In this Report, we use the terms “Company,” “XsunX,” “we,” “us,” and “our,” unless otherwise indicated, or the context otherwise requires, to refer to XsunX, Inc.
Organization
XsunX, Inc. (“XsunX,” the “Company” or the “issuer”) is a Colorado corporation formerly known as Sun River Mining Inc. “Sun River”). The Company was originally incorporated in Colorado on February 25, 1997. Effective September 24, 2003, the Company completed a plan of reorganization and name change to XsunX, Inc.
Business Overview/Summary
XsunX specializes in the sale, design, and installation of solar photovoltaic power generation (PV), energy storage in the form of managed battery systems, and energy use management technologies to provide our clients long term savings, predictability, and control of their energy costs. Making solar and managed energy solutions a sound investment for our clients is our mission.
We service the commercial self-generation energy market in California, and to a lesser extent the residential solar PV market where we see fewer barriers to entry and an overly competitive marketplace. We provide project assessment and installation services to our customers including technology selection, system engineering, procurement, permitting, construction, grid connection, warranty service, system monitoring and maintenance. We offer a wide variety of energy production and management technologies, design our systems in-house to ensure that the performance of the systems we deliver match the financial projections, and our full time project management and licensed assembly crews ensure a seamless process, from start to finish.
The Company operates as licensed contractor in California, and our executive management provides over 30 years of extensive experience in all aspects of construction and project assembly to ensure the accuracy and quality of systems, the continued integrity of the improved building or site, and compliance with all construction codes.
We guide our performance by striving to deliver consistently on the following core objectives:
● Commitment –
to keeping the customer’s best interests at the forefront at all times; and,
● Value –
through a focus
on performance and follow through that meets or exceeds customer expectations.
Recent Developments
In the 2017 period we expanded our product group to include managed energy storage systems comprised of lithium batteries, charge/discharge control, and demand charge management software. The addition of these product capabilities was in response to rising and shifting time-of-use and demand-based charges (measured in kilowatts) by utilities. Pairing solar PV with energy storage can significantly boost project returns through the monitoring and comparison of these time-of-use and demand charges to real-time facility energy needs to then deliver renewable or stored energy when it provides the greatest savings for operations. This product group focuses primarily on commercial facilities and can be installed as a stand-alone technology or paired with our commercial solar rooftop, carport, truckport, and covered storage canopy systems.
Also in 2017 we began efforts to offer our solar car, truck, and storage area solar canopy design/build capabilities to solar contractors and developers. Having established in-house capabilities to design, directly source all the major system components, and install canopy systems has provided us with what we believe is an advantage over other solar contractors whom typically rely on costly third-party specialty contractors to install canopy systems for their solar projects. We believe that offering canopy design/build services to solar contractors creates an opportunity to expand sales for these services for which this group of contractor/customers were already seeking assistance with.
Market Drivers for Solar Power
We believe that a significant demand for solar power and energy storage solutions is developing as a result of following drivers:
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Solar and stored energy provides the ability to control and predict future energy costs
. Our customers invest in the ability to self-generate power and to manage the use and delivery of energy to their operations. These investments provide predictability and control of energy costs, and can significantly reduce overall energy costs while insulating clients from rising retail electricity prices.
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Maturity and dependability of solar and energy storage technologies
. The results and benefits from investments in solar power systems and, the growing effectiveness of new battery chemistries have produced extensive statistical performance data. This historical performance data allows investment benefits for near and long-term future operations to be accurately estimated. This provides customers greater reliance on future results, and the confidence to make investments.
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Rapid capital recovery of energy management investments
. Reports provided by U.S. Energy Department continue to indicate that the installed price reductions for solar PV and energy storage systems are driving growth for installation demand. These cost reductions for the major components allow us to provide per watt pricing for solar PV and per kilowatt hour pricing for energy storage that, coupled with tax and operating benefits, can often result in capital investment recovery within 3 to 4 years.
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Government Incentives.
Helping to further facilitate the market for investments into self-generated power are Federal, State, and local government tax and investment incentives. Federal, state and local government bodies provide incentives to owners, operators, and end users of solar and energy storage systems to promote self-generation energy in the form of rebates, tax credits, exclusion of solar energy systems from property tax assessments and, to a diminishing degree, other financial incentives such as system performance payments
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payments for renewable energy credits associated with renewable energy generation. These incentives help to drive customer acceptance of self-generation energy as an alternative to utility-provided power.
The Federal government currently offers a 30% Investment Tax Credit (“ITC”) under Section 48(a) of the Internal Revenue Code, or the ITC, for the installation of certain solar power facilities until December 31, 2016. By statute, this tax credit was scheduled to decrease to 10% on January 1, 2017, but was extended in December by Congress through 2019, after which it will fall to 26 percent in 2020, 22 percent in 2021 and 10 percent in 2022 for future periods.
The investment economics for purchasing a solar or energy storage system are also increased through eligibility for accelerated depreciation, also known as the modified accelerated cost recovery system, or MACRS, which allows for the depreciation of equipment according to an accelerated schedule set forth by the Internal Revenue Service. This acceleration of the investment depreciation creates a valuable tax benefit that reduces the overall cost of the solar energy system and improves the return on solar investment.
