NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018
AND
2017
1. ORGANIZATION AND LINE OF BUSINESS
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 Asset Purchase Agreement (the “Plan”).
Line of Business
The Company’s focus is on marketing, sales, and delivery of commercial solar power systems as a licensed contractor in California. We see these efforts as a significant business development opportunity as management has the skillset associated with construction management, we have extensive experience associated with solar PV technologies, the design requirements associated with the delivery of a solar power systems, and there is a market demand available for us to provide these services to.
Going Concern
The accompanying 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 financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company does not generate significant revenue, has a history of losses, and has negative cash flows from operations, which 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 year ended September 30, 2018. 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, 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.
Property and Equipment
Property and equipment are stated at cost, and are depreciated using straight line over its estimated useful lives:
Leasehold improvements
|
Length of the lease
|
Computer software and equipment
|
3 Years
|
Furniture & fixtures
|
5 Years
|
Machinery & equipment
|
5 Years
|
The Company capitalizes property and equipment over $500. Property and equipment under $500 are expensed in the year purchased. The depreciation expense for the years ended September 30, 2018, and 2017, were $280 and $164, respectively.
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions 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, which are recognized in the period 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 client’s 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 on a monthly basis. 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 $99,907 and $17,125 at September 30, 2018 and 2017, 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 years ended September 30, 2018 and 2017, 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 Black Scholes option valuation 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.
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
Advertising expenses are expensed as incurred. Total advertising expenses were $25,902 and $26,412 for the years ended September 30, 2018, and 2017, respectively.
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 years ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
(Loss) to common shareholders (Numerator)
|
|
$
|
(3,969,406
|
)
|
|
$
|
(498,663
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding (Denominator)
|
|
|
1,353,970,775
|
|
|
|
930,964,985
|
|
The Company has excluded shares issuable from convertible debt of $245,913 the year ended September 30, 2018, because their impact on the loss per share is anti-dilutive.
The Company has excluded shares issuable from convertible debt of $230,833 the year ended September 30, 2017, because their impact on the loss per share is anti-dilutive.
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 September 30, 2018, 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.
|
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 September 30, 2018 and 2017:
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability at fair value as of September 30, 2018
|
|
$
|
4,154,333
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,154,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability at fair value as of September 30, 2017
|
|
$
|
625,645
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
625,645
|
|
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, 2016
|
|
$
|
430,532
|
|
Fair value of derivative liabilities issued
|
|
|
1,147
|
|
Net Gain on change in derivative liability and conversion of debt
|
|
|
193,966
|
|
Balance as of September 30, 2017
|
|
|
625,645
|
|
Fair value of derivative liabilities issued
|
|
|
107,098
|
|
Net Loss on change in derivative liability and conversion of debt
|
|
|
3,421,590
|
|
Ending balance as of September 30, 2018
|
|
$
|
4,154,333
|
|
Recent 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. The Company has adopted ASC 606 beginning on January 1, 2018.
In May 2016, FASB issued accounting standards update ASU-2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same time Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity).
The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policies. See Note 7 for additional disclosures in accordance with the new revenue recognition standard.
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
In August 2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in the same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact of the adoption of ASU 2017-12 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.
3. CAPITAL STOCK
At September 30, 2018, the Company’s authorized stock consisted of 2,000,000,000 shares of common stock, with no par value. The Company is also authorized to issue 50,000,000 shares of preferred stock with a par value of $0.01 per share of which 10,000 shares have been designated as Series A Preferred Stock. The rights, preferences and privileges of the holders of the preferred stock are determined by the Board of Directors prior to issuance of such shares.
Preferred Stock
As of September 30, 2018 and 2017, 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. As a result of such issuance, Mr. Djokovich has the ability to influence and determine stockholder votes.
Common Stock
During the year ended September 30, 2018, the Company issued 427,960,271 shares of common stock upon conversion of principal in the amount of $126,920, plus accrued interest of $14,577, with an aggregate fair value loss on settlement of debt of $234,450.
