SMXT 10-Q
SolarMax Technology, Inc. (SMXT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM
_________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number
_________________________
(Exact name of registrant as specified in its charter) |
_________________________
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
| (Zip Code) |
(
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
The |
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 during the preceding 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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions 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 | ☐ |
☒ | 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 or 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 Act). Yes
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Table of Contents
| 2 |
| Table of Contents |
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Forward-Looking Statements,” “Item 1A. Risks Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2023, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
| 3 |
| Table of Contents |
Part I - Financial Information
Item 1. Unaudited Financial Statements
SolarMax Technology, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of September 30, 2024 and December 31, 2023
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| September 30, 2024 |
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| December 31, 2023 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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Restricted cash, current |
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Accounts receivable, net |
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Short-term investments, held to maturity |
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Contract assets, net |
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Receivable from SPIC and project companies |
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Customer loans receivable, current, net |
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Inventories, net |
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Other receivables and current assets, net |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Goodwill |
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Investments in unconsolidated solar project companies |
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Customer loans receivable, noncurrent, net |
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Deferred tax assets |
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Restricted cash, noncurrent |
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Other assets |
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Total assets |
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Liabilities and stockholders' deficit |
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Current liabilities: |
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Accounts payable |
| $ |
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Operating lease liabilities, current |
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Unsecured loans, current |
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Secured loans from related parties, current |
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Secured convertible notes, current |
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Accrued expenses and other payables |
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Total current liabilities |
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Operating lease liabilities, noncurrent |
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Secured loans from related parties, noncurrent, net of debt discount and issuance costs |
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Secured convertible notes, noncurrent, net of debt discount and issuance costs |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 17) |
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Stockholders’ deficit: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Treasury stock, at cost, |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit |
| $ |
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| $ |
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See accompanying notes to condensed consolidated financial statements.
| 4 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2024 and 2023
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2024 |
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| 2023 |
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| 2024 |
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| 2023 |
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| (Unaudited) |
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Revenues |
| $ |
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| $ |
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| $ |
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| $ |
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Cost of revenues (includes stock-based compensation expense of $ |
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Gross profit |
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Operating expenses: |
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General and administrative (includes stock-based compensation expense of $ |
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Selling and marketing |
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Goodwill impairment |
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Total operating expense |
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Operating income (loss) |
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Other income (expense): |
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Interest income |
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Interest expense |
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Equity in income of solar project companies |
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Gain on debt extinguishment |
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Gain on early termination of lease |
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Other income (expense), net |
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Total other income (expense) |
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Income (loss) before income taxes |
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Income tax provision (benefit) |
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| ( | ) |
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| ( | ) |
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Net income (loss) |
| $ | ( | ) |
| $ |
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| $ | ( | ) |
| $ |
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Net income (loss) per share |
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Basic |
| $ | ( | ) |
| $ |
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| $ | ( | ) |
| $ |
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Diluted |
| $ | ( | ) |
| $ |
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| $ | ( | ) |
| $ |
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Weighted average shares used to compute net income (loss) per share |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements.
| 5 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2024 and 2023
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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|
| 2024 |
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| 2023 |
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| 2024 |
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| 2023 |
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| (Unaudited) |
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| (Unaudited) |
| ||||||||||
Net income (loss) |
| $ | ( | ) |
| $ |
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| $ | ( | ) |
| $ |
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Other comprehensive income (loss) |
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Foreign currency translation adjustments |
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| ( | ) |
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| ( | ) |
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| ( | ) | |
Total comprehensive income (loss) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |
See accompanying notes to condensed consolidated financial statements.
| 6 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended September 30, 2024 and 2023
|
| Preferred Stock |
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| Common Stock |
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| Additional Paid- In |
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| Treasury Stock |
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| Accumulated |
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| Accumulated Other Comprehensive |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Shares |
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| Amount |
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| Deficit |
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| Loss |
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| Total |
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Balance at June 30, 2024 (Unaudited) |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
Vesting of restricted stock |
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| - |
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| ( | ) |
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| - |
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Stock-based compensation |
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Net income (loss) |
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| - |
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| - |
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| - |
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| ( | ) |
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| ( | ) | |||||
Currency translation adjustments |
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| - |
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| - |
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| - |
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Balance at September 30, 2024 (Unaudited) |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
|
| Preferred Stock |
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| Common Stock |
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| Additional Paid- In |
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| Treasury Stock |
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| Accumulated |
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| Accumulated Other Comprehensive |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Shares |
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| Amount |
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| Deficit |
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| Loss |
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| Total |
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Balance at June 30, 2023 (Unaudited) |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
Net income (loss) |
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| - |
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| - |
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| - |
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Currency translation adjustments |
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| - |
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| - |
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| - |
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Balance at September 30, 2023 (Unaudited) |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
See accompanying notes to condensed consolidated financial statements.
| 7 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Nine Months Ended September 30, 2024 and 2023
|
| Preferred Stock |
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| Common Stock |
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| Additional Paid- In |
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| Treasury Stock |
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| Accumulated |
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| Accumulated Other Comprehensive |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Shares |
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| Amount |
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| Deficit |
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| Loss |
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| Total |
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Balance at December 31, 2023 |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
Vesting of restricted stock |
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| - |
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| ( | ) |
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| - |
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Stock-based compensation |
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| - |
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| - |
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| - |
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Shares issued for warrants exercised |
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| - |
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| - |
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Shares issued for options exercised |
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| - |
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| ( | ) |
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| - |
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Initial public offering |
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| - |
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| - |
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Public offering costs previously capitalized |
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| - |
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| - |
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| ( | ) |
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| - |
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| ( | ) | |||||
Net income (loss) |
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| - |
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| - |
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| - |
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| ( | ) |
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| ( | ) | |||||
Currency translation adjustments |
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| - |
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| - |
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| - |
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Balance at September 30, 2024 (Unaudited) |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
|
| Preferred Stock |
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| Common Stock |
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| Additional Paid-In |
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| Treasury Stock |
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| Accumulated |
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| Accumulated Other Comprehensive |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Shares |
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| Amount |
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| Deficit |
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| Loss |
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| Total |
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Balance at December 31, 2022 |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
Net income (loss) |
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| - |
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| - |
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| - |
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Currency translation adjustments |
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| - |
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| - |
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| - |
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| ( | ) |
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| ( | ) | |||||
Balance at September 30, 2023 (Unaudited) |
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| - |
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| $ |
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| $ |
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| $ |
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| ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||||
See accompanying notes to condensed consolidated financial statements.
| 8 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2024 and 2023
|
| Nine Months Ended September 30, |
| |||||
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| 2024 |
|
| 2023 |
| ||
|
| (Unaudited) |
| |||||
Operating activities |
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| ||
Net income (loss) |
| $ | ( | ) |
| $ |
| |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
|
|
|
| ||
Amortization of loan discounts on customer loan receivables |
|
| ( | ) |
|
| ( | ) |
Amortization of convertible note discount and debt issuance costs |
|
|
|
|
|
| ||
Amortization of operating lease right-of-use assets |
|
|
|
|
|
| ||
Provision for (recovery of) credit losses and loan losses |
|
|
|
|
|
| ||
Provision for excess and obsolete inventories |
|
|
|
|
|
| ||
Provision for warranty and production guaranty |
|
|
|
|
|
| ||
Equity in income of investment in excess of distribution received |
|
| ( | ) |
|
| ( | ) |
Deferred income tax provision |
|
|
|
|
|
| ||
Gain on disposal of property and equipment |
|
| ( | ) |
|
| ( | ) |
Gain on debt extinguishment |
|
| ( | ) |
|
| ( | ) |
Gain on early termination of lease |
|
| ( | ) |
|
| ( | ) |
Stock-based compensation |
|
|
|
|
|
| ||
Goodwill impairment |
|
|
|
|
|
| ||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts Receivable |
|
| ( | ) |
|
|
| |
Contract Assets |
|
|
|
|
| ( | ) | |
Receivables from SPIC and project companies |
|
|
|
|
|
| ||
Customer loans receivable |
|
|
|
|
|
| ||
Inventories |
|
| ( | ) |
|
|
| |
Other receivables and current assets |
|
|
|
|
| ( | ) | |
Other assets |
|
| ( | ) |
|
|
| |
Accounts payable |
|
| ( | ) |
|
|
| |
Operating lease liabilities |
|
| ( | ) |
|
| ( | ) |
Contract liabilities |
|
|
|
|
|
| ||
Accrued expenses and other payables |
|
| ( | ) |
|
| ( | ) |
Other liabilities |
|
| ( | ) |
|
| ( | ) |
Net cash provided by (used in) operating activities |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Purchase of short-term investments |
| $ | ( | ) |
| $ |
| |
Purchase of property and equipment |
|
|
|
|
| ( | ) | |
Proceeds from disposal of property and equipment |
|
|
|
|
|
| ||
Net cash provided by (used in) investing activities |
|
| ( | ) |
|
| ( | ) |
Financing activities |
|
|
|
|
|
|
|
|
Payments on settlement |
|
| ( | ) |
|
| ( | ) |
Net proceeds from initial public offering |
|
|
|
|
|
| ||
Proceeds from note payable |
|
|
|
|
|
| ||
Principal payment on convertible notes |
|
| ( | ) |
|
| ( | ) |
Principal payment on borrowings |
|
|
|
|
| ( | ) | |
Payment on equipment capital lease |
|
|
|
|
| ( | ) | |
Payments related to Uonone acquisition contingency (Note 15) |
|
|
|
|
| ( | ) | |
Proceeds from Uonone acquisition contingency (Note 15) |
|
|
|
|
|
| ||
Net cash provided by (used in) financing activities |
|
|
|
|
|
| ||
Effect of exchange rate |
|
| ( | ) |
|
|
| |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| ( | ) |
|
|
| |
Cash, cash equivalents and restricted cash, beginning of year |
|
|
|
|
|
| ||
Cash, cash equivalents and restricted cash, end of year |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid (received) in cash |
| $ |
|
| $ |
| ||
Income taxes paid (received) in cash |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Non-cash activities for investing and financing activities: |
|
|
|
|
|
|
|
|
Convertible notes issued to unrelated parties in respect of EB-5 loans from related parties |
| $ |
|
| $ |
| ||
See accompanying notes to condensed consolidated financial statements.
| 9 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2024 and 2023 (Continued)
|
| As of September 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
| (Unaudited) |
| |||||
Cash balance at the beginning of the year: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Restricted cash, noncurrent |
|
|
|
|
|
| ||
|
| $ | 2,893,816 |
|
| $ | 4,168,951 |
|
|
|
|
|
|
|
|
|
|
Cash balance at the end of the year: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Restricted cash, current |
|
|
|
|
|
| ||
Restricted cash, noncurrent |
|
|
|
|
|
| ||
|
| $ | 1,151,868 |
|
| $ | 4,191,670 |
|
See accompanying notes to condensed consolidated financial statements.
| 10 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
1. Description of Business
SolarMax Technology, Inc. and subsidiary companies (the “Company”) is an integrated solar and renewable energy company. A solar energy system retains the direct current (DC) electricity from the sun and converts it to alternating current (AC) electricity that can be used to power residential homes and commercial businesses. The solar business is based on the ability of the users of solar energy systems to save on energy costs and reduce their carbon imprint as compared with power purchased from the local electricity utility company. The Company was founded in 2008 to engage in the solar business in the United States of America, where its business is primarily conducted. The Company’s primary business consists of (i) the sale and installation of photovoltaic and battery backup systems for residential and commercial customers, (ii) financing the sale of its photovoltaic and battery backup systems, and (iii) sales of LED systems and services to government and commercial users.
In 2015, the Company acquired, through a subsidiary, Chengdu Zhonghong Tianhao Technology Co., Ltd. (together with its subsidiaries “ZHTH”), and Jiangsu Zhonghong Photovoltaic Electric Co., Ltd. (“ZHPV”), and commenced operations in the People’s Republic of China (the “PRC” or “China”). The Company’s business in the PRC has been primarily conducted through ZHTH and ZHPV, and their subsidiaries. The Company did not generate any revenue from its China segment since 2022, and the China segment does not have any projects or agreements as of the date of this report. During the quarter ended September 30, 2024, the Company performed a goodwill impairment assessment with respect to its China segment considering various factors and based primarily on the continued economic downturn in China that directly impacts the Company's ability to generate new businesses in the foreseeable future and the absence of any agreements or negotiations for agreements at September 30, 2024, The Company recognized impairment charge for the entire balance of the goodwill of $
Initial Public Offering
On March 5, 2024, the Company issued
Including proceeds from the sale of the additional shares, the aggregate gross proceeds from the offering was approximately $
Pursuant to the Underwriting Agreement, the Company issued to the Representative warrants (the “Representative’s Warrants”) to purchase
On March 13, 2024, the Representative’s Warrants were fully exercised on a cashless basis. Based on the formula for cashless exercise, the Company issued a total of
| 11 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Accounting
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2023. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 and for any other interim period or other future year.
Principles of Consolidation
Amounts reported in the condensed consolidated financial statements are stated in U.S. dollars, unless stated otherwise. The functional currency of the Company’s foreign subsidiaries is the Chinese renminbi (“RMB”). These transactions are translated from the local currency into U.S. dollars at exchange rates during or at the end of the reporting period. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include the cost-based inputs to estimate revenues on long-term construction contracts, the collectability of accounts receivable and loans receivable, the useful lives and impairment of property and equipment, goodwill, the fair value of stock options granted and stock-based compensation expense, the fair value of assets acquired and liabilities assumed in a business combination, warranty and customer care reserve, the valuation of deferred tax assets, inventories and provisions for income taxes. Actual results could differ materially from those estimates.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern. The Company’s history of net losses and negative cash flow from operating activities, including its net loss and negative cash flow for the nine months ended September 30, 2024, along with its increased accumulated deficit and stockholders’ deficit raise substantial doubt about the Company's ability to continue as a going concern.
At September 30, 2024, the Company reported a working capital deficit of approximately $
As of September 30, 2024, the Company’s principal sources of liquidity consisted of approximately $
| 12 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
As a result of the above, there is substantial doubt regarding the Company’s ability to continue as a going concern within one year from the date of issuance of these financial statements. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption, or obtain the exchange of any of its current debt for secured convertible debt and thus maintain sufficient cash balances for its planned operations. Future business demands may lead to cash utilization at levels greater than recently experienced. Revenue and cash flow from the Company’s China segment is irregular because of the timing of solar projects and the Company requires significant funds for its operations, particularly during periods when there is little or no revenue or cash flow from projects, and as of September 30, 2024, the Company did not have any agreements for its China segment and was not in negotiation with respect to any agreement. The Company may need to raise additional capital in the future. However, in view of the foregoing and the low price of the Company’s common stock and the possibility that the common stock may be delisted from Nasdaq, the Company cannot assure that it will be able to raise additional capital on acceptable terms, if at all.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposit accounts and highly liquid investments purchased with an original maturity of six months or less. The standard insurance coverage for non-interest bearing transaction accounts in the U.S. is $
Short-term Investments
Short-term investments consist of short-term note receivables with maturities of
Restricted Cash
Restricted cash includes cash held to collateralize ACH transactions and outstanding credit card borrowing facilities.
Restricted cash at September 30, 2024 and December 31, 2023 consisted of:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Deposit held by a US financial institution as collateral for ACH transactions and business credit cards – US Segment |
| $ |
|
| $ |
| ||
Less: current portion |
|
| ( | ) |
|
|
| |
Noncurrent portion |
| $ |
|
| $ |
| ||
Accounts Receivable
Accounts receivable are reported at the outstanding principal balance due from customers. In the U.S., accounts receivable substantially include customer billings for the sales of LED products and services. In the PRC segment, accounts receivable represents the amounts billed under the contracts but uncollected on completed construction contracts. Accounts receivable are recorded at net realizable value.
The Company maintains allowances for the applicable portion of receivables, including accounts receivable, government rebate receivables and other receivables, represents the Company’s estimate of the current expected loss inherent in accounts receivable as of the balance sheet date. The adequacy of the allowance for credit losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain. Once a receivable is deemed to be uncollectible, it is written off against the allowance. The expense related to rebates receivable is recorded as a reduction to revenues.
| 13 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Contract Assets
The contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date, primarily for the solar energy system sales in the U.S.. The contract assets are transferred to receivables when the rights become unconditional (i.e., when the permission to operate is issued). The contract liabilities primarily relate to the advance consideration received from customers related to the solar energy system sales in the U.S., for which the transfer of ownership has not occurred.
