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EX-31.1 - EXHIBIT 31.1 - NovAccess Global Inc.ex_199451.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

 

For The Quarterly Period Ended: June 30, 2020

 

☐ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

 

For The Transition Period From ___________ to _______________

 

Commission File Number: 000-29621

 

XSUNX, INC.

(Exact name of registrant as specified in its charter)

 

Colorado

 

84-1384159

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

8834 Mayfield Road, Suite C

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number: (949) 330-8060

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

XSNX

 OTC Markets

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐  No ☐

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐ 

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company) 

Smaller reporting company ☒

Emerging growth company ☐

 

         

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

The number of shares of common stock issued and outstanding as of August 19, 2020 was 1,601,887,744

 

 

 

 

TABLE OF CONTENTS

 

 

 

PAGE

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1. Financial Statements (Unaudited)

 

 3

 

 

 

 

 

Condensed Balance Sheets

 

3

 

 

 

 

 

Condensed Statements of Operations

 

4

 

 

 

 

 

Condensed Statements of Shareholders Deficit

 

5

 

 

 

 

 

Condensed Statements of Cash Flows

 

6

 

 

 

 

 

Notes to Condensed Financial Statements

 

7

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

Item 3. Qualitative and Quantitative Disclosures About Market Risk

 

23

 

 

 

 

 

Item 4. Controls and Procedures

 

23

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1. Legal Proceedings

 

24

 

 

 

 

 

Item 1A. Risk Factors

 

24

 

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

24

 

 

 

 

 

Item 3. Defaults upon Senior Securities

 

24

 

 

 

 

 

Item 4. Mine Safety Disclosure

 

24

 

 

 

 

 

Item 5. Other Information

 

24

 

 

 

 

 

Item 6. Exhibits

 

25

 

 

 

 

 

Signatures

 

26

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements. 

XSUNX, INC.

CONDENSED BALANCE SHEETS

 

   

June 30, 2020

   

September 30, 2019

 
   

(Unaudited)

         

ASSETS

               
                 

CURRENT ASSETS

               

   Cash

  $ 154     $ 7,964  

   Contract receivables of discontinued operations

    -       198,083  

   Prepaid expenses

    868       6,575  
                 

                        Total Current Assets

    1,022       212,622  
                 
                 

NET PROPERTY & EQUIPMENT DISCONTINUED OPERATIONS

    -       2,570  
                 

                        TOTAL ASSETS

  $ 1,022     $ 215,192  
                 
                 

LIABILITIES AND SHAREHOLDERS' DEFICIT

               
                 

CURRENT LIABILITIES

               

   Accounts payable 

  $ 43,409     $ 129,425  

   Other payable

    61,706       67,155  

   Accrued expenses and interest on notes payable

    53,558       54,478  

   Contract liabilities of discontinued operations

    -       33,138  

   Derivative liability

    748,255       1,945,650  

   Due to related party

    68,312       -  

   Promissory note, related party (Note 6)

    -       7,200  

   Convertible promissory note, related party (Note 5)

    12,000       12,000  

   Convertible promissory notes, current portion net of debt discount of $0 and $36,297,

      respectively (Note 4)

    55,494       36,217  
                 

                        Total Current Liabilities

    1,042,734       2,285,263  
                 

LONG TERM LIABILITIES

               

Convertible promissory notes, net of debt discount of $0 and $12, respectively

    150,000       165,880  
                 

                        Total Long Term Liabilities

    150,000       165,880  
                 

                       TOTAL LIABILITIES

    1,192,734       2,451,143  
                 

SHAREHOLDERS' DEFICIT

               

   Preferred stock 50,000,000 shares authorized, shares issued and outstanding designated as follows:

               

      Preferred Stock Series A, $0.01 par value, 10,000 authorized

      5,000 and 5,000 shares issued and outstanding, respectively

    50       50  

   Common stock, no par value;

     2,000,000,000 authorized common shares

     1,601,887,744 and 1,601,887,744 shares issued and outstanding, respectively

    33,369,424       33,369,424  

   Additional paid in capital

    5,335,398       5,335,398  

   Paid in capital, common stock warrants

    4,210,959       3,811,700  

   Accumulated deficit

    (44,107,543

)

    (44,752,523

)

                 

                      TOTAL SHAREHOLDERS' DEFICIT

    (1,191,712

)

    (2,235,951

)

                 

                      TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT

  $ 1,022     $ 215,192  

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

XSUNX, INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 30, 2020

   

June 30, 2019

   

June 30, 2020

   

June 30, 2019

 
                                 