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Company Operations
What We Do
XsunX specializes in the sale, design, and installation of solar photovoltaic power generation (PV), energy storage in the form of managed battery systems, and energy use management technologies to provide our clients long term savings, predictability, and control of their energy costs. Making solar and managed energy solutions a sound investment for our clients is our mission.
Our customer relationship development begins with a financial analysis providing estimated investment benefits detailing the anticipated energy systems life span. Through this process we tailor the technologies we select, and our system designs, to maximize the financial benefits and returns for each customer. We then focus on 100% customer satisfaction through consistently matching customer expectations with our performance, and the delivery of our systems.
The key elements of our approach include:
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Lead Generation
. We market our services utilizing efforts that include internet marketing, website, search engine optimization, direct mailer campaigns, and customer referrals. Our sales development efforts work with prospective customers from initial interest through tailored proposals and, ultimately, signed contracts.
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Detailed Investment Analysis
. We use information related to our customer’s energy usage, utility rate tariffs, system costs, current or planned operations, and tax basis to determine optimal technology and investment sizing. We combine this data and provide customers with 25 year investment projections that detail capital recovery expectations, system performance and energy savings, tax and operating benefits, and property re-sale value improvement estimates.
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Financing
. We have established relationships with lenders and have been approved to offer their finance options to prospective customers. Through our lender association network, we offer customers financing options that include commercial equipment loans, lease options, power purchase agreements (PPA’s), PACE & HERO financing through property tax assessment, and through our lender network we offer clients the option to apply tax or local utility incentives towards system purchase buy-downs thereby reducing up front out of pocket expenditures or the amount of capital financed.
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Design & Engineering
. To ensure accuracy we perform our site surveys directly and do not rely on third party services. We then finalize designs that will match proposed financial results, and work with a highly skilled team of qualified engineers with extensive commercial experience to ensure compliance with all codes, and best practices for systems operation.
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Installation
. We make the installation process simple for our customers. Once we complete the design and engineering of an energy system, we obtain all necessary building permits. Then, as the general contractor and construction manager, we provide all materials and components and use qualified licensed contractors with commercial electrical and solar experience to provide on-site assembly of systems, utility interconnections, and roofing or structural work. We manage and ensure local building department approvals, and arrange for interconnection to the power grid with the utility.
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Monitoring, Maintenance, and Service
. We provide our customers with real-time facility wide monitoring of energy generation, and facility wide energy consumption. In addition to providing clients with a better understanding of their energy usage, and the opportunity to modify their usage to realize savings, these monitoring systems allow us to confirm the continuing proper operation of installed solar energy systems. We also service what we sell and provide customers with a single source for all system maintenance or warranty coordination and service.
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Customers
The majority of our revenue comes from installations of commercial solar systems in California. Approximately 83% of our sales in 2017 were in the commercial market and approximately 17% were generated by residential sales. We anticipate that through our expanding efforts to promote the sale of our solar canopy and managed energy storage offerings revenues for commercial sales will continue to outpace residential sales through the 2018 period.
Our commercial system sales service the needs of property owners installing solar PV systems typically larger than 20kW, and energy storage systems that start at 60 kilowatt hours of storage capacity. However, system size and installation type can vary significantly in scope from rooftop solar only installations to solar rooftop and carport, truckport, or covered storage combined installations with integrated whole building energy management solutions. The average cycle time for commercial rooftop installs range approximately 6 to 8 weeks with solar canopies such as carports, truck ports, and covered storage requiring as much as twelve to twenty weeks due to additional permitting requirement and reviews. We help to facilitate financing options to fit the specific needs of each customer.
Our residential sales address the needs of property owners typically installing systems smaller than 15kW. The average cycle time for residential rooftop installs is approximately 3 weeks. We help to facilitate financing options to fit the specific needs of each customer.
Sales, Marketing, and Planned Operations
We have focused our sales efforts and operations on the delivery of commercial solar power and energy storage systems in the California market. We believe that our focus provides us long term benefits for brand development as a commercial specialist within a market that we believe to be in the early stages of growth, and poised for a broad adoption of solar power generation.
We see this as a significant business development opportunity as management has the skillset associated with construction management, the licensing qualifications necessary for us to operate as a contractor in California, we have extensive experience associated with solar PV technologies and the design requirements associated with the delivery of a commercial power systems, and there is a market demand available for us to provide these services to. We believe that these efforts will provide us with the fastest path to increasing revenue generation.
In the 2017 period we expanded our product group to include managed energy storage systems comprised of lithium batteries, charge/discharge control, and demand charge management software. The addition of these capabilities was in response to rising and shifting time-of-use and demand-based charges (measured in kilowatts) by utilities. Pairing solar PV with energy storage can significantly boost project returns through the monitoring and comparison of these time-of-use and demand charges to real-time facility energy needs to then deliver renewable or stored energy when it provides the greatest savings for operations. This product group focuses primarily on commercial facilities and can be installed as a stand-alone technology or paired with our commercial solar rooftop, carport, truckport, and covered storage canopy systems.