Applying the practical expedient in ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), paragraph 340‑40-25-4, the Company recognizes the incremental costs of obtaining contracts (i.e., commission fees) in cost of revenue when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in cost of revenues.
Customer Loans Receivable
In the U.S. segment, the Company offered its customers who meet the Company’s credit eligibility standards the option to finance the purchase of solar energy systems through installment loans underwritten through SolarMax Financial. All loans are secured by the solar energy systems or other projects being financed. The outstanding customer loan receivable balance is presented net of an allowance for loan losses. Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at levels considered adequate to cover expected credit losses on the customer loans. In determining expected credit losses, the Company considers its historical level of credit losses, current economic trends, and reasonable and supportable forecasts that affect the collectability of the future cash flows. Loans offered at the promotional interest rate below the market interest rate are accounted for as loan discounts and are amortized on an effective interest method to interest income over the terms of the loans. The Company has not entered into any new loan agreements since early 2020, and its revenues from financing related to its existing loan portfolio.
Inventories
Inventories consist of (a) work in progress on solar systems on housing developments and projects not yet sold; and (b) components principally consisting of photovoltaic modules, inverters, construction and other materials, and LED products, all of which are stated at the lower of cost or net realizable value under the first-in first-out method. The Company reviews its inventories periodically for possible excess and obsolescence to determine if any reserves are necessary.
The estimate for excess and obsolete inventories is based on historical sales and usage experience together with a review of the current status of existing inventories.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are charged to operations as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. Leasehold improvements and solar systems leased to customers are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
The estimated useful lives of the major classification of property and equipment are as follows:
Automobiles |
| |
Furniture and equipment |
| |
Leasehold improvements |
| |
Solar systems leased to customers |
| Lease term, |
| 14 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of assets acquired and liabilities assumed. The Company’s goodwill was derived from the acquisitions of businesses in China in April 2015.
The Company reviews goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. The Company generally performs its impairment test of goodwill in the fourth quarter each year or whenever events or circumstances change or occur that would indicate that goodwill might be impaired. When assessing goodwill for impairment, the Company follows ASC Topic 350, Intangibles-Goodwill and Other. In determining the reporting unit’s fair value, the Company considers the underlying enterprise value and if necessary, the reporting unit’s discounted cash flow, which involves assumptions and estimates, including the reporting unit’s future financial performance, weighted-average cost of capital and interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require the Company to perform a quantitative impairment test include a significant decline in the reporting unit’s financial results, a significant decline in the reporting unit’s enterprise value relative to its net book value, an unanticipated change in competition or market share and a significant change in the reporting unit’s strategic plans. For the Company’s goodwill annual testing, management determined that its reporting units are the same as its operating segments. Accordingly, the reporting unit for the goodwill annual testing is the PRC segment.
During the quarter ended September 30, 2024, the Company performed a goodwill impairment assessment considering various factors and based primarily on the continued economic downturn in China that directly impacts the Company's ability to generate new businesses in the foreseeable future, the absence of any agreements or negotiations with respect the China segment, and the significant decline in the market price of the Company's stock, the Company recognized impairment loss for the entire balance of the goodwill of $7.5 million for the nine months ended September 30, 2024. No impairment loss was recognized for the nine months ended September 30, 2023.
Impairment of Long-Lived Assets
The Company’s long-lived assets include property and equipment which include solar energy systems leased to customers.
In accordance with ASC Topic 360, Property, Plant, and Equipment, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of a long-lived asset, or group of assets, as appropriate, may not be recoverable. If the aggregate undiscounted future net cash flows expected to result from the use and the eventual disposition of a long-lived asset is less than its carrying value, then the Company would recognize an impairment loss based on the excess of the carrying value over the fair value.
There was no impairment loss on such systems for the nine months ended September 30, 2024 and 2023.
Investments in Unconsolidated Joint Ventures and Solar Project Companies
The Company’s unconsolidated investments in the U.S. are held directly by the Company as well as through its subsidiary, SMX Capital, and consist of investments in U.S.-based solar limited liability companies: Alliance Solar Capital 1, LLC (“A#1”), Alliance Solar Capital 2, LLC (“A#2”), and Alliance Solar Capital 3, LLC (“A#3”). The Company’s U.S. segment also has an investment in a PRC-based panel manufacturer, Changzhou Hongyi New Energy Technology Co., Ltd (“Changzhou”).
At September 30, 2024 and December 31, 2023, the Company has unconsolidated investments in the PRC related to its 30% non-controlling interests in three project companies for which it transferred a
For these investments, the Company does not have the controlling interests but it has the ability to exercise significant influence over the operations and the financial decisions of the investees under the respective operating agreements. In each of the investments, the investee also maintains a separate capital account for each of its investors and accordingly, the Company has a separate capital account at each of the investees. Since the Company has the ability to exercise significant influence over the investees, the Company accounts for each of these investments using the equity method of accounting, under which the Company records its proportionate share of the investee’s profit or loss based on the specified profit and loss percentage. Distributions received from equity method investees are accounted for as returns on investment and classified as cash inflows from operating activities, unless the Company’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the Company. When such an excess occurs, the current year distribution up to this excess would be considered a return of investment and classified as cash inflows from investing activities.
| 15 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Because the Company’s investments include privately-held companies where quoted market prices are not available and as a result, the cost method, combined with other intrinsic information, is used to assess the fair value of the investment. If the carrying value is above the fair value of an investment at the end of any reporting period, the investment is reviewed to determine if the impairment is other than temporary. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. The Company monitors its investments in unconsolidated entities periodically for impairment. No impairment indicators were identified and no impairment losses were recorded during the nine months ended September 30, 2024 and 2023.
Warranties
Workmanship Warranty
For the sale of solar and battery systems in the U.S., the Company provides a workmanship warranty for 25 years to cover the quality of the Company’s installation. The warranty is designed to cover installation defects and damages to customer properties caused by the Company’s installation of the solar energy systems and battery storage systems which generally are uncovered within 2-3 years after the installation. The 25-year warranty is consistent with the term provided by competitors and is provided by the Company to remain market competitive. The workmanship warranty does not include the warranties on components, such as panels and inverters which are covered directly by the manufacturers and are, generally provided for 25 years on panels and inverters, and
Quality Warranty for EPC Services
For the PRC segment, the Company provides construction quality warranty on Engineering, Procurement and Construction (“EPC”) services generally for one year after completion. The customer typically retains 3-5% of the contract price which will not be paid to the Company until the expiration of the warranty period which is accounted by the Company as retainage receivable. The Company currently provides a reserve for such potential liabilities based on a nominal percentage of project revenues for the PRC segment in the approximate amount of $
Production Guaranty
For solar systems sold in the U.S., the Company also warrants that modules installed in accordance with agreed-upon specifications will produce at least
LED Warranties
The Company’s warranty for LED products and services ranges from one year for labor and up to seven years for certain products sold to governmental municipalities. The Company currently provides a warranty reserve for LED sales based on
Other Warranties
In 2016, as a result of the bankruptcy of a Chinese panel supplier from whom the Company purchased solar modules, the Company reclassified the liability related to unpaid retentions to warranty liability in the amount of $
| 16 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), defines a framework for determining fair value, establishes a hierarchy of information used in measuring fair value, and enhances the disclosure information about fair value measurements. ASC 820 provides that the “exit price” should be used to value an asset or liability, which is the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale at the measurement date. ASC 820 also provides that relevant market data, to the extent available and not internally generated or entity specific information, should be used to determine fair value.
ASC 820 requires the Company to estimate and disclose fair values on the following three-level hierarchy that prioritizes market inputs.
Level 1: | Quoted prices in active markets for identical assets or liabilities. |
Level 2: | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying amount of cash and cash equivalents, accounts receivable, inventories, other current assets, accounts payable, deposits, taxes payable, warranty liability and accrued payroll and expenses approximates fair value because of the short maturity of these instruments.
The following table presents the fair value and carrying value of the Company’s cash equivalents, loans receivable and borrowings as of September 30, 2024:
|
| Fair Value |
|
| Carrying |
| ||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Value |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash equivalents |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Customer loans receivable |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank and other loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Secured loans from related parties |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Secured convertible debt |
|
|
|
|
|
|
|
|
|
|
|
| ||||
The following table presents the fair value and carrying value of the Company’s cash equivalents, loans receivable and borrowings as of December 31, 2023:
|
| Fair Value |
|
| Carrying |
| ||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Value |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash equivalents |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Customer loans receivable |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank and other loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Secured loans from related parties |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Secured convertible debt |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash equivalents – Cash equivalents consist of money market accounts and are carried at their fair value.
Customer loans receivable – The fair value of customer loans receivable is calculated based on the carrying value and unobservable inputs which include the credit risks of the customers, the market interest rates and the contractual terms. The Company’s underwriting policies for the customer loans receivable have not changed significantly since the origination of these loans. The overall credit risk of the portfolio also has not significantly fluctuated as evidenced by the minimal historical write-offs, and lastly the market interest rates have remained relatively consistent since the origination of the loans.
| 17 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Short-term investments – Short-term investments consist of short-term note receivables with maturities of 12 months or less. Accordingly, their carrying values approximate their fair value.
Bank and other loans – The fair value of such loans payable had been determined based on the variable nature of the interest rates and the proximity to the issuance date.
Secured loans from related parties – The related party loans were issued at the fixed annual interest rates of
Secured convertible debt – The secured convertible debt was issued at the fixed annual interest rates of
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and its various updates (“Topic 606”). Revenue is measured based on the considerations specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when the Company satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by government authorities that are imposed on, or concurrent with, a specific revenue-producing transaction are collected by the Company from the customer and excluded from revenue.
The Company’s principal activities from which the Company generates its revenue are described below.
Revenue from EPC Services
For energy generation assets owned and controlled by the customer, the Company recognizes revenue for sales of EPC services over time as the Company’s performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of EPC services represents a single performance obligation for the development and construction of a single generation asset, which is a complete solar energy project. For such sale arrangements, the Company recognizes revenue using cost-based input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract after consideration of the customer’s commitment to perform its obligations under the contract, which is typically measured through the receipt of cash deposits or other forms of financial security issued by creditworthy financial institutions or parent entities.
Payment for EPC services is made by the customer pursuant to the billing schedule stipulated in the EPC contract which is generally based on the progress of the construction. Once the bills are issued to the customer,
In applying cost-based input methods of revenue recognition, the Company uses the actual costs incurred relative to the total estimated costs (including solar module costs) to determine the progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. Cost based input methods of revenue recognition are considered a faithful depiction of the Company’s efforts to satisfy long-term construction contracts and therefore reflect the transfer of goods to a customer under such contracts. Costs incurred that do not contribute to satisfying the Company’s performance obligations (“inefficient costs”) are excluded from the Company’s input methods of revenue recognition as the amounts are not reflective of the Company’s transferring control of the solar energy system to the customer. Costs incurred towards contract completion may include costs associated with solar modules, direct materials, labor, subcontractors, and other indirect costs related to contract performance. The Company recognizes solar module and direct material costs as incurred when such items have been installed in a system.
| 18 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Cost-based input methods of revenue recognition require the Company to make estimates of net contract revenues and costs to complete its projects. In making such estimates, significant judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance incentives, liquidated damages, and other payments to customers. Significant judgment is also required to evaluate assumptions related to the costs to complete its projects, including materials, labor, contingencies, and other system costs. If the estimated total costs on any contract, including any inefficient costs, are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates had been used since revenue was initially recognized under the contract. Such revisions could occur in any reporting period, and the effects may be material depending on the size of the contracts or the changes in estimates.
The Company’s arrangements may contain clauses such as contingent repurchase options, delay liquidated damages, rebates, penalties or early performance bonus, most favorable pricing or other provisions, if applicable, that can either increase or decrease the transaction price. The Company has historically estimated variable considerations that decrease the transaction price (e.g., penalties) and recorded such amounts as an offset to revenue, consistent with requirements under Topic 606. Under Topic 606, the Company estimates and applies a constraint on variable considerations and includes that amount in the transaction price. Because the Company’s historical policies on estimating variable considerations that would decrease the transaction price have largely mirrored the requirements under Topic 606, and because variable considerations that would increase the transaction price have historically been immaterial or would likely be constrained under Topic 606, there is no cumulative effect adjustment. The Company estimates variable considerations for amounts to which the Company expects to be entitled and for which it is not probable that a significant reversal of cumulative revenue recognized will occur.
For energy generation assets not owned and controlled by the customer during the construction, as well as contracts with customers that do not require progress payments during construction and whereby the contracts include restrictive acceptance provisions before any progress payments are made by the customers, the Company recognizes revenues at a point in time when the Company determines it has transferred control to the customer.
PRC Power Purchase Agreements Revenue
Revenues under certain power purchase agreements are recognized based on the output delivered at an agreed upon rate over the contract term. The Company records the revenue under such power purchase agreements during the period under which it has controlling interest in the project subsidiary. Revenue recognition ceases upon the sale and transfer of controlling interest in the project subsidiary to a third party.
Solar Energy and Battery Storage Systems and Components Sales
Revenue recognition associated with sales of solar energy systems, battery storage systems, and other products is recognized over time as the Company’s performance creates or enhances the property controlled by the customer (the asset is being constructed on a customer’s premises that the customer controls).
The Company’s principal performance obligation is to design and install a solar energy system that is interconnected to the local power grid and for which permission to operate has been granted by a utility company to the customer. The Company recognizes revenue over time as control of the solar energy system transfers to the customer which begins at installation and concludes when the utility company has granted the permission to operate.
All costs to obtain and fulfil contracts associated with system sales and other product sales are expensed to cost of revenue when the corresponding revenue is recognized.
For solar energy and battery storage system sales, the Company recognizes revenue using a cost-based input method that recognizes revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated cost of the contract. In applying cost-based input methods of revenue recognition, the Company uses the actual costs incurred for installation and obtaining the permission to operate, each relative to the total estimated cost of the solar energy and battery storage system, to determine the Company’s progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. Cost‑based input methods of revenue recognition are considered a faithful depiction of our efforts to satisfy solar energy and battery system contracts and therefore reflect the transfer of goods to a customer under such contracts. Costs incurred towards contract completion may include costs associated with solar modules, battery components, direct materials, labor, subcontractors, and other indirect costs related to contract performance.
| 19 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
In the U.S., the Company sells solar energy and battery storage systems to residential and commercial customers and recognizes revenue net of sales taxes. Cash sales include direct payments from the customer (including financing obtained directly by the customer), third-party financing arranged by the Company for the customer, and leasing arranged by the Company for the customer through a third party leasing company.
Direct payments are made by the customer as stipulated in the underlying home improvement or commercial contract which generally includes an upfront down payment at contract signing,
For third-party financing arranged by the Company for the customer, direct payments are made by the financing company to the Company based on an agreement between the financing company and the Company, with the majority of the payments made by the time of completion of installation but not later than the date on which the permission to operate the solar system is granted by the utility company.
For a lease through the third party leasing partner, direct payments are made by the leasing partner to the Company based on an agreement between the leasing partner and the Company, which is generally 80% upon the completion of installation and 20% upon the permission to operate is granted.
LED Product Sales and Service Sales
For product sales, the Company recognizes revenue at a point in time following the transfer of control of the products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. For contracts involving both products and services (i.e., multiple performance obligations), the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations. Revenue from services is recognized when services are completed which is upon acceptance by the customer. The standalone selling price of the warranty is not material and, therefore, the Company has not allocated any portion of the transaction price to any performance obligation associated with the warranty.
Payment for products is generally made upon delivery or with a 30 day term. Extended payment terms are provided on a limited basis not to exceed twelve months. Payment for services is due when the services are completed and accepted by the customer. For certain LED product sales, the Company provides the customers with a right of return subject to restocking fees. The Company assessed such rights of return as variable consideration and recognizes revenue based on the amount of consideration the Company expects to receive after returns are made. Based on the Company’s historical experience, the Company has determined the likelihood and magnitude of a future returns to be immaterial and currently has not provided for a liability for such returns on the LED product sales.