SALES

  $ -     $ -     $ -     $ -  
                                 

COST OF GOODS SOLD

    -       -       -       -  
                                 

GROSS PROFIT

    -       -       -       -  
                                 
                                 

OPERATING EXPENSES

                               

    Selling, general and administrative expenses

    489,873       119,882       750,682       405,464  

    Depreciation and amortization expense

    -       -       -       -  
                                 

              TOTAL OPERATING EXPENSES

    489,873       119,882       750,682       405,464  
                                 
                                 
                                 

OTHER INCOME/(EXPENSES)

                               

    Loss on conversion of debt

    -       -       -       (33,829

)

    Gain (Loss) on change in derivative liability

    1,272,932       (434,387

)

    1,197,395       1,433,500  

    Interest expense

    (7,433

)

    (8,067

)

    (22,985

)

    (64,094

)

                                 

              TOTAL OTHER INCOME/(EXPENSES)

    1,265,499       (442,454

)

    1,174,410       1,335,577  
                                 

NET LOSS FROM CONTINUING OPERATIONS

  $ 775,626     $ (562,336 )   $ 423,728     $ 930,111  

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS

  $ (67,525 )   $ 101,896     $ 221,252     $ 497,900  
                                 
                                 
                                 

NET INCOME (LOSS)

  $ 708,101     $ (460,440 )   $ 644,980     $ 1,428,011  
                                 

BASIC INCOME (LOSS) PER SHARE

  $ 0.00     $ (0.00

)

  $ 0.00     $ 0.00  
                                 

DILUTED INCOME (LOSS) PER SHARE

  $ 0.00     $ (0.00

)

  $ 0.00     $ 0.00  
                                 

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

                               

      BASIC

    1,601,887,744       1,601,887,744       1,601,887,744       1,545,192,198  

      DILUTED

    6,078,865,776       1,601,887,744       6,078,865,776       1,545,192,198  

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

XSUNX, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019

 

   

FISCAL NINE MONTHS ENDED JUNE 30, 2019

 
                                   

 

   

Stock Options/

                 
   

Preferred Stock

   

Common Stock

   

Additional

Paid-in

   

Warrants

Paid-in-

   

Accumulated

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Capital

   

Deficit

   

Total

 

Balance at September 30, 2018

    5,000       50       1,468,106,819       33,311,674       5,335,398       3,811,700       (47,096,505 )     (4,637,683 )
                                                                 

Common stock issued upon conversion of debt and accrued interest

    -       -       133,780,925       91,579       -       -       -       91,579  
                                                                 

Net Income

    -       -       -       -       -       -       1,428,011       1,428,011  

Balance at June 30, 2019 (unaudited)

    5,000     $ 50       1,601,887,744     $ 33,403,253     $ 5,335,398     $ 3,811,700     $ (45,668,494 )   $ (3,118,093 )

 

 

   

FISCAL NINE MONTHS ENDED JUNE 30, 2020

 
                                   

 

   

Stock Options/

                 
   

Preferred Stock

   

Common Stock

   

Additional

Paid-in

   

Warrants

Paid-in-

   

Accumulated

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Capital

   

Deficit

   

Total

 

Balance at September 30, 2019

    5,000       50       1,601,887,744       33,369,424       5,335,398       3,811,700       (44,752,523 )     (2,235,951 )
                                                                 

Stock compensation cost, options

    -       -       -       -       -       399,259       -       399,259  
                                                                 

Net Income

    -       -       -       -       -       -       644,980       644,980  

Balance at June 30, 2020 (unaudited)

    5,000     $ 50       1,601,887,744     $ 33,369,424     $ 5,335,398     $ 4,210,959     $ (44,107,543 )   $ (1,191,712 )

 

 

XSUNX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

 

   

For the Nine Months Ended

 
   

June 30, 2020

   

June 30, 2019

 

OPERATING ACTIVITIES:

               

     Net Income

  $ 644,980     $ 1,428,011  

    Adjustment to reconcile net income (loss) to net cash

      provided by (used in) operating activities

               
                 

    Gain on change in derivative liability

    (1,197,395

)

    (1,433,500

)

    Amortization of debt discount recorded as interest expense

    -       36,309  

    Loss on conversion of debt

    -       33,829  

    Stock compensation expense

    399,259       -  
                 

   Changes in Assets and Liabilities:

               
                 

    Prepaid expenses

    5,707       4,536  

    Accounts payable

    (86,016

)

    17,001  

    Other payable

    (5,449 )     1,721  

    Accrued expenses

    2,477       26,628  
                 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES –CONTINUED OPERATIONS

    (236,437

)

    114,535  
                 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES –DISCONTINUED OPERATIONS

    167,515       (68,723 )
                 