Also in 2017 we began efforts to offer our solar car, truck, and storage area canopy design/build capabilities to solar contractors and developers. Having established in-house capabilities to design, directly source all the major system components, and install canopy systems has provided us with what we believe is an advantage over other solar contractors whom typically rely on costly third-party specialty contractors to install canopy systems for their solar projects. We believe that offering canopy design/build services to solar contractors creates an opportunity to expand sales for these services for which this group of contractor/customers were already seeking assistance with.
While residential rooftop solar will continue to offer sales growth opportunities, we believe that our focus on non-residential solar power, managed energy storage, and solar canopy systems can, in many instances, provide us with opportunities to offer customers diverse installation options, larger project sizing, greater energy savings, and the ability to differentiate XsunX from competitors.
We plan to continue to focus our marketing efforts in the 2018 period highlighting the advantages of these product groups through efforts that include web advertising, direct outside sales, targeted direct marketing, commissioned consultants, and the referral of satisfied customers.
Operations and Supply
We purchase all of our system components such as solar panels, inverters, batteries, charge controllers, management software, and solar module mounting hardware directly from manufacturers and supply houses. When possible, we have established direct factory purchasing relationships. We have selected these suppliers and components based on cost, reliability, availability, warranty coverage, ease of installation, application design and suitability, and technology advantages.
Additionally, to compete favorably we have established relationships with lenders through which we can introduce financing options for the systems we design and install. These financing options provide an alternative cash management solution for our target customers, and a sales inducement to purchase systems.
For the foreseeable future we anticipate that we will purchase the system components for each project on an as-needed basis from suppliers at the then-prevailing prices pursuant to purchase orders issued. Due to the volatility of component pricing we do not anticipate any supplier arrangements that will contain long-term pricing or volume commitments. Should our sales results, volume, and market conditions warrant we may in the future elect to make purchase commitments to ensure sufficient supply and reduced pricing of the components that we use.
Our operations focus is to provide complete project design, management of engineering, facility preparation, installation of systems, repair or restoration to all affected areas resulting from the installation process, and any ongoing maintenance. To accomplish this we use the services of licensed service professionals in each of the representative trades or specialties necessary. Additionally, we provide qualified staff to supervise project operations, inspections, and system start up and energizing. In the 2018 fiscal period we anticipate that our sales may increase, and we plan to expand our direct project management capabilities through the addition of qualified field supervisory and engineering staff.
Competition
We compete with companies that offer solar and energy saving technologies. Many of these competitors have greater resources and access to broader national markets than we do. Our primary areas of competition in the California markets we serve are on pricing, the ability to deliver designs and technology integration that match client goals, service, and the ability to arrange financing. However, when competing for solar installation projects our experience has shown that there is no clear preferred competitor in the markets in which we compete. We also compete with traditional utilities who have well-established relationships with our target customers providing the ease of a status quo relationship without upfront investment costs. The advantages we offer over traditional utilities is that we offer customers the opportunity to create and to manage the use of their own electricity, detach from the traditional electrical grid dependency, and create profitable long-term investments in energy.
Intellectual Property
The following is an outline of certain patents and technologies we have developed, attempted to develop, have acquired, or licensed:
The Company has previously worked to develop a hybrid manufacturing solution to produce high performance Copper Indium Gallium (di) Selenide (CIGS) thin film solar cells. The technology, which we called CIGSolar, focused on the mass production of individual thin-film CIGS solar cells that match silicon solar cell dimensions and could be offered as a non-toxic, high-efficiency and lowest-cost alternative to the use of silicon solar cells.
In April 2012 we filed claims related to our thermal effusion source design. In October 2014 we received a Restriction Requirement from the United States Patent and Trademark Office that reports the results of the initial examination of the patent application. The examination by the USPTO asserts that the application is directed to two distinct inventions and has issued a restriction requirement. The term “restriction” is applied where the Examiner believes that two (2) or more inventions are separately claimed in the same patent application. Thus, by issuing the restriction requirement, the Examiner is asserting that our application covers more than one invention.
After completing a review of options related to modifying our patent application, and the limited market conditions related to the demand for thin film technologies, we elected to abandon our claims. We do not anticipate any further efforts related to filing or pursuing patent claims related to our prior thin film CIGS efforts.
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. We do not currently employ nor envision the use of the above-named patents in the development or commercialization of our CIGSolar technology. Because of technological and business developments within the solar industry, we believe that these patents no longer provide business opportunities for the Company to pursue and we have abandoned maintenance of these patents.
On July 10, 2012, the United States Patent and Trademark Office issued a certificate of registration No. 4,172,218 granting the Company a trademark for the use of “CIGSolar”. Because of not having used this trademark during the previous fiscal years we elected to abandon any continued use of this trade mark and allowed the registration to expire in the 2017 fiscal period.
We rely on trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. We have not been subject to any intellectual property claims.
Company History
XsunX 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”).