For contracts where the Company agreed to provide the customer with rooftop solar energy systems (including design, materials, and installation of the system) in addition to providing LED products and LED installation, these agreements may contain multiple performance obligations: 1) the combined performance obligation to design and install rooftop solar energy system; 2) the performance obligation to deliver the LED products; and, 3) the performance obligation to install the LED products. Topic 606 permits goods and services that are deemed to be immaterial in the context of a contract to be disregarded when considering performance obligations within an agreement. The Company will compare the standalone selling price of the installations and products to the total contract value to determine whether the value of these installations and products is quantitatively immaterial within the context of the contract. Similarly, these services may be qualitatively immaterial in the eyes of the customer. While the customer ordered these products and has received a separate quote for them, they may not be a material driving factor within the agreement for a solar energy system. Further, a reasonable person may not consider providing and installing LED products to be a material part of the arrangement to design and construct a large solar facility. If these products and services are determined to be immaterial within the context of the contract, they will be combined with the performance obligation to design and install the rooftop solar energy system. If management determines that the products and services are determined to be material to the overall project, they will represent a separate performance obligation.
| 20 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Operating Leases and Power Purchase Agreements (PPAs) in U.S.
The Company sells energy generated by PV solar power systems under PPAs. For energy sold under PPAs, which may qualify as a lease, the Company recognizes revenue each period based on the volume of energy delivered to the customer and the price stated in the PPA.
For leases, the Company was considered the lessor of solar energy systems under ASC Topic 840, Leases (“ASC 840”); however, upon the Company’s adoption of ASC Topic 842, Leases (“ASC 842”), the Company is no longer considered the lessor because the Company owns the solar renewable energy certificates related to these solar energy systems, and the counterparty does not receive substantially all of the economic benefits for the use of these energy solar systems. Therefore, these arrangements are not considered leases in accordance with ASC 842.
Loan Interest Income
In the U.S., in the past, the Company provided installment financing to qualified customers to purchase residential or commercial photovoltaic systems, energy storage systems, as well as LED products and services, and some of these loans remain outstanding. The Company has not entered into new loans since early 2020, and its revenues are from financing related to its existing loan portfolio. Customer loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. Loans held-for-investment are carried at amortized cost and are reduced by an allowance for estimated credit losses as necessary. The Company recognizes interest income on loans, including the amortization of discounts and premiums, using the interest method. The interest method is applied on a loan-by-loan basis when collectability of the future payments is reasonably assured. Interest on loans generally continues to accrue until the loans are charged off. Premiums and discounts are recognized as yield adjustments over the term of the related loans. Loans are transferred from held-for-investment to held-for-sale when management’s intent is not to hold the loans for the foreseeable future. Loans held-for-sale are recorded at the lower of cost or fair value. There were no loans held-for-sale at September 30, 2024 and December 31, 2023.
The following table summarizes the Company’s revenue by business line by segment for the three and nine months ended September 30, 2024 and 2023:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Solar energy and battery storage systems |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales on non-installment basis |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Third-party leasing arrangements |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating lease revenues |
|
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|
|
|
|
|
|
|
|
|
| ||||
Power purchase agreement revenues |
|
|
|
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|
|
|
|
|
|
|
| ||||
Total solar energy and battery storage systems |
|
|
|
|
|
|
|
|
|
|
|
| ||||
LED projects |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Financing related |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenues |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Advertising Costs
The Company charges advertising and marketing costs related to radio, internet and print advertising to operations as incurred. Advertising and marketing costs for the three months ended September 30, 2024 and 2023 were approximately $
| 21 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Income Taxes
The Company accounts for income taxes pursuant to the FASB ASC Topic 740, Income Taxes (“ASC 740”). The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. The Company accounts for the investment tax credits under the flow-through method which treats the credits as a reduction of federal income taxes of the year in which the credit arises or is utilized. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. The Company has determined it is more likely than not that its deferred tax assets related to its U.S. operations will not be realizable and has recorded a full valuation allowance against its deferred tax assets. In the event the Company is able to realize such deferred income tax assets in the future in excess of the net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
Topic 740-10 clarifies the accounting for uncertainty in income taxes recognized in the Company’s condensed consolidated financial statements in accordance with U.S. GAAP. The calculation of the Company’s tax provision involves the application of complex tax rules and regulations within multiple jurisdictions. The Company’s tax liabilities include estimates for all income-related taxes that the Company believes are probable and that can be reasonably estimated. To the extent that the Company’s estimates are understated, additional charges to the provision for income taxes would be recorded in the period in which the Company determines such understatement. If the Company’s income tax estimates are overstated, income tax benefits will be recognized when realized.
The Company recognizes interest and penalties related to unrecognized tax positions as income tax expense. For the three and nine months ended September 30, 2024 and 2023, the Company did not incur any related interest and penalties.
The Company does not record U.S. income taxes on the undistributed earnings of its foreign subsidiaries based upon the Company’s intention to permanently reinvest undistributed earnings to ensure sufficient working capital and further expansion of existing operations outside the U.S. As of September 30, 2024 and December 31, 2023, the Company’s foreign subsidiaries operated at a cumulative deficit for U.S. earnings and profit purposes.
Comprehensive Income (Loss)
The Company accounts for comprehensive income loss in accordance with ASC 220, Income Statement – Reporting Comprehensive Income (“ASC 220”). Under ASC 220, the Company is required to report comprehensive income (loss), which includes net income (loss) as well as other comprehensive income (loss). The only significant component of accumulated other comprehensive income (loss) as of September 30, 2024 and December 31, 2023 is the currency translation adjustment.
Net Income (Loss) Per Share
The Company calculates net income (loss) per share by dividing income or losses allocated to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted weighted average shares is computed using basic weighted average shares plus any potentially dilutive securities outstanding during the period using the treasury-stock-type method and the if-converted method, except when their effect is anti-dilutive. Potentially dilutive securities are excluded from the computation of diluted earnings per share for the nine months ended September 30, 2024 because the effect would be antidilutive.
Stock-Based Compensation
The Company accounts for stock-based compensation costs under the provisions of ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest for both employees and non-employees. Stock-based compensation expense recognized includes the compensation cost for all share-based payments granted to employees and non-employees, net of estimated forfeitures, over the employee requisite service period or the non-employee performance period based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported.
| 22 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Foreign Currency
Amounts reported in the condensed consolidated financial statements are stated in U.S. dollars. The Company’s subsidiaries in the PRC use the Chinese RMB as their functional currency and all other subsidiaries use the U.S. dollar as their functional currency.
In accordance with ASC 830, Foreign Currency Matters (“ASC 830”), the Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from RMB into U.S. dollar are recorded in stockholders’ equity as part of accumulated other comprehensive income. Further, foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Losses on those foreign currency transactions of approximately $
Segment Information
Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the executive team, which is comprised of the chief executive officer and the chief financial officer. Based on the financial information presented to and reviewed by the chief operating decision maker in deciding how to allocate the resources and in assessing the performance of the Company, the Company has determined that it has two operating and reporting segments (U.S. and PRC) as of September 30, 2024 and December 31, 2023.
Recently Issued Accounting Pronouncements
As an emerging growth company, the Company has elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Securities and Exchange Act of 1934.
In November 2023, the FASB issued ASU 2023-07 that would enhance disclosures for significant segment expenses for all public entities required to report segment information in accordance with ASC 280. ASC 280 requires a public entity to report for each reportable segment a measure of segment profit or loss that its chief operating decision maker (CODM) uses to assess segment performance and to make decisions about resource allocations. The amendments in ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more useful financial analyses. Currently, Topic 280 requires that a public entity disclose certain information about its reportable segments. The amendments in ASU 2023-07 do not change or remove those disclosure requirements. The amendments in ASU 2023-07 also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments in ASU 2023-07 retrospectively to all prior periods presented in the financial statements.
The Company has determined the adoption effective on January 1, 2024 has no impact on the Company’s condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740). ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, though early adoption is permitted.
| 23 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
The Company is currently evaluating the impact of ASU 2023-09 and does not expect that adoption of this standard will have a material impact on the Company’s income tax disclosures.
The Company has reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on the Company’s condensed consolidated financial statements.
3. Cash, Cash Equivalents and Restricted Cash
As of September 30, 2024 and December 31, 2023, insured and uninsured cash including the balance classified as restricted cash were as follows:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
US Segment |
|
|
|
|
|
| ||
Insured cash |
| $ |
|
| $ |
| ||
Uninsured cash |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
China Segment |
|
|
|
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|
|
|
|
Insured cash |
|
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|
| ||
Uninsured cash |
|
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|
| ||
|
|
|
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|
|
| ||
Total cash and cash equivalents and restricted cash |
|
|
|
|
|
| ||
Less: Cash and cash equivalents |
|
|
|
|
|
| ||
Restricted cash |
| $ |
|
| $ |
| ||
4. Accounts Receivable, net
The activity of the allowance for credit losses for accounts receivable for the nine months ended September 30, 2024 and 2023 is as follows:
|
| Nine Months Ended September 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
|
|
|
|
|
| ||
Balance – beginning of period |
| $ |
|
| $ |
| ||
Provision for credit losses |
|
|
|
|
|
| ||
Recoveries |
|
|
|
|
| ( | ) | |
Effect of exchange rate |
|
|
|
|
| ( | ) | |
Balance – end of period |
| $ |
|
| $ |
| ||
5. Short-term investments
In March 2024, the Company made short-term investments of $
In March 2024, the Company made short-term investments of RMB 5.0 million (approximately $
| 24 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
6. Customer Loans Receivable
In past years, the Company provided financing to qualified customers to purchase residential or commercial photovoltaic systems, as well as other products the Company offered in the U.S. Depending on the credit rating of customers, the interest rate generally ranges from
The customer gives the Company a security interest in the photovoltaic systems and other products financed.
The following tables summarize the Company’s customer loan receivables by credit rating, determined at origination, for each vintage of the customer loan receivable portfolio at September 30, 2024:
|
|
|
|
| September 30, 2024 |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| Prior |
|
| Total |
|
| % |
| ||||||
Prime - FICO score 680 and greater |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
|
|
|
| 80.7 | % | |||||
Near-prime - FICO score 620 to 679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10.1 | % | |||||
Sub-prime - FICO score less than 620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8.2 | % | |||||
Business entity — FICO not available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1.0 | % | |||||
Total Customer Loan Receivables, gross |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
| 100.0 | % | |||||
The following tables summarize the Company’s customer loan receivables by credit rating, determined at origination, for each vintage of the customer loan receivable portfolio at December 31, 2023:
|
|
|
|
| December 31, 2023 |
| ||||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| Prior |
|
| Total |
|
| % |
| |||||||
Prime - FICO score 680 and greater |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
| 86.2 | % | ||||||
Near-prime - FICO score 620 to 679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10.3 | % | ||||||
Sub-prime - FICO score less than 620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2.3 | % | ||||||
Business entity — FICO not available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1.2 | % | ||||||
Total Customer Loan Receivables, gross |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
| 100.0 | % | ||||||
Customer loans receivable consist of the following as of September 30, 2024 and December 31, 2023:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Customer loans receivable, gross |
| $ |
|
| $ |
| ||
Less: unamortized loan discounts |
|
| ( | ) |
|
| ( | ) |
Allowance for loan losses |
|
| ( | ) |
|
| ( | ) |
Customer loans receivable, net |
|
|
|
|
|
| ||
Less: Current portion |
|
|
|
|
|
| ||
Non-current portion |
| $ |
|
| $ |
| ||
| 25 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Principal maturities of the customer loans receivable at September 30, 2024 are summarized as follows:
For the year ending December 31, |
| Amount |
| |
2024 (remainder of) |
| $ |
| |
2025 |
|
|
| |
2026 |
|
|
| |
2027 |
|
|
| |
2028 |
|
|
| |
Thereafter |
|
|
| |
Total customer loans receivable |
| $ |
| |
The Company is exposed to credit risk on the customer loans receivable. Credit risk is the risk of loss arising from the failure of customers to meet the terms of their contracts with the Company or otherwise fail to perform as agreed.
The activity in the allowance for loan losses for customer loans receivable for the nine months ended September 30, 2024 and 2023 is as follows:
|
| Nine Months Ended September 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
|
|
|
|
|
| ||
Balance – beginning of period |
| $ |
|
| $ |
| ||
Provision (recovery) for loan losses |
|
| ( | ) |
|
| ( | ) |
Chargeoffs and adjustments |
|
|
|
|
|
| ||
Balance – end of period |
| $ |
|
| $ |
| ||
Total interest income on the customer loans receivable included in revenues was approximately $
7. Inventories, net
The activity in the reserve for excess and obsolete inventories for the nine months ended September 30, 2024 and 2023 is as follows:
|
| Nine Months Ended September 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
|
|
|
|
|
| ||
Balance – beginning of period |
| $ |
|
| $ |
| ||
Provision for excess and obsolete inventories |
|
|
|
|
|
| ||
Balance – end of period |
| $ |
|
| $ |
| ||
Inventories consisted of the following as of September 30, 2024 and December 31, 2023:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Solar panels, inverters, battery storage and components |
| $ |
|
| $ |
| ||
LED lights |
|
|
|
|
|
| ||
Total inventories, gross |
|
|
|
|
|
| ||
Less: reserve for excess and obsolete inventories |
|
| ( | ) |
|
| ( | ) |
Total inventories, net |
| $ |
|
| $ |
| ||
| 26 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
8. Other Receivables and Current Assets, Net
Other receivables and current assets, net consisted of the following at September 30, 2024 and December 31, 2023:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Receivable from Seller (Uonone Group - Note 15) |
| $ |
|
| $ |
| ||
Deferred project costs |
|
|
|
|
|
| ||
Prepaid expenses and other current assets |
|
|
|
|
|
| ||
Advances to suppliers |
|
|
|
|
|
| ||
Accrued interest on short-term investments |
|
|
|
|
|
| ||
Accrued interest on customer loans receivable |
|
|
|
|
|
| ||
Capitalized offering costs |
|
|
|
|
|
| ||
Total other receivables and current assets |
| $ |
|
| $ |
| ||
Deferred project costs consist of work in process and subcontractor costs incurred on the solar energy systems and LED projects that are not fully completed at September 30, 2024 and December 31, 2023.
Prepaid expenses and other current assets include unpaid accrued rent from Sunspark Technology, Inc. ("Sunspark"), one of the Company's sub-lessees at its office in Riverside, California. Sunspark is also one of the Company's panel suppliers. On June 12, 2024, the Company entered into an offset agreement with Sunspark whereby Sunspark's unpaid rents, utilities and security allocations through June 30, 2024 of $
9. Property and Equipment
Components of property and equipment, net are as follows:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Automobiles |
| $ |
|
| $ |
| ||
Furniture and equipment |
|
|
|
|
|
| ||
Solar systems leased to customers |
|
|
|
|
|
| ||
Leasehold improvements |
|
|
|
|
|
| ||
Total property and equipment, gross |
|
|
|
|
|
| ||
Less: accumulated depreciation and amortization |
|
| ( | ) |
|
| ( | ) |
Total property and equipment, net |
| $ |
|
| $ |
| ||
For the three months ended September 30, 2024 and 2023, depreciation expenses were approximately $
10. Goodwill
The activity of goodwill is as follows:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Balance – beginning of period |
| $ |
|
| $ |
| ||
Effect of exchange rate |
|
| ( | ) |
|
| ( | ) |
Goodwill impairment |
|
| ( | ) |
|
|
| |
Balance – end of period |
| $ |
|
| $ |
| ||
| 27 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
During the three and nine months ended September 30, 2024, as a result of the continued headwinds facing China's economy post the pandemic and the economic indicators seem to indicate further future contraction, all of which will have a direct impact on the Company's ability to generate new businesses in its China segment in the foreseeable future, accordingly the Company recognized a $
11. Investments in Unconsolidated Solar Project Companies
The Company has a
Investee |
| Investment Balance at December 31, 2023 |
|
| Share of Investee’s Net Income |
|
| Effect of Exchange Rate |
|
| Investment Balance at September 30, 2024 |
| ||||
Yilong #2 |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Xingren |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Ancha |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Investee |
| Investment Balance at December 31, 2022 |
|
| Share of Investee’s Net Income (Loss) |
|
| Effect of Exchange Rate |
|
| Investment Balance at September 30, 2023 |
| ||||
Yilong #2 |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||
Xingren |
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||
Ancha |
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||
Total |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||
The following tables present the summary of the combined financial statements of the three solar project companies in which the Company has a 30% equity interest as of September 30, 2024 and December 31, 2023, and for the nine months ended September 30, 2024 and 2023:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Current assets |
| $ |
|
| $ |
| ||
Non-current assets |
|
|
|
|
|
| ||
Total assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ |
|
| $ |
| ||
Noncurrent liabilities |
|
|
|
|
|
| ||
Members’ capital |
|
|
|
|
|
| ||
Total liabilities and members’ capital |
| $ |
|
| $ |
| ||
| 28 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
|
| Nine Months Ended September 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
|
|
|
| ||||
Revenue |
| $ |
|
| $ |
| ||
Gross profit |
|
|
|
|
|
| ||
Net income |
| $ |
|
| $ |
| ||
Revenue of these project companies is generated from the power purchase agreements with the PRC utility companies as well as government subsidies.
