SolarMax Technology(SMXT) - 2024 Q2 - Quarterly Report

Part I. Financial Information Item 1. Unaudited Financial Statements This section presents the unaudited condensed consolidated financial statements for SolarMax Technology, Inc. and its subsidiaries, including balance sheets, statements of operations, comprehensive income (loss), changes in stockholders' equity (deficit), and cash flows, along with detailed notes explaining the company's business, accounting policies, and financial performance for the periods ended June 30, 2024 and 2023 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (Unaudited) | Metric | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Total Assets | $51,092,027 | $48,655,201 | | Total Liabilities | $53,906,066 | $64,543,029 | | Total Stockholders' Deficit | $(2,814,039) | $(15,887,828) | - Total assets increased by approximately $2.4 million from December 31, 2023, to June 30, 2024, while total liabilities decreased by approximately $10.6 million, significantly reducing the stockholders' deficit[10] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $4,454,301 | $14,753,462 | $10,218,375 | $27,621,940 | | Gross Profit | $588,083 | $2,080,555 | $123,676 | $4,152,892 | | Operating Income (Loss) | $(2,399,569) | $(910,669) | $(21,280,308) | $(383,458) | | Net Income (Loss) | $(2,164,224) | $(1,858,295) | $(21,436,011) | $(1,115,480) | | Basic and Diluted EPS | $(0.05) | $(0.05) | $(0.50) | $(0.03) | - Revenues for the six months ended June 30, 2024, decreased by 63% YoY, leading to a significant increase in net loss to $(21.4) million, primarily due to a one-time stock-based compensation expense of $17.2 million[12][158] Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) | $(2,164,224) | $(1,858,295) | $(21,436,011) | $(1,115,480) | | Foreign Currency Translation Adjustments | $(64,577) | $(622,156) | $(272,534) | $(401,149) | | Total Comprehensive Income (Loss) | $(2,228,801) | $(2,480,451) | $(21,708,545) | $(1,516,629) | - Total comprehensive loss for the six months ended June 30, 2024, significantly widened to $(21.7) million, primarily driven by the increased net loss and foreign currency translation adjustments[13] Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited) | Metric | December 31, 2023 | June 30, 2024 | | :----------------------------------- | :---------------- | :------------ | | Common Stock (shares) | 40,983,881 | 46,267,705 | | Common Stock (amount) | $40,984 | $46,268 | | Additional Paid-In Capital | $55,786,634 | $90,563,684 | | Accumulated Deficit | $(68,623,969) | $(90,059,980) | | Accumulated Other Comprehensive Loss | $(1,282,588) | $(1,555,122) | | Total Stockholders' Deficit | $(15,887,828) | $(2,814,039) | - The total stockholders' deficit significantly improved from $(15.9) million at December 31, 2023, to $(2.8) million at June 30, 2024, primarily due to a substantial increase in additional paid-in capital from the initial public offering and stock-based compensation[16][157][158] - Additional paid-in capital increased by approximately $34.8 million, reflecting proceeds from the initial public offering and recognition of stock-based compensation expense[16][157][158] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $(8,022,213) | $(1,383,784) | | Net cash provided by (used in) investing activities | $(7,673,749) | $(6,092) | | Net cash provided by (used in) financing activities | $14,216,118 | $639,990 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(1,220,462) | $(151,978) | - Net cash used in operating activities increased significantly to $(8.0) million for the six months ended June 30, 2024, compared to $(1.4) million in the prior year, primarily due to a larger net loss and changes in working capital[18][193] - Net cash provided by financing activities surged to $14.2 million, driven by $18.6 million in net proceeds from the initial public offering, partially offset by principal payments on convertible notes[18][198] Notes to Condensed Consolidated Financial Statements 1. Description of Business SolarMax Technology, Inc. is an integrated solar and renewable energy company operating in two segments: U.S. operations (solar and battery backup systems, LED sales) and China operations (solar farm projects, EPC services). The company completed an initial public offering in March 2024, issuing 4.5 million shares and an additional 539,950 shares from an over-allotment option, generating approximately $18.6 million in net proceeds - The Company operates in two segments: U.S. operations (residential/commercial solar, battery backup, LED) and China operations (solar farm projects, EPC services)[22] - On March 5, 2024, the Company completed its initial public offering, issuing 4,500,000 shares of common stock at $4.00 per share, and an additional 539,950 shares from an over-allotment option, generating approximately $18.6 million in net proceeds[23][24] - The China segment has not generated revenue since 2022 and currently has no projects or agreements[22] 2. Basis of Presentation and Summary of Significant Accounting Policies This section outlines the company's accounting principles, including U.S. GAAP compliance, consolidation methods, and critical estimates. It highlights significant accounting policies for liquidity and going concern, cash management, various asset and liability classifications, revenue recognition across different business lines, and stock-based compensation. The company also discusses the impact of recently issued accounting pronouncements - The Company's history of net losses and negative operating cash flow, along with a working capital deficit of approximately $10.2 million and a stockholders' deficit of $2.8 million at June 30, 2024, raise substantial doubt about its ability to continue as a going concern[30][31] - Revenue recognition policies vary by business line: EPC services and