NET CASH (USED IN) PROVIDED BY OPERATIONS

    (68,922 )     45,812  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

    Purchase of fixed asset – discontinued operations

    -       (2,284

)

                 

NET CASH USED IN INVESTING ACTIVITIES – DISCONTINUED OPERATIONS

    -       (2,284

)

                 
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

    Due to related party

    68,312       -  

   Payments on related party promissory notes

    (7,200

)

    (24,300

)

                 

NET PROVIDED BY (CASH USED) IN FINANCING ACTIVITIES

    61,112       (24,300

)

                 

NET INCREASE (DECREASED) IN CASH

    (7,810

)

    19,228  
                 

CASH, BEGINNING OF PERIOD

    7,964       41,090  
                 

CASH, END OF PERIOD

  $ 154     $ 60,318  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

               

   Interest paid

  $ 6,955     $ 7,911  

   Taxes paid

  $ -     $ -  
                 

SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS

               

   Issuance of common stock upon conversion of debt and accrued interest

  $ -     $ 91,579  

   Accrued interest capitalized into convertible note

  $ 3,397     $ 4,846  

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

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, 2020 are not necessarily indicative of the results that may be expected for the year ended September 30, 2020. 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, 2019.

 

During the period ending June 30, 2020, the Company discontinued it’s direct delivery method for its solar contracting operations by outsourcing the completion of sold projects under a Transition Services Agreement with a licensed California contractor “the Service Provider”. The Company’s intent is to transition from providing contracting services directly to its customers to marketing solar services to potential customers and referring those customers to the Service Provider or engaging the Service Provider to provide the services to customers on behalf of the Company. The Company’s operations in future periods will be focused on generating a referral fee of 1% of any gross sales generated through these referrals. We anticipate that this change in operations, and delivery method, will have a negative impact on our gross sales and resulting revenues, if any. However, during the period ended June 30, 2020 the Company began efforts to expand its operations to include the commercialization of developmental healthcare solutions in the biotechnology, medical, and health and wellness markets which efforts are ongoing. There can be no assurance that the Company’s change to its contracting operations to focus on referral fee revenues, and its efforts to expand operations into healthcare solutions in the biotechnology, medical, and health and wellness markets will be successful, or that the Company will continue to generate revenues of significance similar to prior periods.

 

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. 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, 2020. 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. 

 

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.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

 

During the six months ended June 30, 2020, the Company sold certain assets at net book value for $2,092.

 

The depreciation expense for the nine months ended June 30, 2020, and 2019, were $478 and $342, respectively. Which are now included in on the discontinued operations.

 

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. 

 

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 $0 and $198,083 at June 30, 2020 and September 30, 2019, 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, 2020, the Company did not experience costs related to warranty claims.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 valuation model, at the date of a stock option grant. The Company has 2,000,000,000 shares of outstanding options as of June 30, 2020.

 

Earnings Per Share

 

(a)

Basic

Basic loss per share is calculated of basic earnings by dividing the net profit (loss) for the three months by the weighted average number of ordinary shares outstanding during the financial periods held by the Company.

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

6/30/2020

   

6/30/2019

   

6/30/2020

   

6/30/2019

 
                                 

Profit (Loss) from continuing operations to common shareholders (Numerator)

  $ 775,626     $ (562,336 )   $ 423,728     $ 930,111  
                                 

Profit (Loss) from discontinued operations to common shareholders (Numerator)

  $ (67,525 )   $ 101,896     $ 221,252     $ 497,900  
                                 

Profit (Loss) to common shareholders (Numerator)

  $ 708, 101     $ (460,440

)

  $ 644,980     $ 1,428,011  
                                 

Weighted average number of common shares outstanding (Denominator)

    1,601,887,744       1,601,887,744       1,601,887,744       1,545,192,198  
                                 

Effect of convertible notes

    -       -       -       -  
                                 

Weighted average number of ordinary shares in issue

    1,601,887,744       1,601,887,744       1,601,887,744       1,545,192,198  
                                 

Basic earnings (loss) per share

  $ 0.00     $ (0.00 )   $ 0.00

 

  $ 0.00  

 

(b)

Diluted

For the purpose of calculating diluted earnings per share, the profit attributable to equity holders and the weighted average number of ordinary shares outstanding during the financial period have been adjusted for the dilutive effects of all potential ordinary shares and shares issuable upon conversion of convertible notes. The dilutive earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of shares that would have been issued upon full conversion of the remaining convertible debt (Note 5), adjusted by the number of such shares that would have been issued at fair value as follows:

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

6/30/2020

   

6/30/2019

   

6/30/2020

   

6/30/2019

 
                                 