12. Financing Arrangements
As of September 30, 2024 and December 31, 2023, the Company had the following borrowings:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Unsecured loan from unrelated party at 8.0% fixed interest due December 31, 2024 |
| $ |
|
| $ |
| ||
Unsecured loan from unrelated party at 12.0% fixed interest due December 31, 2024 |
|
|
|
|
|
| ||
Secured convertible notes payable at 4.0% per annum, due various dates through September 2029 |
|
|
|
|
|
| ||
EB-5 loans - see details below |
|
|
|
|
|
| ||
Notes payable from SMX Property, a related party, at 8% per annum, due October 10, 2025 |
|
|
|
|
|
| ||
Total |
|
|
|
|
|
| ||
Less: debt discount and debt issuance costs |
|
| ( | ) |
|
| ( | ) |
Current portion |
|
| ( | ) |
|
| ( | ) |
Noncurrent portion |
| $ |
|
| $ |
| ||
Unsecured Loans
Unsecured loans include a loan of $
Related party EB-5 financings
The Company’s borrowings under the EB-5 program from related parties consisted of the following as of September 30, 2024 and December 31, 2023:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
$45.0 million loan from Clean Energy Funding, LP |
| $ |
|
| $ |
| ||
$13.0 million loan from Clean Energy Funding II, LP |
|
|
|
|
|
| ||
Total |
|
|
|
|
|
| ||
Less: current portion |
|
| ( | ) |
|
| ( | ) |
Noncurrent portion |
| $ |
|
| $ |
| ||
On January 3, 2012, Clean Energy Fund, LP (“CEF”) entered into a secured loan agreement with SREP, a wholly owned subsidiary of the Company. Under the secured loan agreement, CEF agreed to make loans to SREP in an amount not to exceed $
| 29 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
On August 26, 2014, Clean Energy Funding II, LP (“CEF II”) entered into a secured loan agreement with LED, a wholly-owned subsidiary of the Company, for up to $
The general partner of CEF and CEF II is Inland Empire Renewable Energy Regional Center (“IERE”). The principal owners and managers of IERE consist of the Company’s chief executive officer, its former executive vice president, who is a 5% stockholder, and one of its directors.
Convertible Notes
The Company has issued
All convertible notes issued prior to the Company’s initial public offering have two separate and distinct embedded features. They are: (1) optional conversion upon a public stock event as defined in the convertible note; and (2) redemption put feature upon fundamental transaction.
Commencing six months from the date the Company first receives proceeds from its public stock event for convertible notes made prior to the Company’s initial public offering, and from the date of the convertible note made after the Company’s initial public offering, until the convertible notes are no longer outstanding, the convertible notes and all unpaid accrued interest is convertible into shares of common stock, at the option of the holder, during five trading days commencing on the first, second, third, fourth, and fifth anniversaries of the original issuance date. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the then entire amount of the convertible notes balance outstanding including all unpaid principal and, with the consent of the Company, accrued interest payable by (y) the conversion price. The Company evaluated the embedded optional conversion feature in accordance with the guidance under ASC Topic No. 815, Derivatives and Hedging (“ASC 815”), and determined it is exempt from derivative accounting as the embedded feature is deemed to be indexed to the Company’s own stock and would be classified in stockholder’s equity if freestanding.
All convertible notes issued contained redemption put features that allow the holders of the convertible notes the right to receive, for each conversion share that would have been issuable upon conversion immediately prior to the occurrence of an effective change in control event defined as a fundamental transaction, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration receivable as a result of such fundamental transaction by a holder of the number of shares of common stock for which these convertible notes are convertible immediately prior to such fundamental transaction. The Company evaluated the redemption put feature contained in the convertible notes under the guidance of ASC 815 and concluded that the requirements for contingent exercise provisions as well as the settlement provision for scope exception in ASC 815-10-15-74 has been meet. Accordingly, the redemption put features contained in the convertible notes were not bifurcated and accounted for as freestanding derivative instruments.
During the nine months ended September 30, 2024, the Company redeemed convertible notes in the principal amount of $
The following table sets forth information with respect to the outstanding convertible notes.
Principal amount of convertible notes outstanding at December 31, 2023 |
| $ |
| |
Principal paid during the nine months ended September 30, 2024 |
|
| ( | ) |
Convertible notes converted during the nine months ended September 30, 2024 |
|
|
| |
Convertible notes issued during the nine months ended September 30, 2024 |
|
|
| |
Principal amount of convertible notes outstanding at September 30, 2024 |
| $ |
|
| 30 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Notes Payable to SMX Property, LLC
On October 10, 2022, SMXP made unsecured loans to the Company of $
The $
The $
Interest Expense
For the three months ended September 30, 2024 and 2023, interest expense incurred on the above long-term EB‑5 related party loans was approximately $
Total interest expense incurred (including interest on long-term related party loans) was approximately $
Principal maturities for the financing arrangements as of September 30, 2024 are as follows:
For the year ending December 31, |
| Bank and Other Unsecured Loans |
|
| EB-5 Loans Related – Party |
|
| Notes Payable Related – Party |
|
| Convertible Notes |
|
| Total |
| |||||
2024 (remainder of) |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
13. Accrued Expenses and Other Payables
Accrued expenses and other payables consisted of the following as of September 30, 2024 and December 31, 2023:
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
Customer deposits |
| $ |
|
| $ |
| ||
Accrued operating and project payables |
|
|
|
|
|
| ||
Payable to Uonone (See Note 15) |
|
|
|
|
|
| ||
Accrued compensation expenses |
|
|
|
|
|
| ||
Retainage payable to vendors |
|
|
|
|
|
| ||
Preacquisition liability |
|
|
|
|
|
| ||
Accrued settlement |
|
|
|
|
|
| ||
Accrued warranty expense |
|
|
|
|
|
| ||
VAT taxes payable |
|
|
|
|
|
| ||
Income taxes payable |
|
|
|
|
|
| ||
Refundable vendor bid deposits |
|
|
|
|
|
| ||
Total accrued expenses and other payables |
| $ |
|
| $ |
| ||
| 31 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Accrued Compensation
At December 31, 2023 and September 30, 2024, accrued compensation includes $
Customer Deposits
Customer deposits represent customer down payments and progress payments received prior to the completion of the Company’s earnings process. The amounts paid by customers are refundable during the period which, under applicable state and federal law, the customer’s order may be cancelled and the deposit refunded. Once the cancellation period has expired, the customer still may cancel the project but the Company is entitled to retain the deposit payments for work that was completed and materials that were delivered.
Accrued Settlement
In November 2022, the Company entered into a settlement agreement with two former limited partners of Clean Energy Funding L.P., under which the
Accrued Warranty
The activity of the warranty liability (included in other liabilities) for the nine months ended September 30, 2024 and 2023 is as follows:
|
| Nine Months Ended September 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
|
|
|
| ||||
Balance – beginning of period |
| $ |
|
| $ |
| ||
Provision for warranty liability |
|
|
|
|
|
| ||
Expenditures and adjustments |
|
| ( | ) |
|
| ( | ) |
Reversal of UE Solar accrual |
|
|
|
|
| ( | ) | |
Effect of exchange rate |
|
|
|
|
| ( | ) | |
Balance – end of period |
|
|
|
|
|
| ||
Less: current portion (accrued expenses and other payables) |
|
| ( | ) |
|
| ( | ) |
Non-current portion (other liabilities) |
| $ |
|
| $ |
| ||
Preacquisition Liability
As part of the April 2015 acquisition of ZHPV, the Company assumed a liability associated with one of ZHPV’s projects consisting of reimbursement of project expenses to an unrelated third-party including reimbursement of certain land rental expenses and land use taxes estimated at a total of approximately RMB 10.7 million ($
| 32 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
14. Third-party Leasing Arrangement and Concentrations
Third-party Leasing Arrangement
The Company sells solar energy and battery storage systems to residential and commercial customers in the U.S. and these customers may pay for these sales in cash. Cash sales include direct payments from the customer (including financing obtained directly by the customer), third-party financing arranged by the Company for the customer, and leasing arranged by the Company for the customer from a third-party leasing company.
Concentration Risks
Major Customers
For the nine months ended September 30, 2024 and 2023,
Major Suppliers
During the nine months ended September 30, 2024, one supplier in the U.S. segment accounted for purchases of $
15. Acquisition Contingencies and Other Payable to Uonone Group
Effective on May 12, 2016, in conjunction with the execution of the amendment to the April 2015 share exchange agreement to acquire ZHPV, ZHPV entered into a debt settlement agreement (the “Debt Settlement Agreement”) with one of the former owners of ZHPV, Uonone Group Co., Ltd., (“Uonone Group”), pursuant to which ZHPV and Uonone Group agreed to settle a list of pending business transactions from December 31, 2012 to December 31, 2015,
As of December 31, 2021, Uonone Group had repaid all the amounts agreed to under the debt settlement agreement except for the RMB 3.0 million contingent receivable from Uonone Group discussed above. Uonone Group’s obligation on the contingent receivable does not arise until and unless the Company becomes obligated under the contingent liability. At December 31, 2023, the Company had no payment obligations with respect to the assumed contingent liability and accordingly, Uonone Group had no obligation to the Company with respect to the contingent receivable.
Under the debt settlement agreement, any legal settlement proceeds, less fees and expenses, received by ZHPV related to the projects completed prior to the April 2015 business combination would be repaid to the Uonone Group. During the nine months ended September 30, 2024 the Company did not receive any additional legal settlement proceeds, nor did the Company make any payments to Uonone.
At both September 30, 2024 and December 31, 2023, the amount payable to Uonone, was approximately RMB 18.0 million ($
16. Related Party Transactions
See Note 12 for related party lease transactions and Note 17 for the termination of related party lease.
| 33 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
17. Commitments and Contingencies
Operating Leases
The Company has entered into various non-cancellable operating lease agreements for certain of its offices, warehouse facilities and office equipment, vehicles, and solar energy systems, both in the U.S. and in the PRC. The Company determines if an arrangement is a lease, or contains a lease, at inception and records the leases in the condensed consolidated financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
Related Party Lease Agreements
Effective March 31, 2024, the Company terminated its lease with Fallow Field, LLC, a related party, for office space in Diamond Bar, California. In conjunction with the early lease termination, the Company reported a gain on the lease termination of approximately $
The Company recognized a gain of approximately $
Future minimum lease commitments for offices, warehouse facilities and equipment, payable to related parties and other, as of September 30, 2024, are as follows:
For the year ending December 31, |
| Total |
| |
2024 (remainder of) |
| $ |
| |
2025 |
|
|
| |
2026 |
|
|
| |
Total |
| $ |
| |
For the three months ended September 30, 2024 and 2023, rent expense for offices, warehouse facilities and equipment, including rental expense for related party leases, was approximately $
As of September 30, 2024, the maturities of the Company’s operating lease liabilities (excluding short-term leases) are as follows:
For the year ending December 31, |
| Total |
| |
2024 (remainder of) |
| $ |
| |
2025 |
|
|
| |
2026 |
|
|
| |
Total minimum lease payments |
|
|
| |
Less: Interest |
|
| ( | ) |
Present value of lease obligations |
|
|
| |
Less: current portion |
|
| ( | ) |
Noncurrent portion |
| $ |
| |
Other information related to leases is as follows:
|
| As of September 30, 2024 |
| |
Weighted average remaining lease term (in years) |
|
|
| |
Weighted average discount rate |
|
| % | |
| 34 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
During September and October 2022, the Company entered into subleases with three unrelated companies for portions of office space through December 31, 2022 and one other unrelated company through March 31, 2024. For the three months ended September 30, 2024 and 2023, the total sublease income recognized was approximately $
The following table summarizes the Company’s operating lease cost for the three and nine months ended September 30, 2024 and 2023:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
|
|
|
|
|
|
|
|
| ||||||||
Operating lease cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Short-term lease cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Less: Sublease income |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Operating lease cost, net |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Employment Agreements
On October 7, 2016, the Company entered into employment agreements with its chief executive officer
On February 24, 2020, the Company's then executive vice president resigned. Pursuant to a release and separation agreement dated October 1, 2020, her employment agreement was terminated and, with certain limited exceptions, the Company and the former executive vice president released each other from their obligations under the employment agreement. Pursuant the release and separation agreement, the Company paid the former executive officer $
The Company entered into a consulting agreement dated October 1, 2020 with the former executive vice president pursuant to which the Company engaged her as a consultant for a term ending December 31, 2022, and continuing thereafter on a month-to-month basis for monthly compensation of $
| 35 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
18. Stockholders’ Equity
2016 Long-Term Incentive Plan
In October 2016, the Company’s board of directors adopted and in November 2016 the stockholders approved the 2016 Long-Term Incentive Plan,
Amendment of the 2016 Restricted Stock Grants
Pursuant to the 2016 Long-Term Incentive Plan, the board of directors granted
| · | Granted to the holders of |
| · | Granted to the chief executive officer, the then current executive vice president and one other employee, |
The grantees of the restricted stock grants have all rights of ownership with respect to the shares, including the right to vote the shares and to receive dividends and distributions with respect to the shares until and unless a forfeiture event shall occur; provided, however, that prior to a forfeiture termination event, (i) the grantees shall have no rights to sell, encumber or otherwise transfer the shares, and (ii) any shares of any class or series of capital stock which are issued to the grantee as a holder of the shares as a result of a stock dividend, stock split, stock distribution, reverse split, recapitalization, or similar event, shall be subject to the same forfeiture provisions as the shares. A forfeiture termination event shall mean such date as is six months following a public stock event. The definition of a public stock event includes, among other events, the effectiveness of a registration statement relating to an underwritten public offering by the Company. The board of directors has the right to defer the date of a forfeiture event to a later date. As a result of the Company’s completion of its initial public offering on February 12, 2024, the restricted shares became non-forfeitable and will vest six months following such date.
On October 7, 2016, the Company entered into an advisory services agreement with a consultant who has been providing services to the Company including, among other things, business planning, financial strategy and implementation and corporate structure related to the Company’s business development, financing and acquisition transactions. The term of the service commenced on September 1, 2016 and has been extended to April 30, 2019 pursuant to amendments. As compensation for the service, the Company issued to the consultant
All shares granted above pursuant to the 2016 Long-Term Incentive Plan had vested on August 12, 2024 and are included in common shares outstanding as of September 30, 2024.