During the year ended September 30, 2017, the Company issued 257,066,069 shares of common stock upon conversion of principal in the amount of $86,512, plus accrued interest of $13,722, with an aggregate fair value loss on settlement of debt of $194,653.
4. CONVERTIBLE PROMISSORY NOTES
As of September 30, 2018, the outstanding convertible promissory notes are summarized as follows:
Convertible Promissory Notes, net of debt discount
|
|
$
|
197,604
|
|
Less current portion
|
|
|
31,736
|
|
Total long-term liabilities
|
|
$
|
165,868
|
|
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
4. CONVERTIBLE PROMISSORY NOTES (Continued)
Maturities of long-term debt for the next four years are as follows:
Year Ending
|
|
|
|
|
September 30,
|
|
|
|
|
2020
|
|
$
|
-
|
|
2021
|
|
|
50,880
|
|
2022
|
|
|
75,000
|
|
2023
|
|
|
39,988
|
|
|
|
$
|
165,868
|
|
At September 30, 2018, the $243,913 in convertible promissory notes has a remaining debt discount of $36,309, leaving a net balance of $197,604.
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 bear trading days preceding any conversion date by Holder. The balance of the provisions of the Note remained substantially the same. As of September 30, 2018, the Note has matured and the Company and the Holder have entered into discussions for the repayment of the Note. As of September 30, 2018, the Company has paid $5,000 of the principal balance, leaving a remaining principal balance of $13,033, plus accrued interest of $17,264.
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 three 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. During the year ended September 30, 2018, the Company issued 366,653,589 shares of common stock upon conversion of $74,920 in principal, plus accrued interest of $11,977, and a loss on settlement of $207,190. During the year ended September 30, 2018, the Company recognized debt amortization as interest expense in the amount of $147. As of September 30, 2018, 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 Company received a tranche in the amount of $25,000 upon execution of the May Note. On July 31 and September 18, 2017, the lender advanced additional tranches in the amount of $50,000. The Lender may pay additional consideration at the Lenders discretion. The May Note matures 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 debt discount of $1,147 related to the conversion feature of the May Note, along with derivative liability at inception. During the year ended September 30, 2018, the Company recognized debt amortization as interest expense in the amount of $951. As of September 30, 2018, there remains an outstanding balance of $115,000.
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
4. CONVERTIBLE PROMISSORY NOTES (Continued)
The Company issued an unsecured convertible promissory note (the “Jan Note”), in the amount of $52,000 on date of January 11, 2018, which was funded on January 16, 2018. The Note matured on October 20, 2018, and bore 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 dollar volume weighted average price (“VWAP”) occurring during the fifteen (15) trading days prior to conversion. The conversion feature of the Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. During the year ended September 30, 2018, the Company issued 61,306,681 shares of common stock upon conversion of $52,000 in principal, plus accrued interest of $2,600, and a loss on settlement of $27,260. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $52,000 during the year ended September 30, 2018. The Jan Note was fully converted during the period.
The Company issued an unsecured convertible promissory note (the “May 2018 Note”), in the amount of $25,000 on May 7, 2018, which was funded on May 9, 2018. The Note matures on February 15, 2018, 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 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 recorded amortization of debt discount, which was recognized as interest expense in the amount of $12,852 during the year ended September 30, 2018. As of September 30, 2018, the balance remaining on the May 2018 Note was $25,000.
The Company issued an unsecured convertible promissory note (the “Aug 2018 Note”), in the amount of $30,000 on August 6, 2018, which was funded on August 9, 2018. The Note matures on February 15, 2018, 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 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 recorded amortization of debt discount, which was recognized as interest expense in the amount of $5,851 during the year ended September 30, 2018. As of September 30, 2018, the balance remaining on the August 2018 Note was $30,000.
Issuance of Convertible Promissory Notes for Services to Related Party
As of March 31, 2016, 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.
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.
At September 30, 2018, the fair value of the derivative liability was $4,154,333.
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
4. CONVERTIBLE PROMISSORY NOTES (Continued)
The convertible notes issued and described in Note 4 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 year ended September 30, 2018, as a result of the convertible notes (“Notes”) issued that were accounted for as derivative liabilities, we determined that the fair value of the conversion feature of the convertible notes at issuance was $107,098, based upon a Binomial lattice model calculation. We recorded the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over the life of the Notes.