Pursuant to the Plan, the Company acquired the following three patents from Xoptix, Inc., a California corporation for Seventy Million (70,000,000) shares of common stock (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.
Government Contracts
There are no government contracts as of the fiscal year ended September 30, 2017.
Compliance with Environmental Laws and Regulations
The operations of the Company are subject to local, state and federal laws and regulations governing environmental quality and pollution control. Compliance with these regulations by the Company has required that, when necessary, we retain the use of engineering and design firms of systems related to equipment operations, and occupancy fire and safety construction standards to deal with compliance of safety standards. We do not anticipate that these costs will have a material effect on the Company’s operations or competitive position as these requirements apply to our competition as well, and the cost of such compliance is typically incorporated into projects costs. The Company is unable to assess or predict at this time what effect additional regulations or legislation could have on its activities.
To systems we sell require interconnection permission from the applicable local primary electric utility prior to operation. In almost all cases, interconnection permissions are issued on the basis of a standard process that has been pre-approved by the public utility commission or other regulatory body with jurisdiction over net metering procedures. As such, no additional regulatory approvals are required once interconnection permission is given.
Our operations are subject to federal, state and local laws, including regulations governing the occupational health and safety of our employees and wage regulations. A primary area of compliance are the requirements of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that protect and regulate employee health and safety.
Employees and Consultants
As of the fiscal year ended September 30, 2017, we had two full-time employees including Mr. Tom Djokovich who is President and CEO. While we do add to, and reduce, the size of our workforce based on current needs this represents one full-time employee change to the same period ended 2016. To compensate our need for additional staff the Company also relies on qualified consultants and licensed professionals to perform specific functions that otherwise would require an employee. As we expand our business developments efforts we may need to add staff to adequately respond to sales inquiries, project management, and general labor as warranted. We consider relations with our employees and consultants to be good.
Seasonality
Our operations have, in the past, experienced some seasonality for commercial sales with increased demand early and later in in each year. We believe that this trend may be related to late year project sales stemming from client interest in accessing same year tax benefits for solar investments, and early year sales related to fiscal budgeting for energy projects to be installed.
Available Information
Our website address is www.xsunx.com. Information contained on our website is not incorporated by reference into this 10-K. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, referred to herein as the SEC. Our SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available to the public free of charge over the Internet at our website or at the SEC’s web site at http://www.sec.gov. Our SEC filings will be available on our website as soon as reasonably practicable after we have electronically filed or furnished them to the SEC. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Annual Report on Form 10-K, in evaluating XsunX and our business. If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected. Accordingly, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.
We Have Not Generated Significant Revenues and Our Financial Statements Raise Substantial Doubt About Our Ability to Continue As A Going Concern.
We are in the early stages of executing our plans to grow our business through the sale, design, installation, and servicing of commercial solar power systems and, to date, have not generated any significant revenues. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. Net loss for the years ended September 30, 2017 and 2016 was $(498,663) and $(242,866), respectively. Net cash used for operations was $(44,844) and $(171,972) for the years ended September 30, 2017 and 2016, respectively. At September 30, 2017, we had a working capital deficit of $(919,717). We had an accumulated deficit at September 30, 2017 and 2016 of $(43,127,099) and $(42,628,436), respectively.
The items discussed above and herein raise substantial doubt about our ability to continue as a going concern. We cannot assure you that we can achieve or sustain profitability in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether our product development can be completed, whether our products will achieve market acceptance and whether we obtain additional financing. We may not achieve our business objectives and the failure to achieve such goals would have a materially adverse impact on us.
We expect that we will need to obtain additional financing to continue to operate our business, including expenditures to expand operations for the sales, design, and installation of the systems we sell. This financing may be unavailable or available only on disadvantageous terms which could cause the use to curtail our business operations and delay the execution of our business plan.
We have in the past experienced substantial losses and negative cash flow from operations and have required financing, including equity and debt financing, in order to pursue the commercialization of products based on our technologies. We expect that we will continue to need significant financing to operate our business. Furthermore, there can be no assurance that additional financing will be available or that the terms of such additional financing, if available, will be acceptable to us. If additional financing is not available or not available on terms acceptable to us, our ability to fund our operations, successfully expand operations for the sale and delivery of the systems we sell, complete the sales or development of marketable technologies, products, or services, develop a sales network, or otherwise respond to competitive pressures may be significantly impaired. We could also be forced to curtail our business operations, reduce our investments, decrease or eliminate capital expenditures and delay the execution of any portion or all of our business plans, including, without limitation, all aspects of our operations, which would have a material adverse effect on our business.
We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock and our business.
We may require additional financing to fund future operations, including expansion in current markets, development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, which we have relied on during the year ended September 30, 2017, the holders of these debt securities could have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest and derivative expenses for us which could have a materially adverse effect on our business.
As we continue to expand our business development efforts within the solar PV and energy storage market existing electric utility industry regulations, and changes to regulations, may present technical, regulatory and economic barriers to the purchase and use of our systems that may significantly reduce demand for the energy technologies we design and market.