Profit (Loss) from continuing operations to common shareholders (Numerator)

  $ 775,626     $ (562,336 )   $ 423,728     $ 930,111  
                                 

Profit (Loss) from discontinued operations to common shareholders (Numerator)

  $ (67,525 )   $ 101,896     $ 221,252     $ 497,900  
                                 

Profit (Loss) to common shareholders (Numerator)

  $ 708,101     $ (460,440

)

  $ 644,980     $ 1,428,011  
                                 

Weighted average number of common shares outstanding (Denominator)

    1,601,887,744       1,601,887,744       1,601,887,744       1,545,192,198  
                                 

Effect of convertible notes

    4,476,978,032       -       4,476,978,032       -  
                                 

Weighted average number of ordinary shares in issue

    6,078,865,776       1,601,887,744       6,078,865,776       1,545,192,198  
                                 

Basic earnings (loss) per share

  $ 0.00     $ (0.00 )   $ 0.00     $ 0.00  

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company has included shares issuable from convertible debt of $205,494 for the nine months ended June 30, 2020, because their impact on the loss per share is dilutive.

 

The Company has excluded shares issuable from convertible debt of $201,024 for the nine months ended June 30, 2019, 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 June 30, 2020, 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, 2020:

 

   

Total

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Liabilities

                               
                                 

Derivative Liability

  $ 748,255     $ -     $ -     $ 748,255  

Total Liabilities measured at fair value

  $ 748,255     $ -     $ -     $ 748,255  

 

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, 2019

  $ 1,945,650  

Net Gain on change in derivative liability

    (1,197,395

)

Ending balance as of June 30, 2020

  $ 748,255  

 

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, and there was no material impact on the financial statements. 

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 has evaluated the impact of the adoption of ASU 2017-12 on the Company’s financial statements, and there was no material impact on the financial statements.

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company has evaluated the impact of the adoption of ASU 2018-07 on the Company’s financial statements, and there was no material impact on its financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has evaluated the impact of the adoption of ASU 2018-13 on the Company’s financial statements, and there was no material impact on the 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 December 31, 2019, 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 June 30, 2020, 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. On March 18, 2020, XsunX, Inc. (the “Company”), Tom Djokovich, the President and Chief Executive Officer of the Company, and TN3, LLC, a Wyoming limited liability company owned by Daniel G. Martin (“TN3”) entered into a Stock Purchase Agreement (the “Agreement”). Pursuant to the Agreement, Mr. Djokovich agreed to sell his 5,000 shares of Series A Preferred Stock (“Stock”) of the Company to TN3 in a private sale for cash. The holder of the Series A Preferred Stock may cast votes equal to not less than 60% of the total outstanding voting power of the Company on all matters voted on by the shareholders of the Company. Completion of the sale of the Series A Preferred Stock is conditioned upon a number of events, including the filing by the Company of a Schedule 14F to disclose changes in the management of the Company that will occur in connection with the sale.

 

On May 13, 2020, the Company filed an information statement pursuant to Section 14(f) of the Securities exchange Act of 1934 and Rule 14f-1 thereunder providing further information related to the below proposed transaction, which the Company originally disclosed within its March 24, 2020 filing on Form 8K.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

3.

CAPITAL STOCK (Continued)

 

Common Stock

During the nine months ended June 30, 2020, the Company had no issuance of shares of 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.

CONVERTIBLE PROMISSORY NOTES

 

As of June 30, 2020, the outstanding convertible promissory notes are summarized as follows:

 

Convertible Promissory Notes

  $ 205,494  

Less current portion

    55,494  

Total long-term liabilities

  $ 150,000  

 

Maturities of long-term debt for the next three years are as follows:

 

Period Ended

       

June 30,

       

2022

  $ 55,494  

2023

    60,000  

2024

    90,000  
    $ 205,494  

 

At June 30, 2020, the $205,494 in convertible promissory notes.

 

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 December 31, 2019, the remaining balance of the Note was $36,217. As of June 30, 2020, the balance of the Note was $39,614, which includes capitalized interest for the period of $3,397. As of June 30, 2020, the Note has matured, and the Company and the Holder has entered into discussions for the repayment of the Note.

 

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 Note was extended for each tranche with maturity dates of June 30, 2021 and August 18, 2021. 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, 2020, 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. As of June 30, 2020, the balance remaining on the May Note was $115,000.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

4.

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 based upon the Binomial lattice model calculation.

 

The convertible notes issued and described in Note 4 above, do not have fixed settlement provisions because their conversion prices are not fixed. The conversion feature has been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

We record 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.

 

At June 30, 2020, the fair value of the derivative liability was $748,255.