During the year ended September 30, 2018, the Company converted $126,920 in principal of convertible promissory notes, plus accrued interest of $14,577. As a result of the conversion of these notes and the change in fair value of the remaining notes, the Company recorded a loss on conversion of debt in the amount of $234,450 in the statement of operations for the nine months ended September 30, 2018. At September 30, 2018, the fair value of the derivative liability was $4,154,333.
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 Black Scholes valuation of the derivatives are as follows:
Risk free interest rate
|
|
Between 2.12% and 2.94%
|
Stock volatility factor
|
|
Between 97.11% and 146.5%
|
Months to Maturity
|
|
1 - 5 years
|
Expected dividend yield
|
|
None
|
5. 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. The balance as of September 30, 2018 was $31,500, plus accrued interest of $10,577.
6. 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.
The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the years ended September 30, 2018 and 2017.
|
|
Years Ended
|
|
|
|
September
|
|
|
|
2018
|
|
|
2017
|
|
Commercial
|
|
$
|
608,207
|
|
|
$
|
979,591
|
|
Residential
|
|
|
19,810
|
|
|
|
193,281
|
|
Management fees
|
|
|
37,000
|
|
|
|
-
|
|
|
|
$
|
665,017
|
|
|
$
|
1,172,872
|
|
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
6. REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
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 years ending September 30, 2018 and 2017 was $6,919 and $0, respectively. The contract liability for the years ending September 30, 2018 and 2017, was $141,688 and $14,955, respectively.
7. DEFERRED TAX BENEFIT
The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2014.
Included in the balance at September 30, 2018, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the period ended September 30, 2018, the Company did not recognize interest and penalties.
At September 30, 2018, the Company had net operating loss carry-forwards of approximately $21,616,000 that may be offset against future taxable income from the year 2018 through 2037. No tax benefit has been reported in the September 30, 2018 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended September 30, 2018 and 2017 due to the following:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
Book Income
|
|
$
|
(1,587,750
|
)
|
|
$
|
(199,460
|
)
|
Nondeductible Other Expenses
|
|
|
1,503,750
|
|
|
|
169,400
|
|
Depreciation
|
|
|
10
|
|
|
|
(160
|
)
|
Related Party Accrual
|
|
|
(70
|
)
|
|
|
(310
|
)
|
Valuation Allowance
|
|
|
(84,060
|
)
|
|
|
30,530
|
|
Income Tax Expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
XSUNX, INC.
NOTES TO THE FINANCIAL STATEMENTS – AUDITED
SEPTEMBER 30, 2018 AND 2017
7. DEFERRED TAX BENEFIT (Continued)
Net deferred tax assets consist of the following components as of September 30, 2018 and 2017:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
NOL Carryforward
|
|
$
|
6,268,732
|
|
|
$
|
8,562,970
|
|
R&D Carryforward
|
|
|
46,150
|
|
|
|
46,150
|
|
Related Party Accruals
|
|
|
913
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(10
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(6,315,785
|
)
|
|
|
(8,610,400
|
)
|
Net Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. The Company is still in the process of analyzing the impact to the Company of the TCJA. Where the Company has been able to make reasonable estimates of the effects related to which its analysis is not yet complete, the Company has recorded provisional amounts. The ultimate impact to the Company’s financial statements of the TCJA may differ from the provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. As of September 30, 2018, the Company applied a revised effective tax recapture rate of 29% which resulted in a reduction in the Company value of deferred tax assets and related allowances of approximately $2.3 million.
The Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions.
8. SUBSEQUENT EVENTS
Management has evaluated subsequent events as of the financial statement date according to the requirements of ASC TOPIC 855 and has the following subsequent events to report.
Between November 9 and 27, 2018 the Company issued 52,990,411 shares of common upon conversion of $25,000 of principal and $1,250 in accrued interest by the holder of a 10% convertible Note that was originally issued on May 7, 2018. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.