solar/battery system sales are recognized over time using cost-based input methods, while LED product sales are recognized at a point in time upon transfer of control[60][66][69] - Stock-based compensation costs are recognized based on the fair value of awards, with a significant one-time expense of $17.2 million recognized for the six months ended June 30, 2024, due to the vesting of performance options upon the initial public offering[83][146] 3. Cash, Cash Equivalents and Restricted Cash The company's total cash, cash equivalents, and restricted cash decreased from $2.89 million at December 31, 2023, to $1.67 million at June 30, 2024, with a notable decline in uninsured cash in the China segment Cash, Cash Equivalents and Restricted Cash (Unaudited) | Segment/Type | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | US Segment Insured Cash | $865,398 | $818,534 | | US Segment Uninsured Cash | $518,284 | $813,199 | | China Segment Insured Cash | $211,896 | $295,503 | | China Segment Uninsured Cash | $77,776 | $966,580 | | Total Cash & Equivalents & Restricted Cash | $1,673,354 | $2,893,816 | | Less: Cash and Cash Equivalents | $1,359,990 | $2,539,312 | | Restricted Cash | $313,364 | $354,504 | - Uninsured cash in the China Segment decreased significantly from $966,580 at December 31, 2023, to $77,776 at June 30, 2024[92] 4. Accounts Receivable, net The allowance for credit losses for accounts receivable increased from $4,598 at the beginning of the period to $38,147 at June 30, 2024, reflecting a provision for bad debts of $33,549 Allowance for Credit Losses for Accounts Receivable (Unaudited) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Balance – beginning of period | $4,598 | $1,185,046 | | Provision for bad debts | $33,549 | $113,789 | | Recoveries | $0 | $(1,140,533) | | Effect of exchange rate | $0 | $(4,532) | | Balance – end of period | $38,147 | $153,770 | 5. Short-term investments In March 2024, the Company made short-term investments totaling $7.688 million in promissory notes, including $7.0 million in an 8% note from Webao Limited (Hong Kong) and $688,000 in a 5% note from Qingdao Xiaohuangbei Technology Co., Ltd. (PRC), both with extended maturity dates to September 25, 2024 - The U.S. segment invested $7.0 million in an 8% promissory note from Webao Limited, due June 1, 2024, and extended to September 25, 2024[94] - The China segment invested RMB 5.0 million (approximately $688,000) in a 5% promissory note from Qingdao Xiaohuangbei Technology Co., Ltd., due June 25, 2024, and extended to September 25, 2024[94] 6. Customer Loans Receivable Customer loans receivable, net, decreased from $6.54 million at December 31, 2023, to $5.32 million at June 30, 2024. The portfolio's credit quality remains largely prime (80.8%), with a 0% interest rate portion decreasing from 14% to 5%. The allowance for loan losses increased to $316,378 Customer Loans Receivable, Net (Unaudited) | Metric | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Customer loans receivable, gross | $5,638,045 | $6,794,656 | | Less: unamortized loan discounts | $(126) | $(2,332) | | Allowance for loan losses | $(316,378) | $(256,808) | | Customer loans receivable, net | $5,321,541 | $6,535,516 | | Less: Current portion | $1,548,626 | $2,212,574 | | Non-current portion | $3,772,915 | $4,322,942 | - The percentage of the loan portfolio with a 0% interest rate decreased from 14% at December 31, 2023, to 5% at June 30, 2024[95] Allowance for Loan Losses for Customer Loans Receivable (Unaudited) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Balance – beginning of period | $256,808 | $288,457 | | Provision for loan losses | $38,866 | $43,483 | | Chargeoffs and adjustments | $20,704 | $33,193 | | Balance – end of period | $316,378 | $365,133 | 7. Inventories, net Net inventories increased from $1.34 million at December 31, 2023, to $1.56 million at June 30, 2024, driven by increases in solar components and LED lights. The reserve for excess and obsolete inventories also increased to $646,642 Inventories, Net (Unaudited) | Inventory Type | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Solar panels, inverters, battery storage and components | $1,561,211 | $1,336,066 | | LED lights | $642,850 | $601,698 | | Total inventories, gross | $2,204,061 | $1,937,764 | | Less: reserve for excess and obsolete inventories | $(646,642) | $(596,367) | | Total inventories, net | $1,557,419 | $1,341,397 | Reserve for Excess and Obsolete Inventories (Unaudited) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Balance – beginning of period | $596,367 | $485,504 | | Provision for excess and obsolete inventories | $50,275 | $108,378 | | Balance – end of period | $646,642 | $593,882 | 8. Other Receivables and Current Assets, Net Other receivables and current assets, net, decreased from $5.37 million at December 31, 2023, to $3.82 million at June 30, 2024, primarily due to reductions in advances to suppliers and capitalized offering costs, partially offset by new accrued interest on short-term investments Other Receivables and Current Assets, Net (Unaudited) | Item | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Receivable from Seller (Uonone Group) | $424,917 | $436,698 | | Deferred project costs | $1,492,046 | $1,603,355 | | Prepaid expenses and other current assets | $1,123,044 | $1,342,834 | | Advances to suppliers | $608,855 | $1,300,009 | | Accrued interest on short-term investments | $138,521 | $0 | | Accrued interest on customer loans receivable | $34,463 | $32,537 | | Capitalized offering costs | $0 | $658,564 | | Total other receivables and current assets | $3,821,846 | $5,373,997 | - Capitalized offering costs decreased to $0 at June 30, 2024, from $658,564 at December 31, 2023, following the completion of the IPO[103] 9. Property and Equipment Net property and equipment decreased from $291,416 at December 