As of December 31, 2023, total unrecognized compensation costs for outstanding restricted stock awarded was estimated at $
Out-of-Period Adjustment
During the three months ended September 30, 2024, the Company recorded an out-of-period adjustment of $
| 36 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
The following table below summarizes the activity of the restricted stock shares:
|
| Number of Shares |
|
| Weighted Average Grant Date Fair Value per Share |
| ||
Outstanding at December 31, 2023 |
|
|
|
|
|
| ||
Nonvested as of December 31, 2023 |
|
|
|
|
|
| ||
Outstanding at September 30, 2024 (Unaudited) |
|
| - |
|
|
|
| |
Nonvested as of September 30, 2024 (Unaudited) |
|
| - |
|
|
|
| |
Stock Options
From time to time, the Company granted non-qualified stock options to its employees and consultants for their services. Option awards are generally granted with an exercise price equal to the estimated fair value of the Company’s stock at the date of grant; those option awards generally vest between 18 months and 36 months of continuous service and have contractual terms of seven to ten years. The vested options are exercisable for six months after the termination date unless (i) termination is due to optionee’s death or disability, in which case the option shall be exercisable for 12 months after the termination date, or (ii) the optionee is terminated for cause, in which case the option will immediately terminate.
A summary of option activity is as follows:
|
| Number of Options |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual (years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
| - |
| |||
Nonvested as of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
| - |
| |||
Exercisable as of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Granted |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Exchanged |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Exercised |
|
| ( | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Cancelled or forfeited |
|
| ( | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Outstanding at September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
| - |
| |||
Nonvested as of September 30, 2024 |
|
| - |
|
|
|
|
|
| - |
|
|
| - |
| |
Exercisable as of September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
| - |
| |||
Forfeitures are accounted for as actual forfeitures occur.
The aggregate intrinsic value represents the total pretax intrinsic value. The aggregate intrinsic values as of December 31, 2023 are based upon the value per share of $
Non-vested Option Awards
The following table summarizes the Company’s nonvested option awards activity:
Balance at December 31, 2023 |
| $ |
| |
Granted |
|
| - |
|
Exchanged |
|
| - |
|
Forfeited |
|
| ( | ) |
Vested |
|
| ( | ) |
Balance at September 30, 2024 (Unaudited) |
| $ | - |
|
As a result of the Company’s completion of its initial public offering, all the stock options which are performance-based awards are vested and compensation cost of $
See Note 12 for information relating to the 4% secured subordinated convertible notes to former limited partners of CEF and CEF II, pursuant to exchange agreements with the limited partners. At December 31, 2023, there were convertible notes in the principal amount of $
| 37 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
19. Income Taxes
The components of the Company's income (loss) before income taxes and income (loss) from operations for the three and nine months ended September 30, 2024 and 2023 are as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
|
|
|
|
|
|
|
|
| ||||||||
Domestic (U.S. Segment) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |
Foreign (PRC Segment) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
| |
Income (loss) before income taxes |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Income tax expense (benefit) |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
| ||
Income (loss) from operations |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Effective tax rate |
|
| ( | )% |
|
| ( | )% |
|
| % |
|
| % | ||
The Company is subject to taxation in the U.S. and various states jurisdictions. The Company is also subject to taxation in China. The Company’s effective tax rate is determined quarterly, reflecting actual activities and various tax-related items.
The Company’s effective income tax rate for the three months ended September 30, 2024 and 2023 were (
As of September 30, 2024, the Company determined that, based on an evaluation of its history of net losses and all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none or substantially none of its deferred tax assets would be realized and, therefore, the Company continued to record a valuation allowance on U.S. side and partially on the Chinese side.
| 38 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
20. Net Income (Loss) Per Share
The following table presents the calculation of the Company's basic and diluted net income (loss) per share for the three and nine months ended September 30, 2024 and 2023:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute net loss per share, basic |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares used to compute net loss per share, diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income (loss) per share |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Diluted net income (loss) per share |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
For the nine months ended September 30, 2023, outstanding options to purchase
21. Segment Reporting
The Company uses the management approach for segment reporting disclosure, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reporting segments. For the nine months ended September 30, 2024 and 2023, the Company operates under two operating segments on the basis of geographical areas: The U.S. and the PRC. Operating segments are defined as components of an enterprise about which separate financial information is available and that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company evaluates performance based on several factors, including revenue, cost of revenue, operating expenses, and income from operations. The following tables show the operations of the Company’s operating segments for the three and nine months ended September 30, 2024 and 2023:
| 39 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
|
| Three Months Ended September 30, 2024 |
|
| Nine Months Ended September 30, 2024 |
| ||||||||||||||||||
|
| US |
|
| PRC |
|
| Total |
|
| US |
|
| PRC |
|
| Total |
| ||||||
Revenue from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Solar energy systems |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Finance revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
LED and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar energy systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest (expense) income, net |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Goodwill impairment |
|
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Equity in income of solar farm projects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||
Net income (loss) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| Three Months Ended September 30, 2023 |
|
| Nine Months Ended September 30, 2023 |
| ||||||||||||||||||
|
| US |
|
| PRC |
|
| Total |
|
| US |
|
| PRC |
|
| Total |
| ||||||
Revenue from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Solar energy systems |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Finance revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
LED and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar energy systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest (expense) income, net |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Equity in income of solar farm projects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Provision for income taxes |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
|
|
|
| ||||
and as of September 30, 2024 and December 31, 2023:
|
| September 30, 2024 |
| |||||||||
|
| US |
|
| PRC |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
| |||
Equity investments in solar farm projects |
| $ |
|
| $ |
|
| $ |
| |||
Capital expenditures |
|
|
|
|
|
|
|
|
| |||
Long-lived assets |
|
|
|
|
|
|
|
|
| |||
Total reportable assets |
|
|
|
|
|
|
|
|
| |||
|
| December 31, 2023 |
| |||||||||
|
|
|
| PRC |
|
|
| |||||
|
| US |
|
|
|
|
| Total |
| |||
Equity investments in solar farm projects |
| $ |
|
| $ |
|
| $ |
| |||
Capital expenditures |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Long-lived assets |
|
|
|
|
|
|
|
|
| |||
Total reportable assets |
|
|
|
|
|
|
|
|
| |||
| 40 |
| Table of Contents |
SolarMax Technology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
22. Subsequent Events
The Company has evaluated subsequent events through November 14, 2024, the date the September 30, 2024 condensed consolidated financial statements were available to be issued, and except as disclosed below and in Note 5 - Short-term investments, and Note 12 -Unsecured Loans, no other events require adjustment of, or disclosure in, the condensed consolidated financial statements.
Convertible Notes Issued
In October, 2024, the Company issued a convertible note in the principal amount of $
| 41 |
| Table of Contents |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in “Risk Factors” included in our annual report on Form 10-K. All amounts in this report are in U.S. dollars, unless otherwise noted.
Initial Public Offering
On February 27, 2024, we sold 4,500,000 shares of common stock, at a price of $4.00 per share in our initial public offering. On March 5, 2024, the underwriters purchased 539,950 shares of common stock upon the partial exercise of the over-allotment option. Net proceeds received by us from our initial public offering, including the partial exercise of the over-allotment option, were approximately $18.6 million. We are using the proceeds of our initial public offering for working capital and other corporate purposes, including payment of debt.
Impairment of China Segment Goodwill
During the quarter ended September 30, 2024, we performed a goodwill impairment assessment with respect to our China segment considering various factors and based primarily on the continued economic downturn in China that directly impacts our ability to generate new businesses in the foreseeable future and the absence of any agreements or negotiations for agreements at September 30, 2024, We recognized an impairment charge for the entire balance of the goodwill of $7.5 million for the three and nine months ended September 30, 2024. We can give no assurance as to our ability to generate revenue from our China operations.
Elimination of Forfeiture Provisions of Options upon Initial Public Offering
During the years 2015 to 2019, we granted stock options to employees and consultants, of which options to purchase 5,898,137 shares were outstanding at the date of our initial public offering. Under the terms of the options, the options became non-forfeitable upon our completion of an initial public offering, which occurred on February 12, 2024, the effective date of the registration statement relating to our initial public offering. Under GAAP, upon the termination of the forfeiture provisions, the value of the options is treated as a compensation expense in the period in which the options become non-forfeitable. Using the Black Scholes valuation method, the fair value of the options at the time of our initial public offering was approximately $17.2 million, which is stock-based compensation that does not reflect a cash expense, of which approximately $1.3 million is included in cost of revenues and $15.9 million is included in general and administrative expense. The $17.2 million stock-based compensation expense, which is not deductible for federal and state income tax purposes and is a non-cash expense, together with the $7.5 million impairment charge, represents the major portion of our $31.1 million loss for the nine months ended September 30, 2024.
Effects of NEM 3.0
Net metering is a billing mechanism that credits solar energy system owners for the electricity that they add to the electricity grid. If the owner of a solar system generates more electricity than it consumes, the excess electricity is sold back to the grid. The California Public Utilities Commission has adopted the current net metering regulations, known as NEM 3.0, which became effective in April 2023. NEM 3.0 features a 75% reduction in export rates (the value of excess electricity pushed onto the grid by solar systems) from the rate set forth in the previous net metering regulations, NEM 2.0, thereby reducing the overall savings and increasing the payback period of home solar installations. The changes under NEM 3.0, which are likely to result in reduced benefits for most residential solar users, could alter the return on investment for solar customers.
In January 2024, we laid off a portion of our employees associated with the design and installation of residential solar systems in response to a slowdown in demand after NEM 3.0 took effect in April 2023. The layoff represented approximately 25% of our residential solar system design and installation team. Approximately half of the employees who were laid off had been hired in late 2022 to help install our growing backlog of residential solar systems under contract in anticipation of NEM 3.0, and the contracts representing that backlog were completed during 2023. We may need to revise our pricing metrics to reflect the change resulting from NEM 3.0 in order for the purchase of a solar system to be economically attractive to the customer, which may result in lower prices and reduced margins. Although we anticipate the near-term impact of NEM 3.0 on residential solar contracts will be offset by commercial solar contracts for which we use third-party subcontractors to complete the installations, we cannot assure you that our overall business will not be impacted by the effects of NEM 3.0. Our significant decrease in both revenue and gross margin in both the three and nine months ended September 30, 2024 from the comparable periods of 2023 reflect both a surge in revenue in 2023 in anticipation of the effectiveness of NEM 3.0 in April 2023 and a sharp decline in revenue resulting from the effectiveness of NEM 3.0.
Notice of Noncompliance with Nasdaq Continued Listing Standards
As reported on Form 8-K current reports that we filed with the SEC on October 29, 2024 and November 1, 2024, on October 22, 2024, we received a notice from The Nasdaq Stock Market that we do not meet the Nasdaq Global Market continued listing requirement that we maintain a minimum market value of listed securities of $50,000,000, and on October 24, 2024, we received a notice from Nasdaq that we do not meet the Nasdaq Global Market continued listing requirement that we maintain a minimum bid price of $1 per share. We have 180 days from the date of each notice to become compliant. These 180-day periods expire on April 21, 2025 and April 22, 2025, respectively. We cannot assure you that we will be able to comply with the Nasdaq continued listing requirements, and our failure to comply would result in our common stock being delisted from Nasdaq which could have a material adverse effect upon our operations, including our ability to raise funds in the equity market.
| 42 |
| Table of Contents |
Overview
We are an integrated solar and renewable energy company. A solar energy system retains the direct current (DC) electricity from the sun and converts it to alternating current (AC) electricity that can be used to power residential homes and commercial businesses. The solar business is based on the ability of the users of solar energy systems to save on energy costs and reduce their carbon imprint as compared with power purchased from the local electricity utility company. We were founded in 2008 to engage in the solar business in the United States, where our business is primarily conducted. Our primary business consists of (i) the sale and installation of photovoltaic and battery backup systems for residential and commercial customers, (ii) financing the sale of its photovoltaic and battery backup systems, and (iii) sales of LED systems and services to government and commercial users.
In 2015, we commenced operations in the PRC. We did has not generate any revenue from our China segment since 2022, and the China segment does not have any projects or agreements as of the date of this report. All of our revenue for the three and nine months ended September 30, 2024 and 2023 was generated by our United States segment, and our cost of revenue related to our United States segment.
We are seeking to offset our decline in residential solar sales in California for the three and nine months of 2024 as compared with the comparable periods of 2023 by marketing commercial sales of larger systems to commercial users both in California and in other states; however, we cannot assure you that we will be successful in marketing to commercial users. As of the date of this report, we do not have any contacts for major commercial solar projects. Although we have a non-binding letter of intent with respect to one proposed project and a non-binding term sheet with respect to a second proposed project, both of these proposed projects are subject to the negotiation of development agreements with the owners of the property on which the solar system is to be installed, the identification of a financing source to provide the full financing for each project, the negotiation and execution of an agreement with the financing sources, who would own the project on completion, and the negotiation and execution of a power purchase agreement between the property owner (and in the case of one of these projects, the tenant) and the financing source as the project owner for the purchase of the electricity generated by the project. We cannot assure you that either of these projects or any other projects will be completed or that we will be successful in developing our commercial business as planned
Inflation and Supply Chain Issues
Prior to mid-to-late 2021, our business was not impacted by inflation or supply chain issues. With the recent inflationary pressures combined with the world-wide supply chain issues, our business is subject to the inflationary pressure and we were subject to supply chain issues that were affecting many domestic and foreign companies, and we expect that the inflationary pressures will continue to affect our ability to sell our products, the price at which can sell products in both the United States and China and our gross margin in both the United States and China. To the extent that we are not able to raise our prices or to the extent that we cannot accurately project our costs when we set our prices, our gross margin and the results of our operations will be impacted.
Polysilicon is an essential raw material in the production of solar power products, principally solar panels. The costs of silicon wafers and other silicon-based raw materials have accounted for a large portion of the costs associated with solar panels. Although the price of silicon had declined in recent years, increases in the price of polysilicon have resulted in increases in the price of wafers, leading to increases in our costs. Due to the volatile market prices, we cannot assure you that the price of polysilicon will remain at its current levels particularly in view of inflationary pressures, especially if the global solar power market gains its growth momentum. Moreover, in the event of an industry-wide shortage of polysilicon, we may experience late or non-delivery from suppliers and it may be necessary for us to purchase silicon raw materials of lower quality that may result in lower efficiencies and reduce its average selling prices and revenues. We currently are able to obtain the raw material we request, although the prices pay are increasing as a result of the inflationary pressures.
The inflationary pressures that are affecting us are not unique to our industry, and relate to the cost of raw materials, labor costs generally and the price at which we can sell our products. Because solar energy can be seen as a way to provide a homeowner with relief from the increasing utility prices for electricity, the market for solar systems generally, and our business specifically, has enabled us to sell solar systems. Thus, the effects of inflation may also affect the marketability of our solar systems to residential users which are also impacted by the effects of NEM 3.0
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| Table of Contents |
Our cost of revenue per watt of solar systems, which makes up approximately 80% of our costs, increased approximately 47.7% during the nine months ended September 30, 2024 compared to the same period in 2023. We have increased the price of solar system installations in our United States segment to offset the increase in cost in 2024, 2023 and during the first half of 2022. Although we do not have any data as to the effect of higher utility costs on purchases of solar systems, it has been our experience during the years ended December 31, 2023 and 2022 that, as inflationary pressures are increasing the cost of electricity generally, our domestic business grew as homeowners are seeking alternatives to what they see as high utility bills, although, as discussed above, the effects of NEM 3.0 have resulted in a significant decline in U.S. revenues for solar systems. As a result, we have been able to increase our prices, which reduced the effect of increased cost of raw materials and the general increase in overhead costs. Our gross margin from United States operations decreased from 19.6% for the nine months ended September 30, 2023 to 8.3% for the nine months ended September 30, 2024. The effect of increased costs on our margin was reduced because we were able to increase prices; although our gross margin was affected by both the $1.3 million of stock-based compensation described above under “Elimination of Forfeiture Provisions of Options upon Initial Public Offering” and the 63% decrease in revenues which was not accompanied by a comparable decrease in cost of revenues. Competitive factors limit the amount we can increase our prices, but our price increases reduced what would otherwise have been a greater decline in gross margin for the nine months ended September 30, 2024. If our prices are too high, the residential customer may not see the value of installing a solar system. We are seeking to reduce the effect of increased prices in raw materials by purchasing in greater quantities. However, to the extent inflation continues or increases, we may not be able to raise prices sufficiently to prevent a further significant decline in our gross margins and the results of our operations.