 

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 derivatives are as follows:

 

Risk free interest rate

 

Between 0.13% and 0.29%

Stock volatility factor

 

Between 119.0% and 207.0%

Months to Maturity

 

0 - 5 years

Expected dividend yield

 

None

 

5.

CONVERTIBLE PROMISSORY NOTES – RELATED PARTY

 

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. The convertible note has a fixed settlement provision and does not qualify as a derivative.

 

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 June 30, 2020, the Company paid off the principal in the amount of $5,000, plus accrued interest of $7,903. The balance as of June 30, 2020 was $0.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

7.

REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Revenues and related costs on construction contracts were recognized as the performance of obligations were 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. As of June 2, 2020, the Company discontinued it’s direct delivery method for its solar contracting operations by outsourcing the completion of sold projects under a Transition Services Agreement with a licensed California contractor.

 

The following table represents a disaggregation of revenue by customer type from contracts with customers for the nine months ended June 30, 2020 and 2019:

 

   

Nine Months Ended June 30,

 
   

2020

   

2019

 

Commercial

  $ 998,373     $ 1,091,691  

Residential

    45,960       50,525  

Management fees

    -       17,250  
    $ 1,044,333     $ 1,159,466  

 

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, 2020 and the year ended September 30, 2019 was $0 and $0, respectively. The contract liability for the nine months ended June 30, 2020 and the year ended September 30, 2019 was $0 and $33,138, respectively.

 

8.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consisted of the following at June 30, 2020 and September 30, 2019:

 

   

6/30/2020

   

9/30/2019

 

Trade accounts payable

  $ 93,409     $ 129,425  

Credit cards payable

    61,706       67,155  

Accrued liabilities

    53,558       54,478  
    $ 208,673     $ 251,058  

 

9.

OPTIONS

 

On June 2, 2020, the Company issued 2,000,000,000 options to purchase common stock. These options will be exercisable on a cashless basis for a period of ten years from the effective date of the Stock Split at an exercise price of $0.00001 per share on a pre-Stock Split basis. The purpose of the options are to compensate our directors for serving on the Board without compensation in fiscal 2019. It is difficult to assess the value of the options given the highly limited trading in our Common Stock, the fact that the options shares have not been and are not expected to be registered for resale and will be restricted, and the speculative nature of the Company’s future business plans. However, we estimated the value of the services provided by each of our directors during 2019,and believe that the value of the options to be issued to each of our resigning directors approximates that amount.

 

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

9.

OPTIONS (Continued)

 

A summary of the Company’s options activity and related information follows for the nine months ended June 30, 2020:

 

   

June 30, 2020

 
           

Weighted

 
   

Number

   

average

 
   

of

   

exercise

 
   

Options

   

price

 

Outstanding - beginning of period

    -     $ -  

Granted

    2,000,000,000     $ .00001  

Exercised

    -     $ -  

Forfeited

    -     $ -  

Outstanding - end of period

    2,000,000,000     $ .00001  

 

At June 30, 2020, the weighted average remaining contractual life of options outstanding:

 

       

June 30, 2020

 
                       

Weighted

 
                       

Average

 
                       

Remaining

 

Exercisable

   

Options

   

Options

   

Contractual

 

Prices 

   

 Outstanding 

   

 Exercisable 

   

Life (years)

 
$ .00001       2,000,000,000       2,000,000,000       9.93  

 

For purpose of determining the fair market value of the options, the Company used the Black Scholes  valuation model. The significant assumptions used in the Black Scholes valuation model for the warrants are as follows:

 

Risk Free Interest Rate

    0.32 %

Stock Volatility Factor

    146.0 %

Weighted Average Expected Option Life

 

5 Years

 

Expected Dividend Yield

 

None

 

                                             

The stock-based compensation expense recognized in the statement of operations during the nine months ended June 30, 2020 related to the granting of these warrants was $399,259.

 

10.

DUE TO RELATED PARTY

 

During the period ended June 30, 2020, the Innovest Global, Inc. advanced funds to the Company for operating expenses in the amount of $68,312. As of June 30, 2020, the amount has not been reimbursed to Innovest Global, Inc.

 

15

 

XSUNX, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS – UNAUDITED

JUNE 30, 2020

 

11.

