Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Quarterly Report on Form 10-Q contains forward-looking statements. The presentation of future aspects of XsunX, Inc. (“XsunX”, the “Company” or “issuer”) found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “intend”, or “could” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Item 1A: Risk Factors” in the Company’s Annual Report on Form 10-K.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause XsunX’s actual results to be materially different from any future results expressed or implied by XsunX in those statements. Important facts that could prevent XsunX from achieving any stated goals include, but are not limited to, the following:
Some of these risks might include, but are not limited to, the following:
(a) volatility or decline of the Company’s stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;
(e) failure to commercialize its technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside parties;
(h) insufficient revenues to cover operating costs.
There is no assurance that the Company will be profitable, the Company may not be able to successfully develop, manage or market its products and services. The Company may not be able to attract or retain qualified executives and technology personnel, the Company’s products and services may become obsolete, government regulation may hinder the Company’s business, additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in the Company’s businesses.
The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K and Form 10-K/A filed by the Company and any Current Reports on Form 8-K filed by the Company.
Management believes the summary data presented herein is a fair presentation of the Company’s results of operations for the periods presented. Due to the Company’s change in primary business focus and new business opportunities these historical results may not necessarily be indicative of results to be expected for any future period. As such, future results of the Company may differ significantly from previous periods.
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 (ESS), 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.
Critical Accounting Policies
The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.
Revenue Recognition
We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenue and related costs on construction contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC 605-35”). Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Revenue is recognized based on the percentage of cost incurred. Costs include all direct materials, subcontractor costs, direct labor and those indirect costs related to contract performance, such as indirect labor, supplies, project planning and preparation, tools and repairs. 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. The Contract Asset represents revenues recognized in excess of amounts billed on contracts in progress. The Contract Liability represents billings in excess of revenues recognized on contracts in progress.
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 reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Fair Value of Financial Instruments
Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2018, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASC is effective for fiscal years beginning after December 15, 2017, including interim reporting periods therein. The Company is currently evaluating the impact of the adoption of ASU 2016-12 on the Company’s financial statements.
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 is currently evaluating 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2018 COMPARED TO THREE MONTHS ENDED MARCH 31, 2017.
Revenue and Cost of Sale
s:
The Company generated revenues in the three months ended March 31, 2018 and 2017 of $51,222 and $537,909 respectively. The decrease in revenue during the three months ended March 31, 2018 was attributable to
delays in revenue recognition for several commercial projects sold in the period that were due to time requirements in the permitting processes, and customer project financing. We can often encounter these types of delays in commercial solar energy project delivery that can result in
revenue recognition spanning reporting periods. We anticipate that through our marketing efforts purchase interest, and sales, for our solar carport and energy storage systems will continue to improve and provide us with increased project flow that may result in more consistent period to period revenue growth results.
The costs of goods sold for the three months ended March 31, 2018 and 2017 was $26,086 and $363,551, respectively. The Company to date has had minimal revenue and cost of sales and anticipates continuing to generate revenues while working to increase sales volumes as it matures the scope of the Company’s capabilities and brand awareness.
Selling, General and Administrative Expenses:
Selling, General and Administrative (SG&A) expenses decreased by $18,424 during the three months ended March 31, 2018 to $95,708 as compared to $114,132 for the three months ended March 31, 2017. The decrease in SG&A expenses was related primarily due to the Company experiencing a decrease in administrative costs. Management expects SG&A expenses to increase in future periods as the Company continues to expand its marketing, sales, and service efforts.
Depreciation Expense:
Depreciation expense for the three months ended March 31, 2018 was $70, compared to $32 for the three months ended March 31, 2017.
Other Income/(Expenses):
Other income and (expenses) increased by $361,343 to $(388,565) for the three months ended March 31, 2018, compared to $(27,222) for the three months ended March 31, 2017. The increase was the result of an increase in non-cash loss on conversion of debt and change of fair value of the derivative instruments of $244,532, and an increase in fair value of loss on settlement of debt of $101,030, with an increase in interest expense of $15,781, which included a decrease in non-cash amortization of debt discount in the amount of $10,595.
Net Income (Loss):
For the three months ended March 31, 2018, our net loss was $(459,207) as compared to net income of $32,972 for the three months ended March 31, 2017. This increase in net loss primarily stems from the increase in other income (expenses) associated with the derivative instruments, and an overall decrease in operating expenses, with a decrease in gross profit due to a decrease in revenue. While management is working to increase sales and revenues as it matures the scope of the Company’s capabilities and brand awareness for its commercial and residential solar PV systems, the Company anticipates there is no assurance that any continued trend in sales growth will continue.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2018 COMPARED TO SIX MONTHS ENDED MARCH 31, 2017.
