The accompanying notes are an integral part of these unaudited condensed financial statements.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2019
1.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ended September 30, 2019. For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended September 30, 2018.
Going Concern
The accompanying unaudited condensed financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying unaudited condensed financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the nine months ended June 30, 2019, the Company did not generate significant revenue, incurred a net income of $1,428,013, which included a non-cash change in derivative liability of $1,433,500 and cash provided in operations of $45,812. As of June 30, 2019, the Company had a working capital deficiency of $2,955,021, and a shareholders’ deficit of $3,118,093. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. The Company has obtained funds from its shareholders since its inception through the nine months ended June 30, 2019. Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of its business development efforts in the solar PV industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of XsunX, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, revenue recognition, the deferred tax valuation allowance, the fair value of stock options, and derivative liabilities. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include cash in banks and money markets with an original maturity of three months or less.
Revenue Recognition
We recognize revenue when services are performed, and at the time of shipment of products, if evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2019
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revisions in cost and profit estimates during the contract are reflected in the accounting period in which the facts, which require the revision, become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Contract receivables are recorded on contracts for amounts currently due based upon progress billings, as well as any retentions, which are collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.
Contract Receivable
The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients’ financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers monthly. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The contract receivable balance was $247,491 and $99,907 at June 30, 2019 and September 30, 2018, respectively.
Project Warranties
Customers in our target market of California who purchase solar energy systems are covered by a warranty of up to 10 years in duration for material defects and workmanship. In addition, we provide a pass-through of the major components such as module mounting, inverter and solar panel manufacturers’ warranties to our customers, which generally range from 10 to 25 years. The Company has a limited history of project installations and will access potential warranty costs, and other allowances, based on our experience in servicing warranty claims as they may arise in the future. During the nine months ended June 30, 2019, the Company did not experience costs related to warranty claims.
Stock-Based Compensation
Share-based Payment applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We are required to follow a fair value approach using an option-pricing model, such as the Binomial lattice model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. This has not had a material impact on our results of operations.
Net Earnings (Loss) per Share Calculations
Net earnings (Loss) per share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are computed by dividing by the weighted average number of common shares outstanding during the year. Diluted net earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the effect of stock options and stock-based awards (Note 4), plus the assumed conversion of convertible debt (Note 5).
For the nine months ended June 30, 2019, the Company calculated the dilutive impact of the convertible debt of $201,024, which is convertible into shares of common stock. The convertible debt was not included in the calculation of net income (loss) per share, because their impact was antidilutive.
For the nine months ended June 30, 2018, the Company calculated the dilutive impact of the convertible debt of $272,913, which is convertible into shares of common stock. The convertible debt was not included in the calculation of net loss per share, because their impact was antidilutive.
XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2019
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2019, the balances reported for cash, prepaid expenses, accounts payable, accrued expenses approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
●
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
●
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at June 30, 2019:
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
2,720,833
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,720,833
|
|
Total Liabilities measured at fair value
|
|
$
|
2,720,833
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,720,833
|
|
The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:
Balance as of September 30, 2018
|
|
$
|
4,154,333
|
|
Net Gain on change in derivative liability
|
|
|
(1,433,500
|
)
|
Ending balance as of June 30, 2019
|
|
$
|
2,720,833
|
|
Recent Accounting Pronouncements
In August 2016, FASB issued accounting standards update ASU-2016-15, “Statement of Cash Flows” (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU are effective for public and nonpublic entities for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company has evaluated the impact of the adoption of ASU 2016-15 on the Company’s financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements.
XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2019
3. CAPITAL STOCK
Preferred Stock
As of June 30, 2019, the Company had 5,000 shares of issued and outstanding Series A Preferred Stock issued to the Company’s Chief Executive Officer and Director, Tom M. Djokovich. The shares were issued in consideration for the contribution of services by Mr. Djokovich to the Company valued at fifty dollars, which the Board deemed full and fair consideration. Because of such issuance, Mr. Djokovich has the ability to influence and determine stockholder votes.
Common Stock
During the nine months ended June 30, 2019, the Company issued 133,780,925 shares of common stock upon conversion of principal in the amount of $55,000, plus accrued interest of $2,750, with an aggregate fair value loss on settlement of debt of $33,829.