BUSINESS TRANSITION

 

On June 2, 2020, the Seller (Mr. Tom Djokovich) entered into a transition service agreement, with the Buyer (Mr. Daniel G. Martin), sole owner, president and chairman of the board of TN3. Mr. Martin is also the chief executive officer of Innovest Global, Inc., a diversified industrial company. The Buyer is in the process of ceasing the XsunX business to transition to the StemVax business. XsunX will discontinued it’s direct delivery method for its solar contracting operations by outsourcing the completion of sold projects under a Transition Services Agreement with a licensed California contractor “the Service Provider”. The Company’s intent is to transition from providing contracting services directly to its customers to marketing solar services to potential customers and referring those customers to the Service Provider or engaging the Service Provider to provide the services to customers on behalf of the Company. The Company’s operations in future periods will be focused on generating a referral fee of 1% of any gross sales generated through these referrals. We anticipate that this change in operations, and delivery method, will have a negative impact on our gross sales and resulting revenues, if any. However, during the period ended June 30, 2020 the Company began efforts to expand its operations to include the commercialization of developmental healthcare solutions in the biotechnology, medical, and health and wellness markets which efforts are ongoing. There can be no assurance that the Company’s change to its contracting operations to focus on referral fee revenues, and its efforts to expand operations into healthcare solutions in the biotechnology, medical, and health and wellness markets will be successful, or that the Company will continue to generate revenues of significance similar to prior periods.

 

At the completion of the acquisition of the StemVax Business, Seller will withdraw his position as the qualifying individual for the XsunX contractor license for the XsunX Business, and upon completion of the withdrawal, XsunX and the Seller will terminate the Transition Services Agreement. Thereafter, the Seller may accept contracts initially marketed by XsunX with the Seller as the qualifying individual for the XsunX license, without obligation to XsunX for any cash flows therefrom. The timing and procedures for the transition of the XsunX Business is governed by the Transition Services Agreement. In the event of any contradiction or discrepancy between this Agreement and the Transition Services Agreement, the terms and provisions of the Transition Services Agreement will govern.

 

In connection with preparing for the transition, the Company paid Solar Energy Builders, Inc, a related party,  $185,300 to serve as the outside contractor for the assumption of the jobs that were started, and completed. The Company recognized the expense in cost of sales for the period, and also deducted the net book value of certain assets (computer and small equipment) in the amount of $2,092, leaving a net amount paid of $183,208. As of June 30, 2020, the transition has not been completed.

 

Also, purchase options were issued to the board of directors as mentioned in Note 9 for payment of services.

 

In connection with closing the Transaction and transition into a new business plan, the Company will enter into a transition services agreement (the “Services Agreement”) with Tom Djokovich, our current President and Chief Executive Officer, and Solar Energy Builders, Inc., a company controlled by Mr. Djokovich (“Solar Energy”). Pursuant to the Services Agreement, we will engage Solar Energy to service our solar business customers or refer those customers to Solar Energy on an exclusive basis. For referrals, Solar Energy will pay us a referral fee of 1% of the gross amount paid by the referred customer to Solar Energy. We intend to continue to market our solar services while preparing to transition into the new business plan. As of June 30, 2020, no referral fees have been paid to Solar Energy.

 

12.

DISCONTINUED OPERATIONS

 

On June 2, 2020, the Company entered into a transition agreement, and will change their focus to a new line of business. As a result the Company will discontinue XsunX, Inc., and all related operations. Pursuant to the reporting requirements of ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the Company has determined that the business qualifies for presentation as a discontinued operation. Therefore, the Company has reclassified the business assets and liabilities as discontinued operations in the accompanying Balance Sheet and presented the operating results as discontinued operations in the accompanying statements of Operations and Statements of Cash Flows.

 

16

 

12.

DISCONTINUED OPERATIONS (Continued)

 

Financial information for XsunX Inc, for the three month and nine months ended June 30, 2020, are presented in the following table:

 

   

Three Months Ended

   

Nine Months Ended

   
   

June 30, 2020

   

June 30, 2019

   

June 30, 2020

   

June 30, 2019

   
                                   

SALES

  $ 218,311     $ 296,237     $ 1,044,333     $ 1,159,466    
                                   

COST OF GOODS SOLD

    285,836       194,193       822,603       661,224    
                                   

GROSS PROFIT

    (67,525 )     102,044       221,730       498,242    
                                   

OPERATING EXPENSES

                                 
                                   

    Depreciation and amortization expense

    -       148       478       342    
                                   

              TOTAL OPERATING EXPENSES of DISCONTINUED OPERATIONS

    -       148       478       342    
                                   

         NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS

  $ (67,525 )   $ 101,896     $ 221,252     $ 497,900    

 

   

June 30, 2020

   

September 30, 2019

 
   

(Unaudited)

         

ASSETS

               
                 

CURRENT ASSETS

               
                 

   Contract receivables of discontinued operations

    -       198,083  
                 

                        Total Current Assets of discontinued operations

    -       198,083  
                 

Net Property and Equipment of discontinued operations

    -       2,570  
                 

                        TOTAL ASSETS of DISCONTINUED OPERATIONS

  $ -     $ 200,653  
                 

LIABILITIES

               
                 

CURRENT LIABILITIES

               
                 

   Contract liabilities of discontinued operations

    -       33,138  
                 

                        Total Current Liabilities of discontinued operations

    -       33,138  
                 

                       TOTAL CURRENT LIABILITIES of DISCONTINUED OPERATIONS

    -       33,138  

 

12.