31, 2023, to $243,871 at June 30, 2024, primarily due to ongoing depreciation, with depreciation expenses for the six months ended June 30, 2024, at approximately $49,000 Property and Equipment, Net (Unaudited) | Component | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Total property and equipment, gross | $6,252,142 | $6,375,603 | | Less: accumulated depreciation and amortization | $(6,008,271) | $(6,084,187) | | Total property and equipment, net | $243,871 | $291,416 | - Depreciation expenses for the six months ended June 30, 2024, were approximately $49,000, a decrease from $100,000 in the same period of 2023[105] 10. Goodwill Goodwill decreased from $7.58 million at December 31, 2023, to $7.38 million at June 30, 2024, primarily due to the effect of exchange rate adjustments. No impairment loss was recognized for the six months ended June 30, 2024 or 2023 Goodwill Activity (Unaudited) | Metric | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Balance – beginning of period | $7,584,779 | $7,774,472 | | Effect of exchange rate | $(203,894) | $(189,693) | | Balance – end of period | $7,380,885 | $7,584,779 | - No impairment loss for goodwill was recognized for the six months ended June 30, 2024, or 2023[45] 11. Investments in Unconsolidated Solar Project Companies The Company holds 30% non-controlling interests in three PRC solar project companies, accounted for using the equity method. The total investment balance slightly increased to $9.73 million at June 30, 2024, from $9.70 million at December 31, 2023, despite a decrease in the share of investee's net income and negative exchange rate effects Investments in Unconsolidated Solar Project Companies (Unaudited) | Investee | Investment Balance Dec 31, 2023 | Share of Investee's Net Income | Effect of Exchange Rate | Investment Balance June 30, 2024 | | :----------------------------------- | :------------------------------ | :----------------------------- | :---------------------- | :------------------------------- | | Yilong 2 | $4,213,276 | $127,743 | $(114,462) | $4,226,558 | | Xingren | $2,031,774 | $49,112 | $(55,079) | $2,025,807 | | Ancha | $3,453,258 | $122,127 | $(93,978) | $3,481,406 | | Total | $9,698,308 | $298,982 | $(263,519) | $9,733,771 | Combined Financial Statements of Solar Project Companies (Unaudited) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $4,678,640 | $5,529,652 | | Gross profit | $1,967,492 | $2,912,896 | | Net income | $996,607 | $1,450,947 | - Equity in income from solar project companies decreased by 31.3% for the six months ended June 30, 2024, compared to the same period in 2023, correlating with lower power production in the Guizhou region in China[184] 12. Financing Arrangements Total borrowings decreased from $36.61 million at December 31, 2023, to $32.31 million at June 30, 2024, primarily due to principal payments on EB-5 loans and convertible notes. The company has various unsecured loans, secured convertible notes, and related-party EB-5 financings, with a weighted average interest rate of 4.0% at June 30, 2024 Financing Arrangements (Unaudited) | Type of Borrowing | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Unsecured loan from unrelated party (8.0%) | $2,000,000 | $2,000,000 | | Unsecured loan from unrelated party (12.0%) | $900,000 | $0 | | Secured convertible notes payable (4.0%) | $16,050,000 | $16,250,000 | | EB-5 loans | $12,000,000 | $17,000,000 | | Notes payable from SMX Property (8%) | $1,358,658 | $1,358,658 | | Total | $32,308,658 | $36,608,658 | | Less: debt discount and debt issuance costs | $(325,404) | $(300,232) | | Current portion | $(17,938,658) | $(22,038,658) | | Noncurrent portion | $14,044,596 | $14,269,768 | - During the six months ended June 30, 2024, the Company redeemed $5.0 million in principal amount of convertible notes and exchanged $5.0 million of secured EB-5 notes for convertible notes, resulting in a gain on debt extinguishment of $276,000[118][185] - The weighted average interest rate on loans outstanding was 4.0% as of June 30, 2024, compared to 3.9% as of December 31, 2023[121] 13. Accrued Expenses and Other Payables Accrued expenses and other payables decreased from $16.48 million at December 31, 2023, to $13.33 million at June 30, 2024. This reduction was primarily driven by decreases in accrued operating and project payables, customer deposits, and accrued compensation expenses Accrued Expenses and Other Payables (Unaudited) | Item | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | Customer deposits | $2,078,075 | $2,487,227 | | Accrued operating and project payables | $3,224,732 | $5,351,613 | | Payable to Uonone | $2,482,870 | $2,551,458 | | Accrued compensation expenses | $1,942,016 | $2,387,574 | | Retainage payable to vendors | $739,137 | $802,886 | | Preacquisition liability | $1,476,842 | $1,517,639 | | Accrued settlement | $276,428 | $276,428 | | Accrued warranty expense | $241,828 | $248,508 | | VAT taxes payable | $839,398 | $697,480 | | Income taxes payable | $14,230 | $145,938 | | Refundable vendor bid deposits | $13,764 | $14,145 | | Total accrued expenses and other payables | $13,329,320 | $16,480,896 | - Accrued compensation includes $675,000 for the CEO's restricted stock cancellation and $1.8 million in deferred salary and bonuses, with payments scheduled to begin February 27, 2025[124][209] Warranty Liability (Unaudited) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Balance – beginning of period | $2,174,488 | $2,411,637 | | Provision for warranty liability | $112,157 | $241,747 | | Expenditures and adjustments | $(253,952) | $(95,450) | | Effect of exchange rate | $(6,680) | $(4,915) | | Balance – end of period | $2,026,013 | $2,553,019 | | Less: current portion | $(241,828) | $(242,192) | | Non-current portion | $1,784,185 | $2,310,827 | 14. Third-party Leasing Arrangement and Concentrations The