Compensation costs per employee, excluding stock-based compensation, for sales, marketing and administrative personnel in our United States segment increased approximately 19% for the nine months ended September 30, 2024 compared to the same period in 2023 in response to the increased cost of retaining and attracting talent, and such costs may continue to increase as labor costs in California continue to increase as a result of the inflationary pressures. In addition, to the extent that inflationary pressure affects our cost of revenue and general overhead, we may face the choice of raising prices to try and maintain our margins or reduce or maintain our price structure to generate business. In addition, to the extent that inflationary pressure affects our cost of revenue and general overhead, we may face the choice of raising prices to try and maintain our margins or reduce or maintain our price structure to meet competition which would resulting in a lower gross margin and a drop in operating income. Supply chain issues have caused us to periodically stock up on components such as solar panels and battery systems to ensure an adequate supply to meet expected demand, putting pressure on our cash flow. We do not believe that the supply chain issues that affected our operations in prior periods are currently affecting us. We cannot assure you that such delays and increased costs will not affect our business in the future.
We are seeking to address the inflationary pressures by seeking to cut overhead expenses where possible and raising prices to levels that we believe are both competitive and attractive to customers in view of the increases in utility prices in California and maintaining an inventory of raw materials to enable us to better price our products and by marketing effort directed at commercial sales. We believe that our available cash and cash equivalents and short-term investments will enable us in dealing with the effects of inflation on our business.
To the extent that the United States government imposes tariffs on products imported from China or any other foreign country and we are not able to obtain comparable products at a lower cost from domestic suppliers, our costs of these products may increase, and, depending on the tariff, such increase may be substantial. Such increases may impact both our ability to sell our systems and the price we are able to charge for systems which we sell, which could impair our margins.
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Results of Operations
The following tables set forth information relating to our operating results for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands) and as a percentage of revenue:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||||||||||||||||||
|
| Dollars |
|
| % |
|
| Dollars |
|
| % |
|
| Dollars |
|
| % |
|
| Dollars |
|
| % |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Solar energy sales (US) |
| $ | 5,132 |
|
|
| 81.1 | % |
| $ | 13,326 |
|
|
| 93.4 | % |
| $ | 12,907 |
|
|
| 78.0 | % |
| $ | 39,354 |
|
|
| 93.9 | % |
LED sales (US) |
|
| 1,110 |
|
|
| 17.5 | % |
|
| 823 |
|
|
| 5.8 | % |
|
| 3,359 |
|
|
| 20.3 | % |
|
| 2,125 |
|
|
| 5.1 | % |
Financing (US) |
|
| 89 |
|
|
| 1.4 | % |
|
| 125 |
|
|
| 0.8 | % |
|
| 284 |
|
|
| 1.7 | % |
|
| 416 |
|
|
| 1.0 | % |
Total revenues |
|
| 6,331 |
|
|
| 100.0 | % |
|
| 14,274 |
|
|
| 100.0 | % |
|
| 16,550 |
|
|
| 100.0 | % |
|
| 41,895 |
|
|
| 100.0 | % |
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar energy sales |
|
| 4,118 |
|
|
| 65.0 | % |
|
| 9,631 |
|
|
| 67.5 | % |
|
| 12,201 |
|
|
| 73.8 | % |
|
| 32,092 |
|
|
| 76.7 | % |
LED sales |
|
| 956 |
|
|
| 15.1 | % |
|
| 594 |
|
|
| 4.1 | % |
|
| 2,968 |
|
|
| 17.9 | % |
|
| 1,602 |
|
|
| 3.7 | % |
Total cost of revenues |
|
| 5,074 |
|
|
| 80.1 | % |
|
| 10,225 |
|
|
| 71.6 | % |
|
| 15,169 |
|
|
| 91.7 | % |
|
| 33,694 |
|
|
| 80.4 | % |
Gross profit |
|
| 1,257 |
|
|
| 19.9 | % |
|
| 4,049 |
|
|
| 28.4 | % |
|
| 1,381 |
|
|
| 8.3 | % |
|
| 8,201 |
|
|
| 19.6 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing (US) |
|
| 140 |
|
|
| 2.2 | % |
|
| 300 |
|
|
| 2.1 | % |
|
| 392 |
|
|
| 2.4 | % |
|
| 964 |
|
|
| 2.3 | % |
General and administrative (US) |
|
| 3,517 |
|
|
| 55.6 | % |
|
| 2,188 |
|
|
| 15.3 | % |
|
| 24,242 |
|
|
| 146.5 | % |
|
| 6,565 |
|
|
| 15.7 | % |
General and administrative (China) |
|
| 163 |
|
|
| 2.5 | % |
|
| 640 |
|
|
| 4.5 | % |
|
| 591 |
|
|
| 3.5 | % |
|
| 136 |
|
|
| 0.3 | % |
Goodwill impairment (China) |
|
| 7,464 |
|
|
| 117.9 | % |
|
| - |
|
|
| 0.0 | % |
|
| 7,464 |
|
|
| 45.1 | % |
|
| - |
|
|
| 0.0 | % |
Total operating expenses |
|
| 11,284 |
|
|
| 178.2 | % |
|
| 3,128 |
|
|
| 21.9 | % |
|
| 32,689 |
|
|
| 197.5 | % |
|
| 7,665 |
|
|
| 18.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (US) |
|
| (2,400 | ) |
|
| (37.9 | )% |
|
| 1,561 |
|
|
| 10.9 | % |
|
| (23,253 | ) |
|
| (140.5 | )% |
|
| 672 |
|
|
| 1.6 | % |
Income (loss) from operations (China) |
|
| (7,627 | ) |
|
| (120.5 | )% |
|
| (640 | ) |
|
| (4.5 | )% |
|
| (8,055 | ) |
|
| (48.7 | )% |
|
| (136 | ) |
|
| (0.3 | )% |
Equity in income of solar project companies |
|
| 254 |
|
|
| 4.0 | % |
|
| 452 |
|
|
| 3.2 | % |
|
| 553 |
|
|
| 3.3 | % |
|
| 887 |
|
|
| 2.1 | % |
Gain on debt extinguishment |
|
| 13 |
|
|
| 0.2 | % |
|
| - |
|
|
| 0.0 | % |
|
| 289 |
|
|
| 1.7 | % |
|
| 13 |
|
|
| 0.0 | % |
Gain on early termination of lease |
|
| - |
|
|
| 0.0 | % |
|
| - |
|
|
| 0.0 | % |
|
| 77 |
|
|
| 0.5 | % |
|
| 4 |
|
|
| 0.0 | % |
Interest income |
|
| 206 |
|
|
| 3.3 | % |
|
| 18 |
|
|
| 0.1 | % |
|
| 363 |
|
|
| 2.2 | % |
|
| 53 |
|
|
| 0.1 | % |
Interest (expense) |
|
| (399 | ) |
|
| (6.3 | )% |
|
| (329 | ) |
|
| (2.3 | )% |
|
| (1,169 | ) |
|
| (7.1 | )% |
|
| (1,177 | ) |
|
| (2.8 | )% |
Other income (loss), net |
|
| 387 |
|
|
| 6.1 | % |
|
| 263 |
|
|
| 1.9 | % |
|
| 83 |
|
|
| 0.6 | % |
|
| 183 |
|
|
| 0.5 | % |
Income (loss) before income taxes |
|
| (9,566 | ) |
|
| (151.1 | )% |
|
| 1,325 |
|
|
| 9.3 | % |
|
| (31,112 | ) |
|
| (188.0 | )% |
|
| 499 |
|
|
| 1.2 | % |
Income tax provision (benefit) |
|
| 57 |
|
|
| 0.9 | % |
|
| (141 | ) |
|
| (1.0 | )% |
|
| (53 | ) |
|
| (0.3 | )% |
|
| 149 |
|
|
| 0.4 | % |
Net income (loss) |
|
| (9,623 | ) |
|
| (152.0 | )% |
|
| 1,466 |
|
|
| 10.3 | % |
|
| (31,059 | ) |
|
| (187.7 | )% |
|
| 350 |
|
|
| 0.8 | % |
Currency translation adjustment |
|
| 173 |
|
|
| 2.7 | % |
|
| (43 | ) |
|
| (0.3 | )% |
|
| (99 | ) |
|
| (0.6 | )% |
|
| (444 | ) |
|
| (1.0 | )% |
Comprehensive income (loss) |
| $ | (9,450 | ) |
|
| (149.3 | )% |
| $ | 1,423 |
|
|
| 10.0 | % |
| $ | (31,158 | ) |
|
| (188.3 | )% |
| $ | (94 | ) |
|
| (0.2 | )% |
Three and Nine Months Ended September 30, 2024 and 2023
The following table set forth information relating to our revenue and gross profit results for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Change |
|
| % Change |
|
| 2024 |
|
| 2023 |
|
| Change |
|
| % Change |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Solar energy sales (US) |
| $ | 5,132 |
|
| $ | 13,326 |
|
| $ | (8,194 | ) |
|
| (61.5 | )% |
| $ | 12,907 |
|
| $ | 39,354 |
|
| $ | (26,447 | ) |
|
| (67.2 | )% |
LED sales (US) |
|
| 1,110 |
|
|
| 823 |
|
|
| 287 |
|
|
| 34.9 | % |
|
| 3,359 |
|
|
| 2,125 |
|
|
| 1,234 |
|
|
| 58.1 | % |
Financing (US) |
|
| 89 |
|
|
| 125 |
|
|
| (36 | ) |
|
| (28.8 | )% |
|
| 284 |
|
|
| 416 |
|
|
| (132 | ) |
|
| (31.7 | )% |
Total revenues |
|
| 6,331 |
|
|
| 14,274 |
|
|
| (7,943 | ) |
|
| (55.6 | )% |
|
| 16,550 |
|
|
| 41,895 |
|
|
| (25,345 | ) |
|
| (60.5 | )% |
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar energy sales |
|
| 4,118 |
|
|
| 9,631 |
|
|
| (5,513 | ) |
|
| (57.2 | )% |
|
| 12,201 |
|
|
| 32,092 |
|
|
| (19,891 | ) |
|
| (62.0 | )% |
LED sales |
|
| 956 |
|
|
| 594 |
|
|
| 362 |
|
|
| 60.9 | % |
|
| 2,968 |
|
|
| 1,602 |
|
|
| 1,366 |
|
|
| 85.3 | % |
Total cost of revenues |
|
| 5,074 |
|
|
| 10,225 |
|
|
| (5,151 | ) |
|
| (50.4 | )% |
|
| 15,169 |
|
|
| 33,694 |
|
|
| (18,525 | ) |
|
| (55.0 | )% |
Gross profit |
| $ | 1,257 |
|
| $ | 4,049 |
|
| $ | (2,792 | ) |
|
| (69.0 | )% |
| $ | 1,381 |
|
| $ | 8,201 |
|
| $ | (6,820 | ) |
|
| (83.2 | )% |
| 45 |
| Table of Contents |
Revenues
Revenues for the three months ended September 30, 2024 were $6.3 million, a decrease of $7.9 million or 55.6% from $14.3 million in the three months ended September 30, 2023. The decrease resulted from a $8.2 million decrease in solar energy and battery sales, offset with a $287,000 increase in LED sales. Our revenue from solar systems decreased from $13.3 million for the three months ended September 30, 2023 to $5.1 million for the three months ended September 30, 2024, a 61.5% decrease. , primarily as a result of the change in the net metering regulations in April 2023 from NEM 2.0 to NEM 3.0, reflecting a significant surge in 2023 in the consumer demand for solar energy systems for which orders were placed prior to NEM 3.0 becoming effective, generating a backlog of orders which were mostly filled in 2023. The dramatic decrease in revenue in the three months ended September 30, 2024 also reflects the continued decrease in consumer demand for solar energy systems due to higher interest rates leading to higher borrowing costs as well as the ongoing economic inflation, the effect of which diminishes the appeal of solar as a cost-saving investment for the consumers, which is experienced by the solar industry generally. The decrease in the solar energy and battery sales in the three months ended September 30, 2024 reflects a 56.0% decrease in the number of systems completed and a 71.4% decrease in the wattages deployed. The number of completed systems and the wattages deployed in the three months ended September 30, 2023 reflects incremental business resulting from customers signing solar contracts for solar systems prior to the April 2023 NEM 2.0 deadline in California. During the three months ended September 30, 2024 and 2023, our battery sales were $208,000 and $124,000, respectively. Battery sales refer to the sale of batteries sold other than as part of a solar system.
Revenues for the nine months ended September 30, 2024 were $16.5 million, a decrease of $25.3 million or 60.5% from $41.9 million in the nine months ended September 30, 2023. The decrease resulted from a $26.4 million decrease in solar energy and battery sales, offset by a $1.2 million increase in LED sales. Our revenue from solar systems decreased from $39.4 million for the nine months ended September 30, 2023 to $12.9 million for the nine months ended September 30, 2024, a 67.2% decrease. As with the decrease in revenue for the three months ended September 30, 2024, the significant decrease reflected the effect of the change in the net metering regulations in April 2023 from NEM 2.0 to NEM 3.0, the prior period sales reflected a significant surge in the consumer demand for solar energy systems generating a backlog of orders which were mostly filled in 2023 as well as the continued decrease in consumer demand for solar energy systems due to higher interest rates leading to higher borrowing costs as well as the ongoing economic inflation. The decrease in the solar energy and battery sales i in the nine months ended September 30, 2024 reflects a 64.8% decrease in the number of systems completed and a 74.9% decrease in the wattages deployed. The number of completed systems and the wattages deployed in the nine months ended September 30, 2023 reflects incremental business resulting from customers signing solar contracts for solar systems prior to the April 2023 effectiveness of NEM 3.0 deadline in California. During the nine months ended September 30, 2024 and 2023, our battery only sales were $816,000 and $858,000, respectively. Battery sales refer to the sale of batteries sold other than as a part of a solar system.
We expect the revenue from our residential sales to decrease in 2024, but we are looking to offset the decrease with commercial sales and, commencing in the second quarter of 2024, sales to residential customers through third party leasing companies which can offer favorable terms to customers when compared with third party financing during a time of high interest rates.
Our LED revenue increased by $287,000 or 34.9% to $1.1 million for the three months ended September 30, 2024 from $823,000 for the three months ended September 30, 2023, and by $1.2 million, or 58.1%, to $3.4 million for the nine months ended September 30, 2024 from $2.1 million for the nine months ended September 30, 2023, primarily resulting from the increase in the number of LED projects. LED revenues include LED product sales and LED consulting revenues and are expected to continue to fluctuate based on the number of LED projects awarded which is based on the bidding process and specific customer purchase requirements and timing. The revenue trend from our LED business therefore tends to fluctuate period to period.
We have not originated any loans to our solar customers since early 2020. As a result, our finance revenue for the three months ended September 30, 2024 and 2023 was $89,000 and $125,000, respectively, and for the nine months ended September 30, 2024 and 2023 was $284,000 and $416,000, respectively, from our portfolio of solar loans. Finance revenue will decrease as loans in our portfolio are paid and not replaced by new loans.
Cost of revenue and gross profit
Our cost of revenue for the three months ended September 30, 2024 was $5.4 million, a decrease of $5.2 million, or 50.4% from $10,225 for the three months ended September 30, 2023, reflecting the decrease in revenues. Our cost of revenue for the nine months ended September 30, 2024 was $15.2 million, a decrease of $18.5 million, or 55.0% from $33.7 million for the nine months ended September 30, 2023, reflecting the decrease in revenues. During the nine months ended September 30, 2024, we recognized a one-time non-cash stock-based compensation expense of approximately $1.3 million in cost of revenue as a result of performance options vesting upon our initial public offering on February 12, 2024. Excluding this one-time stock-based compensation expense, cost of revenue decreased 58.7% from $33.7 million in the nine months ended September 30, 2023 to $13.9 million in the nine months ended September 30, 2024. Gross margin decreased to 19.9% for the three months ended September 30, 2024 from 28.4% in the three months ended September 30, 2023, and 8.3% for the nine months ended September 30, 2024 from 19.6% in the nine months ended September 30, 2023, primarily as result of the decreased sales in the current period while the labor components of the cost remain fixed which adversely impacted the gross margin. We have no cost of revenue with respect to interest income on customer loans.
| 46 |
| Table of Contents |
Operating expenses
Sales and marketing expenses for the three months ended September 30, 2024 decreased to $140,000, a decrease of $160,000, or 53.3%, from $300,000 in the comparable period of 2023. Sales and marketing expenses were 2.2% of revenue for the three months ended September 30, 2024 compared to 2.1% for the three months ended September 30, 2023. Sales and marketing expenses for our United States segment for the nine months ended September 30, 2024 decreased to $392,000, a decrease of $571,000, or 59.3%, from $964,000 in the comparable period of 2023. Sales and marketing expenses in the United States were 2.4% of revenue for the nine months ended September 30, 2024 compared to 2.3% for the nine months ended September 30, 2023. Our sales and marketing expenses in the United States may fluctuate from time to time based on the types of marketing and promotion initiatives we deploy. Our China segment did not incur sales and marketing expenses for the three and nine months ended September 30, 2024 and 2023.