SUBSEQUENT EVENTS

 

Management has evaluated subsequent events as of the financial statement date according to the requirements of ASC TOPIC 855 and has no events to report.

  

 

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

 

New Business Plan

 

On June 2, 2020, TN3, LLC, a limited liability company owned by Daniel G. Martin, purchased all of the outstanding shares of preferred stock of XsunX from Tom Djokovich, our former president and chief executive officer, for $50,000. In addition, TN3 agreed to pay for certain expenses of the transaction incurred by Mr. Djokovich and XsunX totaling more than $50,000. Upon acquiring the preferred shares, Mr. Martin became the sole director and chief executive officer of the company. For more information about Mr. Martin’s acquisition of the preferred stock and his appointment to our board, please see our Schedule 14F-1/A filed with the Securities and Exchange Commission (SEC) on May 13, 2020 and Form 8-K filed with the SEC on June 8, 2020.

 

During the period ending June 30, 2020 the Company changed the delivery method for its solar contracting operations by outsourcing the completion of sold projects under a Transition Services Agreement with a licensed California contractor “the Service Provider”. The Company’s intent is to transition from providing contracting services directly to its customers to marketing solar services to potential customers and referring those customers to the Service Provider or engaging the Service Provider to provide the services to customers on behalf of the Company. The Company’s operations in future periods will be focused on generating a referral fee of 1% of any gross sales generated through these referrals. We anticipate that this change in operations, and delivery method, will have a negative impact on our gross sales and resulting revenues, if any. However, during the period ended June 30, 2020 the Company began efforts to expand its operations to include the commercialization of developmental healthcare solutions in the biotechnology, medical, and health and wellness markets which efforts are ongoing. There can be no assurance that the Company’s change to its contracting operations to focus on referral fee revenues, and its efforts to expand operations into healthcare solutions in the biotechnology, medical, and health and wellness markets will be successful, or that the Company will continue to generate revenues of significance similar to prior periods.”

 

On June 2, 2020, we entered into a membership interest purchase agreement with Innovest to acquire StemVax for 7.5     million shares of our unregistered common stock (after giving effect to the 1-for-1,000 reverse stock split described in this information statement). We expect to complete the acquisition in the third calendar quarter of 2020 but cannot guarantee that the transaction will be completed when expected, or at all.

 

We believe that investing in the biotechnology industry will significantly increase value for our shareholders. However, we cannot guaranty that we will be successful in this endeavor or that we can locate, acquire and finance the acquisition of biotechnology companies. Currently, we continue to engage in the marketing of solar photovoltaic power generation and storage solutions.

 

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.

 

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.

 

 

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 estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, valuation 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 June 30, 2020, 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

 

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 JUNE 30, 2020 COMPARED TO THREE MONTHS ENDED JUNE 30, 2019.

 

Selling, General and Administrative Expenses:

 

Selling, General and Administrative (SG&A) expenses increased by $369,991 during the three months ended June 30, 2020 to $489,873 as compared to $119,882 for the prior three months ended June 30, 2019. The increase in SG&A expenses was primarily due to an increase in labor wages, and other administrative expenses, which include non-cash stock compensation expense of $399,259. Management expects SG&A expenses may increase in future periods as the Company continues to expand its marketing, sales, and service efforts.

 

Change in Derivative Liability

 

The change in derivative liability for the three months ended June 30, 2020 and 2019, was a gain of $1,272,932, compared to a loss of $434,387 in the prior period, as a result of an increase in the fair value of the derivative liability.

 

Interest

 

Interest expense during the three months ended June 30, 2020 was $7,432 compared to $8,067 for the prior three months ended June 30, 2019. The decrease was the result of less convertible notes and no debt discount.

 

Net Loss from Continuing Operations

 

Net Income (Loss) from continuing operations was $775,626 and $(562,336) for the three months ended June 30, 2020 and 2019, respectively, as result of gains discussed above.

 

Income ( Loss) from Discontinued Operations

 

Income (Loss) on discontinued operations was a loss of ($67,525) and income of $101,896 for the three months ended June 30, 2020 and 2019, respectively, as a result  of reclassifying XsunX, Inc. business as discontinued operations.