Federal, state and local government regulations and policies concerning the electric utility industry, and internal policies and regulations promulgated by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing and the interconnection of customer-owned electricity generation. In the United States, governments and utilities continuously modify these regulations and policies. Future changes to any of these regulations and policies could deter customers from purchasing renewable energy, including solar energy systems. This could result in a significant reduction in the potential demand for our energy systems. For example, in the 2016 year the Public Utility Commission in California approved changes to future Net Energy Metering (NEM) remuneration pricing policies for publicly regulated utilities. These changes have reduced the economic benefits derived by our target customers, and could make investments in solar power generation less desirable, thereby harming our future business, prospects, financial condition and results of operations.
In addition, any other changes to government or internal utility regulations and policies that favor electric utilities could reduce our competitiveness and cause a significant reduction in demand for our products and services.
We rely on net metering and related policies to offer competitive pricing to our target customers in our key market of California.
California has a regulatory policy known as net energy metering, or net metering. Net metering typically allows our target customers to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by the customers solar energy system that is in excess of actual facility electric load and that is exported to the grid. At the end of the billing period, the customer simply pays for the net energy used in excess of exported solar power or receives a credit for future use at the retail rate if more energy is produced than consumed.
In 2016 the California Public Utilities Commission adopted new policies known as NEM 2.0 as a successor net energy feed in regulation which became generally effective in the first quarter of 2017 throughout the state. A benefit to NEM 2.0 eliminates caps on solar installations within utility territories through 2019. However, customers applying for NEM interconnection with utilities will now be required to pay one-time interconnection fees between $75 to $150 dollars, and pay an average of 2-3¢/kWh “non-bypassable charge” thereby effectively reducing the ability for daytime retail rate credits to offset 100% of costs incurred when purchasing power from the utility in the evenings, and NEM customers will be required to move to Time Of Use (TOU) rate plans.
Our ability to sell solar energy systems or the benefits of the electricity they generate may also be adversely impacted by the unavailability of expedited or simplified interconnection for grid-tied solar energy systems or any limitation on the number of customer interconnections or amount of solar energy that utilities are required to allow in their service territory or some part of the grid.
We anticipate that we will continue to substantially rely on net metering to establish competitive pricing for our solar PV system sales with our prospective customers. The future absence of net metering for customer acquisition, without other product pricing reductions, could greatly limit demand and our ability to effectively market our solar energy system benefits.
Changes in trade policy by the U.S. government imposing trade restrictions or tariffs could adversely impact our ability to provision the products that comprise the solar PV and energy storage systems that we offer, and could impede our ability to offer competitive solar PV and energy storage system products and have a material adverse effect on our business.
As we continue to expand our business development efforts within the solar PV and energy storage market these business operations may depend on the availability of products from offshore manufacturers providing access to low cost materials such as solar modules, batteries, inverters, steel, and wire. In the 2017 calendar year a Section 201 complaint was filed by two American manufacturers of solar modules claiming unfair business practices by foreign solar module suppliers. In November 2017 the ITC issued its report to the President. The determination remedies, if any, are anticipated to be issued in January 2018.
Under section 201 (referred to as global “safeguards”), domestic industries “seriously injured” or threatened with serious injury by increased imports may petition the U.S. Internal Trade Commission (“ITC”) for import relief. The ITC determines whether an article is being imported in such increased quantities that it is a substantial cause of serious injury, or threat thereof, to the U.S. industry producing an article like or directly competitive with the imported article.
If the ITC makes an affirmative determination, it recommends to the President relief that would prevent or remedy the injury and facilitate industry adjustment to import competition. The President makes the final decision whether to provide relief and the amount of relief. The President has very wide authority to take whatever measures deemed appropriate including tariffs, quotas, tariff rate quotas, international negotiations, and other measures.
Any resulting determination that creates import barriers or imposes imports tariffs on products we routinely depend on for our systems may limit the timely availability of solar modules, increase costs thereby reducing economic benefits for solar power generation, and make marketing efforts to attract customers more costly and difficult thereby limiting our growth.
As we continue to expand our business development efforts within the solar PV and energy storage market these business operations will depend on the availability of rebates, tax credits and other financial incentives to attract customers. The expiration, elimination or reduction of these rebates, credits and incentives would adversely impact our planned business expansion.
U.S. federal, state and local government bodies provide incentives to end users and operators of solar and energy storage systems in the form of rebates, tax credits and other financial incentives such as system performance payments and payments for renewable energy credits associated with renewable energy generation. We rely on these governmental rebates, tax credits and other financial incentives to market the low cost operating and investment benefits of solar PV and energy storage systems to our target customers. However, these incentives may expire on a particular date, end when the allocated funding is exhausted, or be reduced or terminated as solar energy adoption rates increase. Certain reductions or terminations could occur without warning.
The Federal government currently offers a 30% Investment Tax Credit (“ITC”) under Section 48(a) of the Internal Revenue Code, or the ITC, for the installation of solar power and energy storage coupled with solar power. By statute, this tax credit was scheduled to decrease to 10% on January 1, 2017, but was extended in December 2016 by Congress through 2019, after which it will fall to 26 percent in 2020, 22 percent in 2021, and 10 percent in 2022 and future years.