4. STOCK OPTIONS
On May 20, 2014, the Company adopted the 2014 XSUNX, Inc. Stock Option and Award Plan (the “Plan”) to enable the Company to obtain and retain the services of the types of Employees, Consultants and Directors who will contribute to the Company’s long range success and to provide incentives which are linked directly to increases in share value which will inure to the benefit of all stockholders of the Company. The 2007 Stock Option Plan is superseded by the newly adopted 2014 XSUNX, Inc. Stock Option and Award Plan. Options granted under the Plan may be either Incentive Options or Nonqualified Options and shall be administered by the Company's Board of Directors ("Board"). Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective Option agreements may provide. Notwithstanding any other provision of the Plan or of any Option agreement, each Option shall expire on the date specified in the Option agreement. There are no stock options outstanding as of June 30, 2019.
5. CONVERTIBLE PROMISSORY NOTES
As of June 30, 2019, the outstanding convertible promissory notes are summarized as follows:
Convertible Promissory Notes
|
|
$
|
201,024
|
|
Less current portion
|
|
|
35,144
|
|
Total long-term liabilities
|
|
$
|
165,880
|
|
Maturities of long-term debt for the next four years are as follows:
Period Ended
|
|
|
|
|
June
3
0
,
|
|
|
|
|
2020
|
|
$
|
35,144
|
|
2021
|
|
|
15,880
|
|
2022
|
|
|
60,000
|
|
2023
|
|
|
90,000
|
|
|
|
$
|
201,024
|
|
On October 20, 2015, the Company entered into a third extension of the Note originally issued September 30, 2013. The extension terms included mandatory payments of $10,000 per month beginning November 1, 2015 until the note in the amount of $143,033 is paid in full. The Note bears interest at 12% annum, and a conversion price of 60% of the lowest volume weighted average price (“VWAP”) occurring during the twenty trading days preceding any conversion date by Holder. The balance of the provisions of the Note remained substantially the same. As of June 30, 2019, the remaining balance of the Note is $35,144, which includes capitalized interest of $22,111 As of June 30, 2019, the Note has matured, and the Company and the Holder have entered into discussions for the repayment of the Note.
XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2019
5. CONVERTIBLE PROMISSORY NOTES (Continued)
On November 20, 2014, the Company issued a 10% unsecured convertible promissory note (the “November Note”) for the principal sum of up to $400,000 plus accrued interest on any advanced principal funds. The November Note matures eighteen months from each advance. The November Note may be converted by the lender into shares of common stock of the Company at the lesser of $.0125 per share or (b) fifty percent (50%) of the lowest trade prices following issuance of the November Note or (c) the lowest effective price per share granted to any person or entity. On November 20, 2014, the lender advanced $50,000 to the Company under the November Note at inception. On various dates from February 18, 2015 through September 30, 2016, the lender advanced an additional $350,000 under the November Note. As of June 30, 2019, there remains an aggregate outstanding principal balance of $50,880.
On May 10, 2017, the Company issued a 10% unsecured convertible promissory note (the “May Note”) for the principal sum of up to $150,000 plus accrued interest on any advanced principal funds. The Lender may pay additional consideration at the Lenders discretion. The Company received a tranche in the amount of $25,000 upon execution of the May Note. On various dates, the Company received additional tranches in the aggregate sum of $90,000. The May Note matured twelve months from each tranche. Within thirty (30) days prior to the maturity date, the Lender may extend the maturity date to sixty (60) months. The May Note may be converted by the lender into shares of common stock of the Company at the lesser of $.01 per share or (b) fifty percent (50%) of the lowest trade price of common stock recorded on any trade day after the effective date, or (c) the lowest effective price per share granted to any person or entity. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $12 during the nine months ended June 30, 2019. As of June 30, 2019, the balance remaining on the May Note was $115,000.
On May 7, 2018, the Company issued a 10% unsecured convertible promissory note (the “May 2018 Note”), in the amount of $25,000. The May 2018 Note was funded on May 9, 2018. The Note matures on February 15, 2019 and bears interest at 10% per annum. The Note may be converted into shares of the Company’s common stock at a variable conversion price of 65% of the lowest two-dollar volume weighted average price (“VWAP”) occurring during the fifteen (15) trading days prior to conversion. The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. The Company issued 52,990,411 shares of common stock upon conversion of principal of $25,000, plus accrued interest of $1,250, with a fair value loss on conversion of debt of $13,151. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $12,148 during the nine months ended June 30, 2019. As of June 30, 2019, the balance remaining on the May 2018 Note was $0.