 

Net Income (Loss)

 

Net Income for the three months ended June 30, 2020, was $708,101, compared to a Net Loss of $(460,440) for the prior period ended June 30, 2019. The increase in Net Income was caused by the change in income and expense discussed above.

 

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2020 COMPARED TO NINE MONTHS ENDED JUNE 30, 2019.

 

Selling, General and Administrative Expenses:

 

Selling, General and Administrative (SG&A) expenses $750,682 as compared to $405,464 for the nine months ended June 30, 2019. The increase in SG&A expenses was related primarily due to a increase in non-cash stock compensation expense of $399,259 and other administrative expenses.

 

Change in Derivative Liability

 

The change in derivative liability for the nine months ended June 30, 2020 and 2019, was a gain on change in derivative of $1,197,395 compared to a gain of $1,433,500, and a gain on conversion of debt of $33,829 in the prior period. The decrease in the current period was the  result of a decrease in the fair value of the derivative liability and gain on conversion of debt.

 

Interest

 

Interest expense during the nine months ended June 30, 2020 was $22,985 compared to $64,094 for the prior nine months ended June 30, 2019. The decrease was the result of less convertible notes and no debt discount.

 

Net Loss from Continuing Operations

 

Net Income from continuing operations was $423,728 and $930,113 for the nine months ended June 30, 2020 and 2019, respectively, as result of gains discussed above.

 

Income (Loss) from Discontinued Operations

 

Income (Loss) on discontinued operations was income of $221,252 and income of $497,900 for the nine months ended June 30, 2020 and 2019, respectively, as a result of reclassifying XsunX, Inc. business as discontinued operations.

 

Net Income (Loss)

 

Net Income for the nine months ended June 30, 2020, was $644,980, compared to a Net Loss of $1,428,013 for the prior period ended June 30, 2019. The increase in Net Income was caused by the change in income and expense discussed above.

 

Liquidity and Capital Resources

 

We had a working capital deficit at June 30, 2020 of $1,041,712, as compared to a working capital deficit of $2,072,641 as of September 30, 2019. The decrease in working capital deficit was primarily the result of an decrease in derivative liability.

 

Cash Flows

 

   

Nine months ended June 30, 

 
   

2020

   

2019

 

Net cash (used in) provided by operating activities - continuing operations

  $ (236,437 )   $ 114,535  

Net cash provided by investing activities - continuing operations

  $ -     $ -  

Net cash provided by (used in) financing activities

  $ 61,112     $ (24,300 )

 

Cash flows used in operating activities – continuing operations was $236,437 for the nine months ended June 30, 2020, as compared to cash flows provided by operating activities of $114,535 for the prior nine months ended June 30, 2019. The increase in cash flow used in operating activities was due primarily to a decrease of cash flow from accounts receivable.

 

Cash flows provided by investing activities – continuing operations for the nine months ended June 30, 2020 was $0, as compared to cash flows used in investing activities of $0 for the prior nine months ended June 30, 2019. The Company purchased certain assets in the prior period.

 

 

Cash flows provided by financing activities for the nine months ended June 30, 2020 was $61,112, compared to cash flows used in financing activities of $24,300. 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 June 30, 2020 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, 2019, 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.

 

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.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We do not have any market risk sensitive instruments. Since all operations are in U.S. dollar denominated accounts, we do not have foreign currency risk. Our operating costs are reported in U.S. dollars.

 

The Company does not invest in term financial products or instruments or derivatives involving risk other than money market accounts, which fluctuate with interest rates at market.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 

 

Changes in Internal Control over Financial Reporting

 

There was no change to our internal control over financial reporting that occurred during our second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

None

 

Item 1A.  Risk Factors

 

There are no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K filed with the Securities and Exchange Commission dated December 20, 2019. 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mining and Safety Disclosures

 

None.

 

Item 5.  Other information

 

None.

 

 

Item 6.  Exhibits

 

The following is a complete list of exhibits filed as part of this Form 10-Q.  Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.

 

Exhibit

 

Description

 

 

 

10.1   Form 14F/A disclosing proposed change in management and business model (2)
10.2   Form 14C shareholder information statement related to biotechnology (3)

31.1

 

Certification of Chief Financial Officer and Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (1)

32.1

 

Certification of Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (1)

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Label Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

(1)

Filed Herewith

  (2) Incorporated by reference to Form 14F/A filed with the securities exchange commission on May 13, 2020
  (3) Incorporated by reference to Form 14C filed with the securities exchange commission on June 29, 2020

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

XSUNX, INC.

 

 

 

Dated: August 21, 2020

By:

/s/ Daniel G. Martin

 

 

Daniel G. Martin,

Principal Executive and Accounting Officer

 

 

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