A material drop in the retail price of utility-generated electricity or electricity from other sources would harm our business development efforts for the sale of solar PV and energy storage systems and cause a material adverse effect to our future financial condition and results of operations.
Our target customer’s decision to invest in renewable energy will be primarily driven by their desire to pay less for electricity. The customer’s decision may also be affected by the cost of other renewable energy sources. Decreases in the retail prices of electricity from the utilities or from other renewable energy sources would harm our ability to offer our products as a competitive alternative and could harm our business. The price of electricity from utilities, while historically proven to be unlikely, could decrease as a result of any number of market conditions including:
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the construction of a significant number of new power generation plants, including nuclear, coal, natural gas or renewable energy technologies, and;
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a reduction in the price of natural gas as a result of new drilling techniques or a relaxation of associated regulatory standards;
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A reduction in utility electricity prices would make the investment by our target customers into the solar PV and energy storage systems less economically attractive.
In addition, a shift in the timing of peak rates for utility-generated electricity to a time of day when solar energy generation is less efficient could make our solar energy system offerings less competitive and reduce demand for our products and services. If the retail price of energy available from utilities were to decrease due to any of these reasons, or others, we would be at a competitive disadvantage,
we may be unable to attract customers and our growth would be limited.
A material drop in the retail price of utility-generated electricity would particularly adversely impact our ability to attract commercial customers which represent our target customer base.
In addition, a shift in the timing of peak rates for utility-generated electricity to a time of day when solar energy generation is less efficient could make our solar energy system offerings less competitive and reduce demand for our products and services.
We anticipate that commercial customers will continue to comprise a sizable portion of our business, and the commercial market for energy is particularly sensitive to price changes. Typically, commercial customers pay less for certain aspects of delivered energy from utilities than residential customers. Any future decline in the retail rate of energy, or shifts in the timing of peak rate charges for commercial entities could have a significant impact on our ability to attract commercial customers. We may be unable to offer solar or energy storage systems for the commercial market that produce electricity at rates that are competitive with the price of retail electricity on a non-subsidized basis. If this were to occur, we would be at a competitive disadvantage to other energy providers and may be unable to attract new commercial customers, and our future business operations would be harmed.
Rising interest rates could adversely impact all aspects of current and planned business operations.
Changes in interest rates could have an adverse impact on our business by increasing the cost of capital for our target customers. For example, rising interest rates, or tightening credit requirements, may negatively impact our ability to provide financing sources on favorable terms to facilitate our customers’ purchase of our solar PV and energy storage systems.
As we continue to expand our business development efforts within the solar PV and energy storage system market we will continue to act as the licensed general contractor for our customers and will be subject to risks associated with construction, cost overruns, delays, regulatory compliance and other contingencies, any of which could have a material adverse effect on our business and results of operations.
We intend to, and are required to, operate as a licensed contractor in every region we service, and we will be responsible for customer installations. For our commercial solar PV system projects, we are the general contractor and construction manager, and we will typically rely on licensed subcontractors representing specialty trades such as electrical, concrete, grading, roofing, and carpentry to install the commercial systems we sell. We may be liable to customers for any damage we cause to their facility, belongings or property during the installation of our systems. In addition, any shortages that may occur of skilled subcontractor labor for our projects could significantly delay a project or otherwise increase our costs. Because our profit on a installation will be based in part on assumptions as to the cost of such project, cost overruns, delays or other execution issues may cause us to not achieve our expected margins or cover our costs for that project.
In addition, our system installations are subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, environmental protection, utility interconnection and metering, and related matters. Any new government regulations or utility policies pertaining to the systems we design, and install may result in significant additional expenses to us and our future customers and, as a result, could cause a significant reduction in demand for our systems and services.
Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties, operational delays and adverse publicity.
The installation of solar PV and energy storage systems will require our employees, and any subcontractors that we engage, to work at heights with complicated and potentially dangerous electrical systems. The evaluation and modification of buildings that may be necessary as part of our business may require our employees to work in locations that may contain potentially dangerous levels of asbestos, lead or mold. Our operations are subject to regulation under the U.S. Occupational Safety and Health Act, or OSHA, and equivalent state laws. Changes to OSHA requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA regulations, even if no work-related serious injury or death occurs, we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures, or suspend or limit operations.
As we continue to expand our business development efforts within the solar PV and energy storage system installation market future problems with product quality or performance may cause us to incur warranty expenses, and may damage our market reputation and cause our financial results to decline.
Customers in our target market of California who purchase solar energy systems are covered by a warranty of up to 10 years in duration for material defects and workmanship. In addition, we provide a pass-through warranty of the major components such as module mounting, inverter, and solar panel manufacturers to our customers, which generally range from 10 to 25 years. We may also make extended warranties available at an additional cost to customers.
