Company or available only on disadvantageous terms. Lack of funding could cause the Company to curtail its business operations and delay the execution of its business plan.

Unproven technology

As a result of a change to the Company’s plan of operations during FY 2009, XSNX is working to develop new manufacturing technologies for thin-film solar cells. Revenues and profits may never materialize if the Company is unable to successfully complete the development of its technology or secure licensing agreements. Additionally, there can be no assurance that there will be market demand for the new technology.

Reliance on government incentives can pose risk

Solar power is not yet cost-competitive with conventional energy sources or other renewable energy sources. Government incentives are required to sustain demand and create incentives to further reduce solar energy production costs. These subsidies and incentives are subject to policy changes and fiscal budgets.

Risk Analysis


October 12th, 2009


Mr. Grimes brings to XSNX more than eight years direct experience in thin-film technology and manufac-turing. He was most recently vice president of defense solutions for Envisage Technology Company, where he directed and managed the defense group business development process, acquisition strategies and vi-sion for next generation applications. He previously served as co-founder, president and CEO of ISERA Group, where he established the company’s infrastructure and guided five development teams, finally sell-ing the company to Envisage. His direct experience in thin-film technology came from Applied Magnetics Corp. where he was manager for thin-film prototype assembly. Mr. Grimes holds a B.S. in business economics and environmental studies, and a M.S. in computer model-ing and operation research applications, both from the University of California at Santa Barbara.

Joseph GrimesPresident and Chief Operating Officer

Mr. Wendt holds a B.S. and M.S. in metallurgical engineering and material science from the Colorado School of Mines. His responsibility encompasses technical specifications for XSNX facilities, equipment, and manufacturing processes. Prior to joining XSNX, Mr. Wendt was vice president of Sales, Product De-velopment, and Engineering at Global Solar Energy, where he led several areas including copper indium gallium diselenide (CIGS) technology development, equipment design and integration, facilities design and construction, engineering, production and operations.

Previously, Mr. Wendt worked for ITN with responsibility for developing thin-film deposition technolo-gies, thin-film PV, and charge controller/battery systems for portable solar cell powered systems. Prior to joining ITN, Mr. Wendt spent eight years with Lockheed Marietta Astronautics, where he served as pro-gram manager/principal investigator on more than 20 material-based programs. From 1994 to 1995, Mr. Wendt served as the technical lead for thin-film PV research at the Denver Division.

Robert WendtChief Technology Officer

Management

Mr. Anderson is the managing director of the Environmental Science and Engineering Directorate of Qine-tiq North America in Los Alamos, New Mexico. He has been with Qinetiq North America, formerly Apo-gen Technologies, since January 2005. Mr. Anderson has 18 years experience in environmental consulting, providing consulting services in the areas of 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. He earned his B.S. in geology from Denison University and his M.S. in environmental science and engineer-ing from Colorado School of Mines.

Thomas AndersonChairman

Mr. Djokovich joined XSNX in October 2003 as CEO. He leads XSNX’s business and solar technologies development efforts. Mr. Djokovich’s background includes more than five years of thin-film solar develop-ment experience and 30 years of executive management and entrepreneurial experience managing growth and innovation in both the high-tech and building industries. He is a veteran manager of publicly held corporations and has successfully attracted tens of millions of dollars in capital investments for business development. Mr. Djokovich’s other responsibilities include management of securities compliance, internal controls, and public relations for XSNX. He has also served on XSNX’s board of directors since 2003.

Tom M. DjokovichChief Executive Officer


October 12th, 2009


Dr. Russak has more than 35 years of industrial experience as a research scientist and senior executive of two public companies. He has expertise in thin-film materials and devices for magnetic recording, PV, solar thermal applications, semiconductor devices and glass, glass-ceramic and ceramic materials. He also has more than 12 years experience at the executive management level working for public companies with significant off shore development and manufacturing assets Dr. Russak received his B.S. in Ceramic Engineering in 1968 and his Ph.D. in Materials Science in 1971, both from Rutgers University in New Brunswick, NJ. During his career, he has been a contributing scientist and program manager at Grumman Aerospace Corp., a research staff member and technical manager in the areas of thin film materials and processes at the Research Division of IBM Corporation at T.J. Watson Research Laboratories. In 1993, he joined HMT Technology, a manufacturer of thin-film disks for magnetic storage, as vice president of Research and Development. His responsibilities included new product de-sign and introduction. Dr. Russak became chief technical officer of HMT and held that position until 2000 when HMT merged with Komag Inc. Dr. Russak was appointed president and chief technical officer of the combined company. He continued to set technical, operational and business direction for Komag until his retirement at the end of 2006. Dr. Russak is currently executive director of IDEMA-US, the trade associa-tion for the hard disk drive industry. He has published more than 90 technical papers, and holds 23 U.S. patents.

Dr. Michael A. RussakDirector, Member of XSNX’ Scientific Advisory Board

Mr. Padgett designs and leads quality and reliability initiatives in product design, technology demonstra-tion, process development, and operations. He has more than 25 years experience in new product and process quality planning, control and improvement, and in product reliability testing and validation. Mr. Padgett has consulted nationwide in statistical methods and quality improvement across numerous indus-tries, and has extensive experience in statistical design and analysis of experiments, process control, and yield improvement. Mr. Padgett holds a B.A. from Yale University, and an M.S. in industrial technology from Eastern Michigan University.