Company utilizes third-party leasing arrangements for solar energy and battery storage systems sales. There were no major customers accounting for 10% or more of revenues in the six months ended June 30, 2024 or 2023. One supplier accounted for 12.0% of purchases in the U.S. segment for the six months ended June 30, 2024 - No single customer accounted for 10% or more of the Company's revenues for the six months ended June 30, 2024, or 2023[129] - One supplier in the U.S. segment accounted for 12.0% ($2.2 million) of purchases during the six months ended June 30, 2024[129] 15. Acquisition Contingencies and Other Payable to Uonone Group The Company has a payable to Uonone Group of approximately $2.5 million at June 30, 2024, related to a debt settlement agreement from the 2015 acquisition of ZHPV. This includes a contingent liability for the Ningxia project, for which Uonone Group's obligation is contingent on the Company's payment obligations - The amount payable to Uonone Group was approximately RMB 18.0 million ($2.5 million) at June 30, 2024, down from RMB 19.4 million ($2.8 million) at December 31, 2023[132] - Uonone Group's obligation on a RMB 3.0 million contingent receivable (approx. $437,000) does not arise until the Company becomes obligated under the corresponding contingent liability[130][131] 16. Related Party Transactions This section refers to details of related party lease transactions and the termination of a related party lease, which are further elaborated in Notes 12 and 17 17. Commitments and Contingencies The Company has various operating lease commitments, with total minimum lease payments of $4.34 million as of June 30, 2024. It also terminated a related party lease, recognizing a gain of approximately $77,000. Employment agreements with key executives include deferred compensation and bonus structures Future Minimum Lease Commitments (Unaudited) | Year Ending December 31, | Total | | :----------------------------------- | :------------ | | 2024 (remainder of) | $860,606 | | 2025 | $1,725,564 | | 2026 | $1,768,488 | | Total | $4,354,658 | - The Company recognized a gain of approximately $77,000 on the early termination of a related party lease with Fallow Field, LLC, effective June 30, 2024[132] - Sublease income for the six months ended June 30, 2024, was approximately $490,000, offsetting operating lease costs[134][135] 18. Stockholders' Equity The 2016 Long-Term Incentive Plan authorizes up to 15,120,000 shares for equity-based incentives. Upon the initial public offering on February 12, 2024, restricted stock grants became non-forfeitable and performance-based stock options vested, leading to a $17.2 million stock-based compensation expense - The 2016 Long-Term Incentive Plan was amended to increase the maximum number of shares to 15,120,000[139] - Upon the completion of the initial public offering on February 12, 2024, restricted shares became non-forfeitable and performance-based stock options vested, resulting in a $17.2 million stock-based compensation expense for the six months ended June 30, 2024[141][146] Stock Option Activity (Unaudited) | Metric | Number of Options (Dec 31, 2023) | Number of Options (June 30, 2024) | | :----------------------------------- | :------------------------------- | :-------------------------------- | | Outstanding | 6,295,858 | 6,197,741 | | Nonvested | 5,946,320 | 0 | | Exercisable | 349,538 | 6,197,741 | 19. Income Taxes The Company reported an income tax benefit of approximately $110,083 for the six months ended June 30, 2024, compared to an expense of $289,765 in the prior year. The effective tax rate for the six months ended June 30, 2024, was 0.5%, significantly lower than the U.S. federal statutory rate of 21%, primarily due to losses not benefited for tax purposes and a valuation allowance against deferred tax assets Income (Loss) Before Income Taxes and Income Tax Expense (Benefit) (Unaudited) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Domestic (U.S. Segment) | $(21,426,826) | $(1,978,749) | | Foreign (PRC Segment) | $(119,268) | $1,153,034 | | Income (loss) before income taxes | $(21,546,094) | $(825,715) | | Income tax provision (benefit) | $(110,083) | $289,765 | | Effective tax rate | 0.5% | (35.1)% | - The effective tax rate for the six months ended June 30, 2024, was 0.5%, a significant variance from the U.S. federal statutory rate of 21%, mainly due to unbenefited losses and state/foreign taxes[147] - The Company maintains a full valuation allowance against its U.S. deferred tax assets and partially on the Chinese side, as it is more likely than not that these assets will not be realized[148] 20. Net Income (Loss) Per Share Due to consolidated net losses for both periods, basic and diluted net loss per share were the same. For the six months ended June 30, 2024, basic and diluted EPS was $(0.50), compared to $(0.03) in the prior year, with potentially dilutive securities excluded as they were anti-dilutive Net Income (Loss) Per Share (Unaudited) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic and diluted EPS | $(0.05) | $(0.05) | $(0.50) | $(0.03) | | Weighted average shares used (Basic and Diluted) | 41,477,573 | 39,735,536 | 43,230,183 | 39,735,536 | - Potentially dilutive securities, including options to purchase 199,736 shares and 8,276,115 shares from convertible notes, were excluded from diluted EPS calculation due to their anti-dilutive effect[149] 21. Segment Reporting The Company operates in two segments: U.S. and PRC. For the six months ended June 30, 2024, the U.S. segment generated all revenue ($10.2 million) but incurred a significant net loss of $(21.4) million, largely due to stock-based compensation. The PRC segment generated no revenue and a net loss of $(1,902) Segment Revenue and Net Income (Loss) (Unaudited) | Metric | US Segment (6M 2024) | PRC Segment (6M 2024) | Total (6M 