As we continue to expand our business development efforts within the solar PV and energy storage system installation market we may be required to make assumptions and apply judgments regarding many factors, including our anticipated rate of warranty claims, and the durability, performance and reliability of the components employed in the assembly of energy systems. The Company has a limited history of project installations and assesses potential warranty costs, and other allowances, based on our experience in servicing warranty claims as they may arise in the future.
If products and technologies that we market, or products based on technologies we assemble, cannot be developed for manufacture and sold commercially or our products or the products we market become obsolete or noncompetitive we may be unable to recover our investments or achieve profitability which will have a materially adverse effect on our business.
There can be no assurance that any of the products we market that comprise the solar PV and energy storage systems we offer will gain or maintain market acceptance, or our limited research and development efforts will be successful. Further, the areas in which we have developed product groups are characterized by rapid and significant technological change. Rapid technological development may result in our products becoming obsolete or noncompetitive. If products based on our technologies cannot be developed for manufacture and sold commercially or our products become obsolete or noncompetitive, we may be unable to recover our investments or achieve profitability. In addition, any commercialization schedule may be delayed if we experience delays in meeting development goals, if products based on our technologies exhibit technical defects, or if we are unable to meet cost or performance goals. In this event, potential purchasers of products based on our technologies may choose alternative technologies and any delays could allow potential competitors to gain market advantages.
There is no assurance that the market will accept the products that we offer which could have an adverse effect on our business.
There can be no assurance that products we market, or products based on technologies that we may develop, will be perceived as being superior to existing products or new products offered or being developed by competing companies or that such products will otherwise be accepted by consumers. The market prices for our products and services may exceed the prices of competitive products based on existing technologies or new products based on technologies currently under development by competitors. There can be no assurance that the prices of products we offer, or the technologies of others that we market will be perceived by consumers as cost-effective or that the prices of such products will be competitive with existing products or with other new products or technologies. If consumers do not accept products based on our technologies, we may be unable to recover our investments or achieve profitability.
There is no assurance that the market will accept our continued efforts to offer design, engineering, and installation services for solar electric PV and energy storage systems which could have an adverse effect on our business.
The market for sales and installation of solar electric PV and energy storage systems is highly competitive with limited barriers to entry by potential competitors. There can be no assurance that the products and services we will offer will be perceived as being superior or a better value to other comparable products and services offered by competing companies or that such products will otherwise be accepted by consumers. If consumers do not accept our design, engineering, and installations services at the pricing we offer we may be unable to recover our investments, make sales of any significance, or achieve profitability.
Other companies, many of which have greater resources than we have, may develop or offer competing products or technologies which cause products and services we market to become noncompetitive which could have an adverse effect on our business.
We have and will continue to compete with firms, both domestic and foreign, that perform research and development, as well as firms that sell or install solar products. In addition, we expect additional potential competitors to enter the markets for solar and energy storage products and installation services in the future. Some of these competitors are large companies with longer operating histories, greater name recognition, access to larger customer bases, well-established business organizations and product lines and significantly greater resources and research and development staff and facilities. There can be no assurance that one or more such companies will not succeed in developing technologies or products that will become available for commercial sale prior to our products, that will have performance superior to products based on our technologies or that would otherwise render our products noncompetitive. If we fail to compete successfully our business would suffer and we may lose or be unable to gain market share.
The loss of strategic relationships
used in provisioning the products that comprise the solar PV and energy storage systems that we offer could impede our ability to offer competitive solar PV and energy storage system products or further the development of our products and have a material adverse effect on our business.
We have established a plan of operations under which a significant portion of our operations will rely on strategic relationships with third parties to provide materials and components necessary for the assembly of solar PV and energy storage systems. A loss of any of our third-party relationships for any reason could cause us to experience difficulties in implementing our business strategy. There can be no assurance that we could establish other relationships of adequate expertise in a timely manner or at all.
We may suffer the loss of key personnel or may be unable to attract and retain qualified personnel to maintain and expand our business which could have a material adverse effect on our business.
Our success is highly dependent on the continued services of a limited number of skilled managers, technicians, and access to qualified consultants and licensed subcontractors. The loss of any of these individuals or resources will have a material adverse effect on us. In addition, our success will depend upon, among other factors, the recruitment and retention of additional highly skilled and experienced management and technical personnel. There can be no assurance that we will be able to retain existing employees or to attract and retain additional personnel on acceptable terms given the competition for such personnel in the market.
We may not be successful in protecting our intellectual property and proprietary rights and may be required to expend significant amounts of money and time in attempting to protect these rights. If we are unable to protect our intellectual property and proprietary rights, our competitive position in the market could suffer.
Our current intellectual property consists of trade secrets, and trade dress. To protect our proprietary business methods, technologies and processes, we rely on trade secret protection and we have also sought formal legal devices such as patents. Our success depends in part on our ability to create and maintain intellectual property to differentiate our services. There can be no assurance that we will be able to seek or obtain patents for our products or services in the U.S.