On August 6, 2018, the Company issued a 10% unsecured convertible promissory note (the “Aug 2018 Note”), in the amount of $30,000. The Aug 2018 Note was funded on August 9, 2018. The Note matures on May 15, 2019 and bears interest at 10% per annum. The Note may be converted into shares of the Company’s common stock at a variable conversion price of 65% of the lowest two-dollar volume weighted average price (“VWAP”) occurring during the fifteen (15) trading days prior to conversion. The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. During the nine months ended June 30, 2019, the Company issued 80,790,514 shares of common stock upon conversion of principal in the amount of $30,000, plus accrued interest of $1,500, with a fair value loss on conversion of debt of $20,678. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $24,149 during the nine months ended June 30, 2019. As of June 30, 2019, the balance remaining on the August 2018 Note was $0.
Issuance of Convertible Promissory Notes for Services to Related Party
As of June 30, 2019, the remaining unsecured Convertible Promissory Notes (the “Notes”) in the amount of $12,000 to a Board member (the “Holder”) in exchange for retention as a director during the fiscal year ending September 30, 2014. The Note can be converted into shares of common stock by the Holder for $0.0045 per share. The Note matured on October 1, 2015 and bore a one-time interest charge of $1,200 which was applied to the principal on October 1, 2014. So long as any shares issuable under a conversion are subject to transfer and sale restrictions imposed pursuant to SEC Rule 144 of the Rules promulgated under the Securities Act of 1933, the Company shall, upon written request by Holder, file Form S-8, if applicable, with the U.S. Securities and Exchange commission to register the issued.
XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2019
5. CONVERTIBLE PROMISSORY NOTES (Continued)
We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has no explicit limit on the number of shares issuable, so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock price fluctuations.
The convertible notes issued and described in Note 5 do not have fixed settlement provisions because their conversion prices are not fixed. The conversion feature has been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
During the nine months ended June 30, 2019, as a result of the convertible notes (“Notes”) issued that were accounted for as derivative liabilities, we determine the fair value of the conversion feature of the convertible notes at issuance, based upon a Binomial lattice model calculation. We record the full value of the derivative as a liability at issuance with an offset to valuation discount, which would be amortized over the life of the Notes. During the period there were no new issuances.
During the nine months ended June 30, 2019, the Company converted $55,000 in principal of convertible promissory notes, plus accrued interest of $2,750. Due to the conversion of these notes and the change in fair value of the remaining notes, the Company recorded a fair value loss on conversion of debt in the amount of $33,829 in the statement of operations for the nine months ended June 30, 2019. At June 30, 2019, the fair value of the derivative liability was $2,720,833.
For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Binomial lattice valuation model. The significant assumptions used in the Binomial lattice valuation of the derivative are as follows:
Risk free interest rate
|
|
Between 1.71% and 2.18%
|
Stock volatility factor
|
|
Between 48.0% and 140.0%
|
Months to Maturity
|
|
1 - 4 years
|
Expected dividend yield
|
|
None
|
6. NOTE PAYABLE-RELATED PARTY
On August 5, 2014 the Company issued a 10% unsecured promissory note (the “Note”) to a related party in the aggregate principal amount of up to $80,000, plus accrued interest on any advanced principal funds. The principal use of the proceeds from any advance under the Note are intended to assist in the purchase of materials, and services for the solar PV systems that we sell and install. Consideration advanced under the Note matures twenty-four (24) months from each advance. During the nine months ended received payment in the amount of $24,300. The balance as of June 30, 2019 was $7,200, plus accrued interest of $12,541.
7. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). The cost of uninstalled materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of progress.
XSUNX, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2019
7. REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
The following table represents a disaggregation of revenue by customer type from contracts with customers for the nine months ended June 30, 2019 and 2018:
|
|
Six Months Ended
June
3
0
,
|
|
|
|
2019
|
|
|
2018
|
|
Commercial
|
|
$
|
1,091,691
|
|
|
$
|
502,108
|
|
Residential
|
|
|
50,525
|
|
|
|
-
|
|
Management fees
|
|
|
17,250
|
|
|
|
22,000
|
|
|
|
$
|
1,159,466
|
|
|
$
|
524,108
|
|
Contract assets represents revenues recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in excess of revenues recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The contract asset for the nine months ending June 30, 2019 and the year ended September 30, 2018 was $0 and $6,919, respectively. The contract liability for the nine months ended June 30, 2019 and the year ended September 30, 2018 was $213,288 and $141,688, respectively.
8. SUBSEQUENT EVENTS
Management has evaluated subsequent events as of the financial statement date according to the requirements of ASC TOPIC 855 and has no subsequent events to report.