2024) | | :----------------------------------- | :------------------- | :-------------------- | :-------------- | | Revenue from external customers | $10,218,375 | $0 | $10,218,375 | | Net income (loss) | $(21,437,913) | $1,902 | $(21,436,011) | - The U.S. segment's net loss of $(21.4) million for the six months ended June 30, 2024, was heavily impacted by the $17.2 million stock-based compensation expense[152][158] - The PRC segment generated no revenue for the three and six months ended June 30, 2024 and 2023, and reported a net loss of $(1,902) for the six months ended June 30, 2024[152][176] 22. Subsequent Events The Company evaluated subsequent events through August 14, 2024, and noted no material events requiring adjustment or disclosure beyond those already mentioned in Note 5 (Short-term investments) and Note 12 (Unsecured Loans) - No other events require adjustment or disclosure in the condensed consolidated financial statements beyond those in Note 5 (Short-term investments) and Note 12 (Unsecured Loans)[155] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and operational results, highlighting the impact of the initial public offering, the one-time stock-based compensation expense, and external factors like NEM 3.0 regulations and inflation. It details revenue declines in the U.S. solar segment, efforts to mitigate these, and the continued lack of revenue from China operations. The discussion also covers liquidity, capital resources, and critical accounting estimates - The Company completed its initial public offering in February/March 2024, raising approximately $18.6 million in net proceeds, used for working capital and debt payment[157] - A one-time non-cash stock-based compensation expense of approximately $17.2 million was recognized for the six months ended June 30, 2024, due to the vesting of performance options upon the IPO, significantly impacting net loss[158] - The U.S. solar energy sales decreased by 70.1% for the six months ended June 30, 2024, primarily due to the adverse effects of NEM 3.0 regulations and higher interest rates, leading to reduced consumer demand[162][174] - The China segment generated no revenue for the six months ended June 30, 2024, and has no current projects or agreements[160][176] Initial Public Offering - The Company sold 4,500,000 shares of common stock at $4.00 per share in its initial public offering on February 27, 2024[157] - Underwriters purchased an additional 539,950 shares upon partial exercise of the over-allotment option on March 5, 2024[157] - Net proceeds from the IPO, including the over-allotment option, were approximately $18.6 million, allocated for working capital and debt payment[157] Elimination of Forfeiture Provisions of Options upon Initial Public Offering - Stock options to purchase 5,898,137 shares became non-forfeitable upon the IPO's completion on February 12, 2024[158] - A one-time non-cash stock-based compensation expense of approximately $17.2 million was recognized, with $1.3 million in cost of revenues and $15.9 million in general and administrative expense[158] - This $17.2 million expense was the major component of the $21.4 million loss for the six months ended June 30, 2024[158] Overview - SolarMax Technology, Inc. is an integrated solar and renewable energy company, founded in 2008, with operations in the U.S. and China[159] - U.S. operations focus on sales and installation of photovoltaic and battery backup systems for residential and commercial customers, and LED systems/services[159] - China operations involve identifying and procuring solar farm projects for resale and performing EPC services, but have generated no revenue since 2022[160] Effects of NEM 3.0 - NEM 3.0, effective April 2023, reduced export rates for excess solar electricity by 75%, decreasing savings and increasing payback periods for residential solar installations[161] - The Company laid off approximately 25% of its residential solar system design and installation team in January 2024 due to a slowdown in demand post-NEM 3.0[162] - The Company is seeking to offset residential solar sales decline by marketing commercial sales in California and other states, but success is not assured[163] Inflation and Supply Chain Issues - Inflationary pressures and supply chain issues are impacting raw material costs (e.g., polysilicon), labor costs, and gross margins[164][165][168] - Cost of revenue per watt of solar systems increased approximately 51.1% for the six months ended June 30, 2024, compared to the same period in 2023[167] - Gross margin from U.S. operations decreased from 15.0% for the six months ended June 30, 2023, to 1.2% for the six months ended June 30, 2024, partly due to stock-based compensation and revenue decline[167] Results of Operations Revenues Total revenues for the six months ended June 30, 2024, decreased by 63.0% to $10.2 million, primarily due to a 70.1% decrease in U.S. solar energy and battery sales, largely influenced by NEM 3.0 and higher interest rates. LED sales, however, increased by 72.7% Revenue Breakdown (Unaudited) | Revenue Source | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Solar energy sales (US) | $3,131,000 | $13,978,000 | $7,775,000 | $26,029,000 | | LED sales (US) | $1,230,000 | $635,000 | $2,248,000 | $1,302,000 | | Financing (US) | $93,000 | $140,000 | $195,000 | $291,000 | | Total revenues | $4,454,000 | $14,753,000 | $10,218,000 | $27,622,000 | - U.S. solar energy and battery sales decreased by 77.6% for the three months and 70.1% for the six months ended June 30, 2024, primarily due to NEM 3.0 and higher interest rates[172][173][174] - LED revenue increased by 93.7% for the three months and 72.7% for the six months ended June 30, 2024, driven by an increase in LED projects[177] Cost of revenue and gross profit Cost of revenue for the six months ended June 30, 2024, decreased by 57.0% to $10.09 million, but gross profit significantly declined by 97.0% to $124,000, resulting in a gross margin of 1.2%. This was largely due to a $1.3 million non-cash stock-based compensation expense and fixed labor components amidst decreased sales Cost of Revenue and Gross Profit (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Total cost of revenues | $3,866,000 | $12,672,000 | $10,094,000 | $23,469,000 | | Gross profit | $588,000 | $2,081,000 | $124,000 | $4,153,000 | | Gross margin | 13.2% | 14.1% | 1.2% | 15.0% | - A one-time non-cash stock-based compensation expense of approximately $1.3 million was recognized in cost of revenue for the six months ended June 30, 2024[178] - Excluding this stock-based compensation, the overall gross margin for the six months ended June 30, 2024, would have been 13.6%, compared to 15.0% in the prior year[179] Operating expenses Total operating expenses for the six months ended June 30, 2024, increased significantly to $21.4 million, primarily due to a $15.9 million stock-based compensation expense in general and administrative (G&A) for the U.S. segment. Excluding this, U.S. G&A expenses increased by $403,000, reflecting higher compliance costs as a public company Operating Expenses (Unaudited) | Expense Type | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Sales and marketing (US) | $87,000 | $414,000 | $252,000 | $664,000 | | General and administrative (US) | $2,725,000 | $2,328,000 | $20,725,000 | $4,377,000 | | General and administrative (China) | $176,000 | $249,000 | $427,000 | $(505,000) | | Total operating expenses | $2,988,000 | $2,991,000 | $21,404,000 | $4,536,000 | - Sales and marketing expenses for the six months ended June 30, 2024, decreased by 62.0% to $252,000[181] - U.S. G&A expenses for the six months ended June 30, 2024, included a one-time stock-based compensation expense of approximately $15.9 million[182] Income (loss) from operations Consolidated loss from operations for the six months ended June 30, 2024, significantly increased to $21.3 million, compared to $383,000 in the prior year, primarily driven by the substantial loss in the U.S. segment due to decreased revenue and increased G&A expenses including stock-based compensation Income (Loss) from Operations by Segment (Unaudited) | Segment | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | US Segment | $(2,224,000) | $(661,000) | $(20,853,000) | $(888,000) | | China Segment | $(176,000) | $(250,000) | $(427,000) | $504,000 | | Consolidated | $(2,399,569) | $(910,669) | $(21,280,308) | $(383,458) | Equity in income (loss) from unconsolidated entities Equity in income from unconsolidated solar project companies, related to the China segment, decreased by 31.3% to $299,000 for the six months ended June 30, 2024, primarily due to lower power production in the Guizhou region Equity in Income of Solar Project Companies (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Equity in income | $239,000 | $367,000 | $299,000 | $435,000 | - The decrease in equity income correlates with lower power production in the Guizhou region in China[184] Gain on debt extinguishment The Company recognized a gain on debt extinguishment of $276,000 for the six months ended June 30, 2024, primarily from exchanging $5.0 million of secured EB-5 notes for convertible notes and settling $500,000 of convertible notes Gain on Debt Extinguishment (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Gain on debt extinguishment | $222,000 | $0 | $276,000 | $13,000 | - The gain for the six months ended June 30, 2024, resulted from exchanging $5.0 million of EB-5 notes for convertible notes ($134,000 gain) and settling $500,000 of convertible notes ($142,000 gain)[185] Interest expense, net Net interest expense for the six months ended June 30, 2024, decreased by 24.7% to $612,000, primarily due to a reduction in overall debt obligations despite a slight increase in the weighted average interest rate Interest Expense, Net (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Interest (expense) | $(385,000) | $(449,000) | $(769,000) | $(848,000) | | Interest income | $141,000 | $26,000 | $157,000 | $35,000 | | Interest expense, net | $(244,000) | $(423,000) | $(612,000) | $(813,000) | - The weighted average interest rate on loans outstanding was 4.0% as of June 30, 2024, compared to 3.9% as of December 31, 2023[121] Other income (expenses), net Other expense, net, for the six months ended June 30, 2024, was $306,000, primarily consisting of foreign currency transaction losses and a loss from the write-off of a legal settlement receivable, partially offset by a gain on property disposal Other Income (Expenses), Net (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Other income (loss), net | $(96,000) | $(400,000) | $(306,000) | $(80,000) | - For the six months ended June 30, 2024, other expense included a $291,000 foreign currency transaction loss and a $30,000 loss from a legal settlement receivable write-off, offset by a $14,000 gain on property disposal[188] Income tax benefit (provision) The Company reported an income tax benefit of $110,083 for the six months ended June 30, 2024, compared to an expense of $289,765 in the prior year. The U.S. segment incurred minimal state minimum tax liabilities, while the China segment reported a benefit due to profitable operations Income Tax Provision (Benefit) (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Income tax provision (benefit) | $(115,000) | $491,000 | $(110,000) | $290,000 | - The U.S. segment reported minimal state minimum tax liabilities ($6,000 for six months ended June 30, 2024 and 2023)[188] - The China segment reported an income tax benefit of approximately $116,000 for the six months ended June 30, 2024, compared to an expense of $284,000 in the prior year[189] Net income (loss) The consolidated net loss for the six months