Our future commercial success may require us not to infringe on patents and proprietary rights of third parties, or breach any licenses or other agreements that we have entered into with respect to the products that we market, our technologies, products and businesses. The enforceability of patent positions cannot be predicted with certainty. We have in the past applied for patents covering certain aspects of technologies we have worked to developed and we may elect to file additional patents, if any, as we deem appropriate. Patents, if issued, may be challenged, invalidated or circumvented. There can be no assurance that no other relevant patents have been issued that could block our ability to obtain patents or to operate as we would like. Others may develop similar technologies or may duplicate technologies developed by us.
We are not currently a party to any litigation with respect to any of our patent positions or trade secrets. However, if we become involved in litigation or interference proceedings declared by the United States Patent and Trademark Office, or other intellectual property proceedings outside of the U.S., we might have to spend significant amounts of money to defend our intellectual property rights. If any of our competitors file patent applications or obtain patents that claim inventions or other rights also claimed by us, we may have to participate in interference proceedings declared by the relevant patent regulatory agency to determine priority of invention and our right to a patent of these inventions in the U.S. Even if the outcome is favorable, such proceedings might result in substantial costs to us, including, significant legal fees and other expenses, diversion of management time and disruption of our business. Even if successful on priority grounds, an interference proceeding may result in loss of claims based on patentability grounds raised in the interference proceeding. Uncertainties resulting from initiation and continuation of any patent or related litigation also might harm our ability to continue our research or to bring products to market.
An adverse ruling arising out of any intellectual property dispute, including an adverse decision as to the priority of our inventions would undercut or invalidate our intellectual property position. An adverse ruling also could subject us to significant liability for damages, prevent us from using certain processes or products, or require us to enter into royalty or licensing agreements with third parties. Furthermore, necessary licenses may not be available to us on satisfactory terms, or at all.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
To protect our proprietary business methods, technologies and processes, we rely on trade secret protection and we have also sought formal legal devices such as patents. Although we have taken security measures to protect our trade secrets and other proprietary information, these measures may not provide adequate protection for such information. Our policy is to execute confidentiality and proprietary information agreements with each of our employees and consultants upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not be disclosed to third parties. These agreements also generally provide that technology conceived by the individual in the course of rendering services to us shall be our exclusive property. Even though these agreements are in place there can be no assurances that that trade secrets and proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, or that we can fully protect our trade secrets and proprietary information. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. Costly and time-consuming litigation might be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection might adversely affect our ability to continue our research or bring products to market.
Downturns in general economic conditions could adversely affect our ability to attract customers and our potential for future profitability.
Downturns in general economic conditions can cause fluctuations in demand for any products we may offer, product prices, volumes and margins. Economic conditions may at any time not be favorable to our industry. A decline in the demand for our products and services or a shift to lower-margin products due to deteriorating economic conditions could adversely affect sales of our intended products and our profitability and could also result in impairments of certain of our assets.
Standards for compliance with section 404 of The Sarbanes-Oxley Act Of 2002 are subject to change, and if we fail to comply in a timely manner, our business could be harmed, and our stock price could decline.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards and will impose significant additional expenses on us. We may encounter problems or delays in completing activities necessary to assess our internal control over financial reporting. If we cannot assess our internal control over financial reporting as effective, investor confidence and share value may be negatively impacted.
Our common stock is considered a “Penny Stock” and as a result, related broker-dealer requirements affect its trading and liquidity.
Our common stock is considered to be a “penny stock” since it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the common stock trades at a price less than $5.00 per share; (ii) the common stock is not traded on a “recognized” national exchange; (iii) the common stock is not quoted on the NASDAQ Stock Market, or (iv) the common stock is issued by a company with average revenues of less than $6.0 million for the past three (3) years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend our Common Stock to investors, thus hampering its liquidity.
Section 15(g) and Rule 15g-2 require broker-dealers dealing in penny stocks to provide potential investors with documentation disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the documents before effecting any transaction in a penny stock for the investor’s account. Potential investors in our Common Stock are urged to obtain and read such disclosure carefully before purchasing any of our shares.
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives.
The trading market in our common stock is limited and may cause volatility in the market price.
Our common stock is currently traded on a limited basis on the OTC. The OTC is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Stock Market and the other national markets. Quotes for stocks included on the OTC are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTC may be difficult to obtain.
The quotation of our common stock on the OTC does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Thus, the market price for our common stock is subject to volatility and holders of common stock may be unable to resell their shares at or near their original purchase price or at any price. In the absence of an active trading market:
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investors may have difficulty buying and selling or obtaining market quotations;
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market visibility for our common stock may be limited; and
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a lack of visibility for our common stock may have a depressive effect on the market for our common stock.
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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 affect 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. Such restrictions could have a materially adverse effect on our business.
We may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common stock.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including:
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technological innovations or new products and services by us or our competitors;
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additions or departures of key personnel;
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sales of our common stock;
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our ability to integrate operations, technology, products and services;
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our ability to execute our business plan;
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operating results below expectations;
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loss of any strategic relationship;
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economic and other external factors; and
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period-to-period fluctuations in our financial results.
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Because we have a limited operating history with limited revenues to date, you may consider any one of these factors to be material. Our stock price may fluctuate widely as a result of any of the above listed factors. In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we will require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain financing through debt, equity or other means.