Mr. Fundingsland brings more than 40 years of sales, marketing, executive business management, finance and corporate governance experience to XSNX. His professional and business experience comes from his experience at Applied Magnetics Corp., a disk drive and data storage company. Prior to his retirement from Applied Magnetics in 1994, Mr. Fundingsland served as an executive officer and vice president of Sales and Marketing for 11 years directing sales growth from $50 million to more than $550 million. From 1993 through 2003, Mr. Fundingsland served as a member of the board of directors for the International Disk Drive Equipment Manufacturers Association “IDEMA” where he retired emeritus, and continues to serve as an advisor to the board. For the last 13 years, Mr. Fundingsland has provided consulting services to companies in the disk drive, optical, software and LED industries.

Marcus M. PadgettSenior Quality & Reliability Engineer

Oz FundingslandDirector


October 12th, 2009


Dr. Yu received his A.B. (summa cum laude) and A.M. degrees in physics from Harvard University in 1986, and his Ph.D. degree in applied physics from the California Institute of Technology. In September 1992, following a one-year postdoctoral appointment at the IBM Thomas J. Watson Research Center in Yorktown Heights, NY, he joined the faculty of the University of California, San Diego, as assistant professor of elec-trical and computer engineering. He was promoted to associate professor in 1996 and professor in 1998. Professor Yu has been the recipient of an NSF CAREER Award (1995), an ONR Young Investigator Award (1995), an Alfred P. Sloan Research Fellowship (1995), and the UCSD ECE Graduate Teaching Award (1997). He has served on numerous conference organizing committees and currently serves as general chair/past program chair of the TMS Electronic Materials Committee and Electronic Materials Conference, and fellow of the DARPA Defense Sciences Research Council (DSRC). At UCSD, Professor Yu directs a research labora-tory concerned generally with the characterization, understanding and application of physical phenomena and material and device properties at nanometer to atomic length scales. Current research interests of his group include III-V nitride heterostructure materials and device physics; scanning probe characterization of advanced electronic materials and devices; solid-state nanoscience and nanotechnology; and PVs and other technologies for energy generation. The results of his research have been reported in more than 140 refereed journal and conference publications and more than 150 conference and seminar presentations.

Dr. Edward T. YuMember ScientificAdvisory Board

XSNX Scientific Advisory Board

Dr. Ahrenkiel is a research professor of metallurgical and materials engineering at the Colorado School of Mines. He is also a consultant and research fellow emeritus at the National Renewable Energy Laboratory, (formerly the Solar Energy Research Institute) in Golden, Colorado, where he worked from 1981 to 2005. He became a research fellow at NREL in 2000. His area of specialization is the measurement and character-ization of PV cells and materials. He is one of the world’s experts in the area of carrier recombination and carrier lifetime. He also works in PV device design and modeling. He received a B.S. degree in engineer-ing physics and the M.S. and Ph.D degrees in physics from the University of Illinois, Urbana. He joined Eastman Kodak Company, and from 1972-1976 he worked on the newly founded electronic photography project using silicon charge-coupled devices as sensing elements. He joined the Laser Division of the Los Alamos National Laboratory in 1976 (then LASL), and in 1978, became a group leader in the Electronics Division of LANL. He is a Fellow of the American Physical Society, the Institute of Electrical and Electronic Engineers (IEEE), the American Vacuum Society, and the Optical Society of America.

Dr. Richard K. AhrenkielMember ScientificAdvisory Board

Dr. Moore is a materials scientist and the Trustees’ Professor and Head of the Department of Metallurgical and Materials Engineering at the Colorado School of Mines. Dr. Moore is also director of the interdisciplin-ary graduate program in materials science and director of the advanced coatings and surface engineering laboratory (ACSEL) at the Colorado School of Mines. Dr. Moore established ACSEL in 1994. The main purpose 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.S. 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. John MooreChairman ScientificAdvisory Board


October 12th, 2009


Disclaimer

DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice.

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Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company. An individual should never invest in the securities of any of the companies profiled based solely on information contained in our report. Individuals should assume that all information contained in the report about profiled companies is not trustworthy unless verified by their own independent research.

Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.

The report is a service of BlueWave Advisors, LLC, a financial public relations firm that has been compensated by the companies profiled. All direct and third party compensation received has been disclosed within each individual profile in accordance with section 17(b) of the Securities Act of 1933. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BlueWave Advisors, LLC, and/or its affiliated will hold, buy, and sell securities in the companies profiled. When compensated in shares, all readers should be aware that is our policy to liquidate all shares immediately. We reserve the right to buy or sell the shares of any the com-panies mentioned in any materials we produce at any time. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BlueWave Advisors LLC has been compensated nine hundred thousand Restricted Rule 144 shares directly from XsunX as a marketing budget to manage a comprehensive investor awareness program including the creation and distribution of this report as well as other investor relations efforts; BlueWave Advisors has been previously compensated a total of seventy five thousand dollars for contracts, which have expired. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies.

Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the informa-tion provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www.finra.org. All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant posi-tions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

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