General and administration expenses for the United States segment for the three months ended September 30, 2024 increased $1.3 million or 60.7% to $3.5 million compared to $2.2 million for the three months ended September 30, 2023, representing 55.6% of revenue for the three months ended September 30, 2024 compared to 15.3% of revenue for the three months ended September 30, 2023. The increase during the three months ended September 30, 2024 is principally attributed to the stock compensation expense recognized as a result of the vesting in August 2024 of 264,650 shares of restricted stock previously issued to two former consultants. Additionally, the quarter to quarter increase reflects the increase in compliance costs associated with being a publicly-traded company beginning in February 2024 and the incremental compensation related to full-time headcounts as we hired employees in 2023 to manage sales though dealers who are selling on the Company’s behalf. We have decreased our headcount as a result of the decrease in orders reflected in our reduced revenue in the 2024 period. The increase in the percentage in the three months ended September 30, 2024 is primarily attributed to the large decline in revenue in the 2024 period compared to the comparable prior of 2023.
During the nine months ended September 30, 2024, our United States operations recognized a one-time stock-based compensation expense of approximately $17.3 million in general and administrative expense as a result of performance options vesting of 5,898,137 option shares upon our initial public offering in February 2024 and the vesting in August 2024 of 264,650 restricted shares granted to two former consultants. Excluding the stock-based compensation expense, general and administrative expenses for the United States segment for the nine months ended September 30, 2024 increased by $406,000 to $7.0 million compared to $6.6 million for the nine months ended September 30, 2023. General and administrative expenses were 15.7% of revenue for the nine months ended September 30, 2023, compared to 42.1% for the nine months ended September 30, 2024. Our overall increase in general and administrative expenses in 2024 reflects the cost of compliance and other regulatory costs associated with being a public reporting company. All of our corporate overhead, other than overhead directly related to the China segment, is allocated to the United States segment.
General and administrative expenses relating to the China segment were $164,000 in the three months ended September 30, 2024 compared to $640,000 in the three months ended September 30, 2023, and $591,000 in the nine months ended September 30, 2024, as compared with $136,000 in the nine months ended September 30, 2023. During the nine months ended September 30, 2023, we had a $1.1 million recovery of previously reserved receivable on one of our projects for SPIC as a result of the settlement of a legal proceeding.
During the three and nine months ended September 30, 2024, as a result of the continued headwinds facing China's economy post the pandemic and the economic indicators seem to indicate further future contraction, all of which will have a direct impact on our ability to generate new businesses in our China segment in the foreseeable future, accordingly, we recognized a $7.5 million impairment loss related to goodwill that originated in our 2015 business combinations.
Income (loss) from operations
As a result of the factors described above, our loss from operations for the United States segment was $2.4 million for the three months ended September 30, 2024, compared to income from operations of $1.6 million for the three months ended September 30, 2023, and a loss from operations of $23.3 million for the nine months ended September 30, 2024, compared to income from operations of $673,000 in the nine months ended September 30, 2023. Our loss from operations for the China segment was $7.6 million for the three months ended September 30, 2024, compared to a loss from operations of $640,000 for the three months ended September 30, 2023, and a loss from operations of $8.1 million for the nine months ended September 30, 2024, compared to a loss from operations of $136,000 in the nine months ended September 30, 2023.
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The consolidated loss from operations was $10.0 million for the three months ended September 30, 2024 compared to a consolidated income from operations of $920,000 for the three months ended September 30, 2023, and a consolidated loss from operations of $31.3 million for the nine months ended September 30, 2024 compared to a consolidated income from operations of $537,000 for the nine months ended September 30, 2023.
Equity in income (loss) from unconsolidated entities
Equity in income from unconsolidated entities relates to our China segment and comprises the equity in income from three unconsolidated project companies in which we have a non-controlling 30% interest. The equity in income reported for the three months ended September 30, 2024 was $254,000 compared to $452,000 in the three months ended September 30, 2023, a decrease of $(198,000) or 43.8%. The equity in income for the nine months ended September 30, 2024 was $553,000, compared to $887,000 in the nine months ended September 30, 2023, a decrease of $334,000 or 37.7%. The change period over period correlates with the lower power production in the Guizhou region in China, which can vary from year to year depending on the weather.
Gain on debt extinguishment
Gain on debt extinguishment for the three months ended September 30, 2024 was $13,000 and for the nine months ended September 30, 2024 was $289,000. During the three months ended September 30, 2024, we exchanged a 3% secured EB-5 notes payable to related party in principal amount of $500,000 to 4% convertible notes, resulting in gain on debt extinguishment of approximately $13,000. During the nine months ended September 30, 2024, we exchanged $5.5 million of secured EB-5 notes payable to related party to 4% convertible notes in the same principal amount, resulting in gain on debt extinguishment of $147,000, and settled $500,000 principal amount of 4% convertible note for a gain of approximately $142,000. The gain on debt extinguishment for the three months ended September 30, 2023 was zero and for the nine months ended September 30, 2023 was $13,000, representing the gain on exchange of $500,000 principal amount of EB-5 notes for a convertible note in the same principal note.
Interest expense, net
Interest expense, net, for the three months ended September 30, 2024 was $193,000, a decrease of $118,000 or 37.9%, from the three months ended September 30, 2023. Interest expense, net, for the nine months ended September 30, 2024 was $805,000, a decrease of $319,000, or 28.4%, from the nine months ended September 30, 2023. Our interest expense in the nine months ended September 30, 2024 primarily includes interest at 3% on two loans from related parties in the United States with a total principal balance of $11.5 million at September 30, 2024, interest at 4% on convertible notes issued to former limited partners of CEF in transactions in which the former limited partners of CEF accepted a 4% convertible note issued by SolarMax and the subsidiary that borrowed the funds from CEF with an aggregate principal balance of $16.3 million at September 30, 2024, interest at 8% on promissory notes issued to SMX Property (a related party) due in October 2024 with a principal balance of $1.4 million at September 30, 2024, interest at 6% on a promissory note issued to an unrelated individual due in December 2024 with a principal balance of $2.0 million at June 30, 2024, and interest at 12% on a promissory note issued to an unrelated investment company due in November 2024 with a principal balance of $900,000. The convertible notes issued to the former limited partners of CEF were issued as payment of the former limited partner’s capital account in CEF and replace debt of an equal amount that had been due to CEF. The notes are secured by the same collateral as the notes to CEF. Our interest income in the nine months ended September 30, 2024 includes interest earned on $7.0 million promissory notes receivable at 8.0% in the United States segment due June 1, 2024, extended to September 25, 2024 and further extended to December 31, 2024, and interest earned on RMB 5.0 million (approximately $688,000) promissory notes receivable at 5% in the China segment due June 25, 2024, extended to September 25, 2024 and further extended to December 25, 2024.
Other income (expenses), net
During the three months ended September 30, 2024, other income, net was $387,000 consisting primarily of $371,000 of foreign currency transaction gains for our United States segment intercompany receivable denominated in the Chinese currency. During the three months ended September 30, 2023, other income, net was $263,000 consisting of $277,000 of sublease income, partially offset by $57,000 of foreign currency transaction losses for our United States segment intercompany receivable denominated in the Chinese currency.
During the nine months ended September 30, 2024, other income, net was $81,000 consisting primarily of a $85,000 of foreign currency transaction gains for our United States segment intercompany receivable denominated in the Chinese currency, a $30,000 loss associated with the write-off of legal settlement receivable as a result of the debtor's bankruptcy, and a gain on disposal of property in the amount of $14,000. During the nine months ended September 30, 2023, other expense was $182,000, consisting primarily of $264,000 of gain on insurance settlement related the fire claim at the Riverside headquarters for the United States segment, $48,000 of income related to the foreign currency transaction gain for our United States segment intercompany receivable denominated in the Chinese currency, offset with $17,000 of expense related to a legal settlement involving a former employee.
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Income tax benefit (provision)
For the three months ended September 30, 2024 and 2023, our United States segment reported an income tax expense of $0 and $0, respectively, attributable to state minimum tax liabilities. For the nine months ended September 30, 2024 and 2023, our United States segment reported an income tax expense of $6,000 and $6,000, respectively, attributable to minimum state tax liabilities.
For the China segment, an income tax benefit of approximately $57,000 and an income tax expense of $141,000 was reported for the three months ended September 30, 2024 and 2023, respectively. For the China segment, an income tax benefit of approximately $59,000 and an income tax expense of $143,000 was reported for the nine months ended September 30, 2024 and 2023, respectively, arising from profitable operations subject to China income tax.
Net income (loss)
As a result of the foregoing, we had consolidated net loss of $9.6 million or $(0.21) per share (basic and diluted) for the three months ended September 30, 2024, compared with a consolidated net income of $1.5 million or $0.04 per share (basic and diluted) for the three months ended September 30, 2023.
As a result of the foregoing, we had consolidated net loss of $31.1 million, or $(0.71) per share (basic and diluted), for the nine months ended September 30, 2024, compared with a consolidated net income of $0.3 million, or $0.01 per share (basic and diluted), for the nine months ended September 30, 2023.
Currency translation adjustment
Although our functional currency is the U.S. dollar, the functional currency of our China subsidiaries is the Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end exchange rates for assets and liabilities, and average exchange rates for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and reflects changes in the exchange rates between U.S. dollars and RMB.
As a result of foreign currency translations, which are non-cash adjustments, we reported net foreign currency translation losses of $173,000 and $43,000 for the three months ended September 30, 2024 and 2023, respectively, and losses of $99,000 and $444,000 for the nine months ended September 30, 2024 and 2023, respectively.
Liquidity and Capital Resources
The following tables show consolidated cash flow information for the nine months ended September 30, 2024 and 2023 (dollars in thousands):
|
| Nine Months Ended September 30, |
|
| $ Increase |
| ||||||
|
| 2024 |
|
| 2023 |
|
| (Decrease) |
| |||
Consolidated cash flow data: |
|
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) operating activities |
| $ | (7,819 | ) |
| $ | (389 | ) |
| $ | (7,430 | ) |
Net cash provided by (used in) investing activities |
|
| (7,692 | ) |
|
| (6 | ) |
|
| (7,686 | ) |
Net cash provided by (used in) financing activities |
|
| 13,856 |
|
|
| 22 |
|
|
| 13,834 |
|
Net increase (decrease) in cash and cash equivalents and restricted cash |
|
| (1,742 | ) |
|
| 23 |
|
|
| (1,765 | ) |
Net increase (decrease) in cash and cash equivalents and restricted cash excluding foreign exchange effect |
| $ | (1,655 | ) |
| $ | (374 | ) |
| $ | (1,281 | ) |
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2024 was $7.8 million, compared to net cash used by operating activities for the nine months ended September 30, 2023 of $0.4 million. The cash used in operations for the nine months ended September 30, 2024, resulting from our net loss of $31.1 million, increases in non-cash expense from increases of $18.5 million in stock-based compensation expenses and an increase of $7.5 million in China goodwill impairment loss, and an increase of $3.4 million in cash use for our operating assets and liabilities. During the nine months ended September 30, 2024, our operating assets and liabilities used $3.5 million in cash, compared to $1.8 million of cash used in the nine months ended September 30, 2023.
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Net cash used by operations for the nine months ended September 30, 2023 of $389,000 resulted from net loss of $350,000, increased by a $2.0 million decrease in cash from contract assets, $3.6 million decrease in cash from other receivables and current assets, with an offset from $740,000 increase in cash from accounts receivable, $3.1 million increase in cash from customer loans receivable, $1.6 million increase in cash from inventories, $27,000 increase in cash from other assets, $1.4 million increase in cash from accounts payable, $1.0 million decrease in cash from operating lease liabilities, $2.3 million increase in cash from contract liabilities, $3.5 million decrease in cash from accrued expenses and other payables, and $1.1 million decrease in cash from other liabilities. We expect the fluctuations of working capital over time to vary based on the construction status and the related contractual billings of the projects in progress.
Non-cash adjustments changes:
| ● | $334,000 net increase resulting from equity in income from our equity investments. |
|
|
|
| ● | $13,000 net decrease in depreciation and amortization expense which includes loan and debt discounts amortization. |
|
|
|
| ● | $276,000 net decrease from the reduction in gain on debt extinguishment. |
|
|
|
| ● | $73,000 decrease from the gain on early termination of leases |
|
|
|
| ● | $240,000 decrease in expenses associated with loss provisions for bad debts, loan losses, inventories, warranty, customer care and production guaranty. |
|
|
|
| ● | $102,000 decrease in deferred income taxes. |
|
|
|
| ● | $18.5 million increase in stock-based compensation expense |
|
|
|
| ● | $7.5 million increase in goodwill impairment loss |
Changes in operating assets and liabilities:
| ● | $3.3 million increase in net cash inflow from accounts receivable, other receivables and current assets |
|
|
|
| ● | $1.9 million decrease in net cash inflow from inventories. |
|
|
|
| ● | $1.4 million decrease in net cash inflow from customer loans receivable. |
|
|
|
| ● | $2.0 million decrease in cash inflows from accounts payable. |
|
|
|
| ● | $0.9 million increase in cash from accrued expenses and other payables and other liabilities. |
|
|
|
| ● | $2.3 million decrease in net cash from contract liabilities related to projects for which the performance obligations have not been satisfied under the revenue recognition standard which became effective January 1, 2019. |
|
|
|
| ● | $2,137,000 increase in net cash from contract assets related to projects for which the performance obligations have not been satisfied under the revenue recognition standard which became effective January 1, 2019. |
|
|
|
| ● | $57,000 decrease in net cash from operating lease liabilities. |
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Investing Activities
Net cash used by investing activities for the nine months ended September 30, 2024 was approximately $7.7 million, consisting of $7.7 million of short-term investment in three promissory notes (of which $713,000 relates to the China segment), offset by $21,000 of cash proceeds received from disposal of property and equipment. Net cash used by investing activities for the nine months ended September 30, 2023 was 6,000, consisting of cash received of $22,000 related to the disposal of property and equipment, offset by $28,000 used in the purchase of property and equipment.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2024 was $13.9 million, consisting of $18.6 million of net cash proceeds from the initial public offering completed in February and March 2024, $900,000 loan proceeds from a new short term borrowing, offset by $5.3 million principal payments on convertible notes in the United States segment.
Net cash provided by financing activities for the nine months ended September 30, 2023 was $22,000, consisting of $4.1 million principal payments on convertible notes in the United States segment, $40,000 payments on other borrowings and equipment leases in the United States segment, and $2.2 million payment to Uonone, offset by $6.7 million of proceeds from Uonone, related to legal settlement received by SolarMax on Uonone’s behalf in the China segment.
Cash and Cash Equivalents and Restricted Cash
The following table sets forth, our cash and cash equivalents and restricted cash held by our United States and China segments at September 30, 2024 and December 31, 2023 (dollars in thousands):
|
| September 30, 2024 |
|
| December 31, 2023 |
| ||
|
|
|
|
|
|
| ||
US Segment |
|
|
|
|
|
| ||
Insured cash |
| $ | 887 |
|
| $ | 819 |
|
Uninsured cash |
|
| 155 |
|
|
| 813 |
|
|
|
| 1,042 |
|
|
| 1,632 |
|
China Segment |
|
|
|
|
|
|
|
|
Insured cash |
|
| 109 |
|
|
| 296 |
|
Uninsured cash |
|
| - |
|
|
| 966 |
|
|
|
| 109 |
|
|
| 1,262 |
|
Total cash and cash equivalents & restricted cash |
|
| 1,151 |
|
|
| 2,894 |
|
Less: Cash and cash equivalents |
|
| 871 |
|
|
| 2,539 |
|
Restricted cash |
| $ | 280 |
|
| $ | 355 |
|
We currently do not plan to repatriate any cash or earnings from any of our non-United States operations because we intend to utilize such funds to expand our China operations. Therefore, we do not accrue any China exit taxes related to the repatriation.