Revenue and Cost of Sale
s:
The Company generated revenues in the six months ended March 31, 2018 and 2017 of $131,097 and $931,611 respectively. The decrease in revenue during the six months ended March 31, 2018 was attributable to delays in revenue recognition for several commercial projects sold in the period that were due to time requirements in the permitting processes, and customer project financing. We can often encounter these types of delays in commercial solar energy project delivery that can result in revenue recognition spanning reporting periods. We anticipate that through our marketing efforts purchase interest, and sales, for our solar carport and energy storage systems will continue to improve and provide us with increased project flow that may result in more consistent period to period revenue growth results.
The costs of goods sold for the six months ended March 31, 2018 and 2017 was $69,385 and $662,605, respectively. The Company to date has had minimal revenue and cost of sales and anticipates continuing to generate revenues while working to increase sales volumes as it matures the scope of the Company’s capabilities and brand awareness.
Selling, General and Administrative Expenses:
Selling, General and Administrative (SG&A) expenses decreased by $27,879 during the six months ended March 31, 2018 to $213,173 as compared to $241,052 for the six months ended March 31, 2017. The decrease in SG&A expenses was related primarily due to the Company experiencing a decrease in administrative costs. Management expects SG&A expenses to increase in future periods as the Company continues to expand its marketing, sales, and service efforts.
Depreciation Expense:
Depreciation expense for the six months ended March 31, 2018 was $140, compared to $63 for the six months ended March 31, 2017.
Other Income/(Expenses):
Other income and (expenses) increased by $343,719 to $(374,149) for the six months ended March 31, 2018, compared to $(30,430) for the six months ended March 31, 2017. The increase in income (expenses) was the result of an increase in non-cash loss on conversion of debt and change of fair value of the derivative instruments of $160,215, and an increase in fair value of loss on settlement of debt of $170,870, an increase in interest expense of $12,834, which included a decrease in non-cash amortization of debt discount in the amount of $5,626, with a decrease in penalties of $200.
Net Income (Loss):
For the six months ended March 31, 2018, our net loss was $(525,750) as compared to net loss of $(2,539) for the six months ended March 31, 2017. This increase in net loss primarily stems from the increase in other income (expenses) associated with the derivative instruments, and an overall decrease in operating expenses, with a decrease in gross profit due to a decrease in revenue. While management is working to increase sales and revenues as it matures the scope of the Company’s capabilities and brand awareness for its commercial and residential solar PV systems, the Company anticipates there is no assurance that any continued trend in sales growth will continue.
Liquidity and Capital Resources
We had a working capital deficit at March 31, 2018 of $1,111,367, as compared to a working capital deficit of $919,717 as of September 30, 2017. The increase in working capital deficit of $191,650 was the result of an increase in accounts payable, accrued expenses, contract liabilities, derivative liability, with a decrease in cash, contract receivables, prepaid expenses, and convertible notes.
Cash flow used by operating activities was $(94,234) for the six months ended March 31, 2018, as compared to cash flows provided in operating activities of $46,520 for the six months ended March 31, 2017. The increase in cash flow used by operating activities was due to a decrease in revenue.
Cash flow provided by (used in) investing activities for the six months ended March 31, 2018 and 2017 were $0, respectively.
Cash provided by financing activities for the six months ended March 31, 2018 was $92,000, as compared to cash used of $(25,000) in financing activities for the six months ended March 31, 2017. Our capital needs have primarily been met from the proceeds of private placements, convertible notes, and initial revenues resulting from our change in business operations focused on the sale, design, and installation of Solar Photovoltaic (PV), and managed Energy Storage Systems (ESS) for commercial and industrial real-estate in in the period.
Our financial statements as of March 31, 2018 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued their report dated December 20, 2017, that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
For the six months ended March 31, 2018, the Company’s capital needs have been met from the use of working capital provided by the proceeds of (i) the convertible notes and (ii) revenues in the amount of $131,097.
Capital Resources
We have only common and preferred stock as our capital resources. We have no material commitments for capital expenditures within the next year, however as we work to market and make sales of our commercial solar PV system services, substantial capital may be needed to expand and pay for these activities.
Need for Additional Financing
We do not have capital sufficient to meet our cash needs. We will have to seek loans or equity placements to cover such cash needs. No commitments to provide additional funds have been made by our management or other stockholders. Accordingly, there can be no assurance that any additional funds will be available to us to allow it to cover our expenses as they may be incurred.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity or capital expenditures.