ended June 30, 2024, significantly increased to $21.4 million, or $(0.50) per share, compared to a net loss of $1.1 million, or $(0.03) per share, in the prior year, primarily due to the one-time stock-based compensation expense Consolidated Net Income (Loss) (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) | $(2,164,000) | $(1,858,000) | $(21,436,000) | $(1,115,000) | | Basic and diluted EPS | $(0.05) | $(0.05) | $(0.50) | $(0.03) | - The significant increase in net loss for the six months ended June 30, 2024, was largely attributable to the $17.2 million non-cash stock-based compensation expense[158][190] Currency translation adjustment The Company reported net foreign currency translation losses of $273,000 for the six months ended June 30, 2024, a decrease from $401,000 in the prior year, reflecting exchange rate changes between the U.S. dollar and RMB Currency Translation Adjustment (Unaudited) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Currency translation adjustment | $(65,000) | $(622,000) | $(273,000) | $(402,000) | - Foreign currency translation adjustments are non-cash and reflect changes in exchange rates between the U.S. dollar and RMB[190] Liquidity and Capital Resources Operating Activities Net cash used in operating activities significantly increased to $8.0 million for the six months ended June 30, 2024, from $1.4 million in the prior year. This was primarily driven by the $21.4 million net loss and a $17.2 million increase in non-cash stock-based compensation expenses Consolidated Cash Flow Data (Unaudited) | Metric | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by (used in) operating activities | $(8,022,000) | $(1,384,000) | - The increase in cash used in operations was primarily due to the $21.4 million net loss and $17.2 million in stock-based compensation expenses[193] Investing Activities Net cash used in investing activities increased substantially to $7.7 million for the six months ended June 30, 2024, from $6,000 in the prior year. This was mainly due to $7.7 million in short-term investments made from IPO proceeds Consolidated Cash Flow Data (Unaudited) | Metric | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by (used in) investing activities | $(7,674,000) | $(6,000) | - The Company made $7.7 million in short-term investments in promissory notes, utilizing a portion of its IPO proceeds[197] Financing Activities Net cash provided by financing activities significantly increased to $14.2 million for the six months ended June 30, 2024, from $640,000 in the prior year. This surge was driven by $18.6 million in net proceeds from the IPO, partially offset by $5.0 million in principal payments on convertible notes Consolidated Cash Flow Data (Unaudited) | Metric | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by (used in) financing activities | $14,216,000 | $640,000 | - Financing activities were boosted by $18.6 million in net cash proceeds from the initial public offering[198] - Principal payments on convertible notes amounted to $5.0 million in the U.S. segment[198] Cash and Cash Equivalents and Restricted Cash Total cash, cash equivalents, and restricted cash decreased from $2.89 million at December 31, 2023, to $1.67 million at June 30, 2024. The Company does not plan to repatriate cash from China operations, intending to use it for expansion there Cash and Cash Equivalents and Restricted Cash by Segment (Unaudited) | Segment | June 30, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :---------------- | | US Segment (Insured + Uninsured) | $1,384,000 | $1,632,000 | | China Segment (Insured + Uninsured) | $289,000 | $1,262,000 | | Total | $1,673,000 | $2,894,000 | | Less: Cash and cash equivalents | $1,360,000 | $2,539,000 | | Restricted cash | $313,000 | $355,000 | - The Company does not plan to repatriate cash or earnings from its non-U.S. operations, intending to utilize such funds to expand China operations[199] - The Company invested $7.0 million of IPO proceeds in an 8% promissory note and its China segment invested $688,000 in a 5% note, both extended to September 25, 2024[201] Borrowings The Company has various debt obligations, including unsecured loans, EB-5 loans from related parties, and convertible notes. Total outstanding EB-5 loans were $12.0 million at June 30, 2024, with $41.5 million of limited partners having received green card approval, triggering potential repayment demands - The Company issued two 8% notes totaling $1.36 million to SMX Property, a related party, due October 10, 2024, for lease obligations and a security deposit[202][206] - A new short-term unsecured promissory note for $900,000 at 12% interest was signed in June 2024, maturing in November 2024[202] - As of June 30, 2024, $12.0 million in EB-5 loans were outstanding, with $41.5 million of limited partners having received green card approval, potentially triggering repayment demands[204][205] Contractual Obligations As of June 30, 2024, the Company's total contractual obligations for borrowings amount to $32.31 million, with $12.24 million due in the remainder of 2024. Operating lease commitments total $4.36 million, with $861,000 due in the remainder of 2024 Principal Maturities for Financing Arrangements (Unaudited, in thousands) | Year Ending December 31, | Bank and Other Unsecured Loans | EB-5 Loans - Related Party | Notes Payable - Related Party | Convertible Notes | Total | | :----------------------------------- | :----------------------------- | :------------------------- | :---------------------------- | :---------------- | :---- | | 2024 (remainder of) | $2,900 | $4,000 | $1,359 | $3,980 | $12,239 | | 2025 | $0 | $4,000 | $0 | $6,090 | $10,090 | | 2026 | $0 | $4,000 | $0 | $2,890 | $6,890 | | 2027 | $0 | $0 | $0 | $1,490 | $1,490 | | 2028 | $0 | $0 | $0 | $1,000 | $1,000 | | Thereafter | $0 | $0 | $0 | $600 | $600 | | Total | $2,900 | $12,000 | $1,359 | $16,050 | $32,309 | Future Minimum Operating Lease Commitments (Unaudited, in thousands) | Year Ending December 31, | Total | | :----------------------------------- | :---- | | 2024 (remainder of) | $861 | | 2025 | $1,726 | | 2026 | $1,768 | | Total | $4,355 | Employment Agreements The CEO, David Hsu, has an employment agreement with an annual salary of $737,924 for 2024. The Company owes Mr. Hsu $675,000 for restricted shares exchange and $1,833,378 in deferred salary and bonuses, with payments for both commencing on February 27, 2025, in twelve equal monthly installments - CEO David Hsu's annual salary for 2024 is $737,924[209] - The Company owes Mr. Hsu $675,000 for restricted shares exchange, payable in twelve equal monthly installments starting February 27, 2025[209] - An additional $1,833,378 is owed to Mr. Hsu for deferred salary and bonuses, also payable in twelve equal monthly installments starting February 27, 2025[209] Cash Requirements The Company requires substantial funds and believes current cash, equivalents, short-term investments, and operating cash flow will meet requirements for the next twelve months. However, significant debt obligations mature within the year, and refinancing efforts for EB-5 debt and other loans are ongoing, with no assurance of success, raising substantial doubt about the Company's ability to continue as a going concern - The Company believes current liquidity sources are sufficient for the next twelve months, excluding approximately $17.9 million of debt due in the next twelve months[32][211] - Refinancing efforts for EB-5 loans through convertible notes and extensions for other debt obligations are ongoing, but success is not assured[32][211] - The financial statements for the year ended December 31, 2023, include a going concern paragraph, and substantial doubt remains regarding the Company's ability to continue as a going concern[33][211] Critical Accounting Estimates and Policies Impairment assessment of goodwill The Company annually assesses goodwill for impairment using qualitative factors and, if necessary, a discounted cash flow model. Despite no new projects in the China segment since 2021, management believes the fair value of the China segment exceeds its carrying value, anticipating new business in 2024 or early 2025 - Goodwill is tested for impairment at least annually, considering qualitative factors and, if necessary, a discounted cash flow model[213] - Despite no new projects in the China segment since 2021, management believes its fair value is greater than its carrying value, anticipating new business from SPIC or other PRC customers in 2024 or early 2025[214][215] Allowance for credit and loan losses The Company estimates credit and loan losses using a forward-looking methodology based on historical collection experience, current and forecasted economic conditions, and individual customer financial status. This approach is applied to accounts receivable, customer loans receivable, and certain contract assets - Credit and loan losses are estimated using a forward-looking methodology, considering historical collection experience, current/forecasted economic conditions, and individual customer financial status[216] - Specific allowance amounts are provided for customers with a higher probability of default, and the China segment's political landscape is also considered[216] Income Taxes The Company estimates income taxes by assessing temporary differences and the realizability of deferred tax assets, including net operating loss and tax credit carryforwards. A valuation allowance is recorded when it is more likely than not that deferred tax assets will not be realized, based on GAAP earnings trends and future taxable income forecasts - Income taxes are estimated by assessing temporary differences and the realizability of deferred tax assets, including NOLs and tax credit carryforwards[218] - A valuation allowance is recorded when it is more likely than not that deferred tax assets will not be realized, based on GAAP earnings trends and future taxable income forecasts[219] - Management judgment is used to determine uncertain tax positions, considering technical merits, regulations, and potential settlement outcomes[220] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the Company in this report - The Company states that this item is not applicable[221] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2024, concluding they were effective at a reasonable assurance level. No material changes in internal control over financial reporting occurred during the period - Disclosure controls and procedures were evaluated by management, including the CEO and CFO, and concluded to be effective as of June 30, 2024, at the reasonable assurance level[222] - No material changes in internal control over financial reporting occurred during the period covered by this report[223] - The Company acknowledges that any control system provides reasonable, not absolute, assurance and is subject to judgments and resource constraints[224] Part II. Other Information Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, and various Inline XBRL documents - The report includes certifications from the CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002[226] - A certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is also included[226] - Various Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are filed as exhibits[226] Signatures The report is duly signed on behalf of SolarMax Technology, Inc. by David Hsu, Chief Executive Officer, and Stephen Brown, Chief Financial Officer, as of August 14, 2024 - The report is signed by David Hsu, Chief Executive Officer (Principal Executive Officer), and Stephen Brown, Chief Financial Officer (Principal Financial Officer)[227] - The signing date of the report is August 14, 2024[227]