Under applicable PRC law and regulations, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated after-tax profits, if any, each year, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital before they may pay dividends. We do not believe that this restriction will impair our operations since we do not anticipate that we will use the cash generated from our PRC operations in those operations and we do not plan to repatriate such funds to the United States.
We invested $7,000,000 from the proceeds of our initial public offering in an 8% promissory note issued by Webao Limited, a Hong Kong based social media company. The initial maturity was June 1, 2024 and, at the request of the maker, it was extended to September 25, 2024 and further extended to December 31, 2024. Our China segment invested RMB 5,000,000, or approximately $688,000, in a 5% note issued by Qingdao Xiaohuangbei Technology Co., Ltd., a PRC-based company. The initial maturity was June 25, 2024 and, at the request of the maker, it was extended to September 25, 2024 and further extended to December 25, 2024. These notes are shown on our balance sheet as short-term investments. Maintaining any significant portion of our cash in non-financial institutions, which do not have any of the protections provided United States banks and which have requested extensions of the payment date, is subject to adverse conditions in the financial or credit markets, which could impact access to our invested cash and could adversely impact our operating liquidity and financial performance.
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Borrowings
At September 30, 2024, our current liabilities included secured convertible notes in the principal amount of $9.2 million, secured notes to related parties of $7.9 million and unsecured notes payable of $2.9 million.
Contemporaneously with the execution of our lease with 3080 Landlord and the termination of our former lease with SMXP, we issued two two-year 8% notes to SMXP. Both notes provide for quarterly payments of interest during the term with the principal being due at maturity on October 10, 2024 which was extended to October 10, 2025. One note, in the principal amount of $414,581, was issued to pay past due rent under our former lease with SMXP for the period June 1, 2022 to October 12, 2022. The second note, for $944,077 was issued to finance our security deposit ($809,209) and one month’s rent under our lease with 3080 Landlord.
In June 2024, our United States LED subsidiary borrowed $900,000 at a fixed interest rate of 12% from a non-affiliated party for working capital purposes. The note was due on November 10, 2024 which was extended to December 31, 2024 at our request.
EB-5 Loans
On January 3, 2012, CEF entered into a loan agreement with SREP, one of our United States subsidiaries, pursuant to which CEF advanced $45.0 million. On August 26, 2014, CEF II entered into a loan agreement with LED, another United States subsidiary, for up to $13.0 million. CEF II advanced $10.5 million pursuant to the agreement. The loans from CEF and CEF II bear interest at 3% per annum. The loans are secured by a security interest in the accounts and inventory of the borrowing subsidiary. CEF and CEF II are limited partnerships, the general partner of which is Inland Empire Renewable Energy Regional Center, a related party. The limited partners of both CEF and CEF II are investors who are not related parties who made a capital contribution to CEF or CEF II pursuant to the United States EB-5 immigration program. The EB-5 immigrant investor visa is a federal program that grants green cards and a path to citizenship to foreign investors who invest at least $500,000 toward job-creating projects. Under this program, which is administered by the United States Customs and Immigration Service, entrepreneurs (and their spouses and unmarried children under 21) are eligible to apply for a green card (permanent residence) if they make the necessary investment in a commercial enterprise in the United States and plan to create or preserve 10 permanent full-time jobs for qualified United States workers. We are a commercial enterprise that creates permanent full-time jobs in the United States.
The loans from CEF and CEF II become due, as to the investment of each limited partner, four years from the date of the loan and may be extended as may be necessary to meet applicable USCIS immigrant investor visa requirements, which will be the date that the limited partner is eligible for a green card. Under the limited partnership agreements for CEF and CEF II, the limited partners have the right to demand repayment of their capital account when the petition is approved, which demand may trigger a maturity of the loan from CEF or CEF II in the amount of the limited partner’s investment. The initial four-year term of notes in the principal amount of $55.5 million, which were issued to CEF and CEF II, and had expired prior to December 31, 2023 and are on extension until the limited partners meet applicable immigrant investor visa requirements. We cannot determine the period of the extensions. As of September 30, 2024, limited partners whose capital contributions funded loans of $41.5 million had received their green card approval and their extensions expired and one limited partner whose capital contribution funded $500,000 had withdrawn from CEF II and the limited partner’s capital contribution was returned. The petitions of limited partners of CEF whose capital contribution funded loans of $3.5 million are pending.
As the loans matured and the limited partners requested return of their capital contribution, we offered the limited partners, in lieu of the payment by the limited partnership, a convertible note with a term of five years, with 20% of the principal amount being due on each of the first, second, third, fourth and fifth anniversaries of the date of issuance. The notes are secured by the same assets that secured the notes issued to CEF. As of September 30, 2024, we had issued convertible notes in the principal amount of $37.5 million to former limited partners of CEF, of which principal payments of $21.1 million had been made on the anniversary of the respective dates of issuance, and convertible notes in the principal amount of $2.5 million had been purchased by us for $1.8 million, leaving convertible notes in the principal amount of $16.3 million outstanding. As of September 30, 2024, notes to CEF and CEF II in the aggregate principal amount of $11.5 million were outstanding and convertible notes in the principal amount of $16.3 million were outstanding.
Other Debt Obligations
We have a loan for $2.0 million from an unrelated party bearing interest rate at 6% per annum which becomes due at December 31, 2024. This loan had been extended periodically since the original maturity date of April 30, 2021.
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Contractual Obligations
Borrowings
Principal maturities for the financing arrangements as of September 30, 2024 are as follows (dollars in thousands):
For the year ending December 31, |
| Bank and Other Unsecured Loans |
|
| EB5 Related Party Loans |
|
| Notes Payable - Related Party |
|
| Convertible Notes |
|
| Total |
| |||||
2024 (remainder of) |
| $ | 2,900 |
|
| $ | 2,500 |
|
| $ | 1,359 |
|
| $ | 3,680 |
|
| $ | 10,439 |
|
2025 |
|
| - |
|
|
| 4,000 |
|
|
| - |
|
|
| 6,190 |
|
|
| 10,190 |
|
2026 |
|
| - |
|
|
| 5,000 |
|
|
| - |
|
|
| 2,990 |
|
|
| 7,990 |
|
2027 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,590 |
|
|
| 1,590 |
|
2028 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,100 |
|
|
| 1,100 |
|
Thereafter |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 700 |
|
|
| 700 |
|
Total |
| $ | 2,900 |
|
| $ | 11,500 |
|
| $ | 1,359 |
|
| $ | 16,250 |
|
| $ | 32,009 |
|
Operating Leases
Future minimum lease commitments for office facilities and equipment for each of the next five years as of September 30, 2024, are as follows (dollars in thousands):
For the year ending December 31, |
| Total |
| |
2024 (remainder of) |
| $ | 444 |
|
2025 |
|
| 1,726 |
|
2026 |
|
| 1,768 |
|
Total |
| $ | 3,938 |
|
Employment Agreements
On October 7, 2016, we entered into an employment agreement with our chief executive officer, David Hsu, for a five-year term commencing January 1, 2017 and continuing on a year-to-year basis unless terminated by us or Mr. Hsu on not less than 90 days’ notice prior to the expiration of the initial term or any one-year extension. The agreements provide for an annual salary with an increase of not less than 3% and an annual bonus in restricted stock and cash equal to a specified percentage of consolidated revenues for each year. Mr. Hsu’s annual salary for 2023 was $716,431, and his salary for 2024 is at the annual rate of $737,924. We also owe Mr. Hsu $675,000 as the cash payment in connection with his exchange of 1,348,213 restricted shares of common stock for options to purchase 1,428,432 shares of common stock at $5.01 per share and a cash payment of $675,000, which was initially payable by December 15, 2019 and has been extended and is now due commencing on February 27, 2025 in twelve equal monthly installments. In addition, at September 30, 2024, we owed Mr. Hsu $1,833,378, representing deferred salary from 2019, 2020, 2021, 2022, 2023, and 2024 and cash bonuses deferred from 2017 and 2018. Mr. Hsu waived his bonus for 2019, 2020, 2021, 2022, and 2023 as part of the suspension of incentive programs for key employees, and he agreed that the $1,833,378 deferred salary and bonus be paid in twelve equal monthly installments with the first payment becoming due on February 27, 2025.
Cash Requirements
We require substantial funds for our business, and we believe that the cash and cash equivalents and short-term investment, together with cash generated by our operations should enable us to meet our cash requirements for at least the twelve months from the date of this report. However, we cannot assure you that we will not require additional funds to meet our commitments or that funds will be available on reasonable terms, if at all. We have significant debt obligations which mature or may mature during the next year. We have extended our loan obligation to an unrelated third party for $2.0 million to December 31, 2024 and, with respect to the loans made under the EB-5 program, as described above, we are seeking to refinance the loans through the issuance of secured subordinated convertible notes to the limited partners of the lenders. We also have obligations to Mr. Hsu described above, approximately $2.5 million of which will be paid in twelve equal monthly installments with the first payment becoming due on February 27, 2025. We cannot assure you that we will be able to negotiate extensions to our loans or refinancing of our EB-5 debt. The willingness of the limited partners of CEF and CEF II to accept convertible notes rather than a cash payment of their investment in the limited partnership may be affected by their perception of our performance and the performance of our common stock, including our low stock price and the possibility of our being delisted from Nasdaq, as well as their perception that they could get a more favorable result with litigation. We cannot assure you that such financing will be available on acceptable, if any terms, which would impair our ability to develop our business. The low price of our common stock may make it difficult for us to issue convertible notes that are convertible at a discount from the market price of our common stock. Our financial statements for the year ended December 31, 2023 and the nine months ended September 30, 2024 have a going concern paragraph.
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Critical Accounting Estimates and Policies
The accounting policies described below are considered critical to obtaining an understanding of our consolidated financial statements because their application requires the use of significant estimates and judgments by management in preparing the consolidated financial statements. Management estimates and judgments are inherently uncertain and may differ significantly from actual results achieved. Management considers an accounting estimate to be critical if the estimate requires significant assumptions and changes in the estimate or, the use of alternative estimates, could have a material impact on our results of operations or financial position. For more information on our accounting policies, see “Notes to Consolidated Financial Statements—Note 2. Basis of Presentation and Summary of Significant Accounting Policies.”
Impairment assessment of goodwill
Nature of Estimates Required
We assess the carrying value of our long-lived assets and related intangibles for impairment at least annually and also whenever events or changes in circumstances indicate that the carrying value of the long-lived asset, or group of assets, may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the long-lived assets to the respective estimated future undiscounted cash flows. The estimated future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. If our analysis indicates that the carrying value of the long-lived assets is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value of the long-lived asset.
Key Assumptions and Approach Used
Goodwill is tested for impairment at least annually based on certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. When assessing goodwill for impairment, we consider the enterprise value and if necessary, the discounted cash flow model, which involves assumptions and estimates, including our future financial performance, weighted-average cost of capital and interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require us to perform a quantitative impairment test include a significant decline in the financial results, a significant decline in the enterprise value relative to our net book value, an unanticipated change in competition or the market share and a significant change in the strategic plans.
Our China segment did not complete any new projects in 2021, 2022 or 2023 and did not generate any revenue since 2022. As of September 30, 2024, we did not have any contracts for the China segment and we were no engaged in any active negotiations with respect to potential contracts. As a result of the continued economic downturn in China that directly impacts our ability to generate new businesses in the foreseeable future and the absence of any agreements or negotiations for agreements at September 30, 2024, we recognized an impairment charge for the entire balance of the goodwill for our China segment of $7.5 million for the three and nine months ended September 30, 2024.
Effect if Different Assumptions Used
Under different assumptions, there could be a likelihood that the fair value of our China segment is less than its carrying value and would require an impairment.
Allowance for credit and loan losses
Nature of Estimates Required
In adopting ASU 2016-13, we are required to estimate credit and loan losses based on a forward-looking methodology and, if needed, record a reserve for each of the following assets: accounts receivable, customer loans receivable and certain contract assets.
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Key Assumptions and Approach Used
In determining the expected loss, we make assumptions based on historical collection experience, current and forecasted economic and business conditions, and a review of the status of each customer’s financial asset account. Specifically, we estimate loss reserve based on the aging of the financial asset balances and the financial condition of customers and provide for specific allowance amounts for those customers that have a higher probability of default. With respect to our China segment, we review China’s current and future economic conditions along with its political landscape, and how these factors may affect our receivable from SPIC, a state-owned entity. We regularly monitor collection status of these financial assets through account reconciliation, payment tracking, customer’s financial condition and macroeconomics conditions.
Effect if Different Assumptions Used
We believe that assumptions not based on the use of historical collection experience, current and forecasted economic, political (China segment) and business conditions, and a review of the status of each customer’s financial asset account would be contra to the requirements of ASU 2016-13 and a departure from GAAP.
Income Taxes
Nature of Estimates Required
As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes for each jurisdiction in which we operate. This process involves estimating actual current period tax expense together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheets, including net operating loss and tax credit carryforwards. Certain estimates and assumptions are required to determine whether deferred tax assets can and will be utilized in future periods.
We take certain tax positions we believe are in accordance with the applicable tax laws. However, these tax positions are subject to interpretation by the Internal Revenue Service, state tax authorities and the courts. We determine uncertain tax positions in accordance with the authoritative guidance.
Key Assumptions and Approach Used
In determining whether it is more likely than not that all or some portion of net operating loss and tax credit carryforwards can be utilized, we analyze the trend of GAAP earnings and then estimates the impact of future taxable income, reversing temporary differences and available prudent and feasible tax planning strategies based on currently enacted tax laws.
Accounting for tax obligations requires management judgment. We use judgment in determining whether the evidence indicates it is more likely than not, based solely on the technical merits, that a tax position will be sustained, and to determine the amount of tax benefits to be recognized. Judgment is also used in determining the likelihood a tax position will be settled and possible settlement outcomes. In assessing uncertain tax positions we consider, among others, the following factors: the facts and circumstances of the position, regulations, rulings, and case law, opinions or views of legal counsel and other advisers, and the experience gained from similar tax positions. We evaluate uncertain tax positions at the end of each reporting period and make adjustments when warranted based on changes in fact or law.
Effect if Different Assumptions Used
Should a change in facts or circumstances, including a change in enacted tax legislation, lead to a change in judgment about the ultimate realizability of a deferred tax asset, we would record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in the provision for income taxes.
Actual income taxes may differ from the estimated amounts which could have a significant impact on the liabilities, revenue and expenses recorded in the financial statements. Significant judgment is required to determine the tax treatment of particular tax positions that involve interpretations of complex tax laws. Such liabilities are based on judgment and a final determination could take many years from the time the liability is recorded. Furthermore, settlement of tax positions included in open tax years may be resolved by compromises of tax positions based on current factors and business considerations that may result in material adjustments to income taxes previously estimated. For a discussion of current and deferred taxes, net operating losses and tax credit carryforwards, accounting for uncertainty in income taxes, unrecognized tax benefits, and tax disputes, see Note 19. Income Taxes of “Notes to Consolidated Financial Statements.”
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report at the reasonable assurance level due to the material weaknesses in our internal control over financial reporting described below.
Notwithstanding the material weakness, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the condensed consolidated financial statements included in this quarterly report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.
Material Weakness
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.
Lack of adequate controls enabling us to identify the change in the status of the permit-to-operate field in the system, which affects recognition of revenue, coupled with lack of any monitoring and review controls to identify changes to the permit-to-operate field resulted in a material audit adjustment during the quarter ended September 30, 2024. The adjustment to revenue in the third quarter was corrected in the financial statements included in this quarterly report. Additionally, a manual detective control related to the contract asset accrual calculation, which would have facilitated a review of the accrual against all previously billed projects to flag for projects previously billed, has not been designed by us.
Changes in Internal Control over Financial Reporting
Subsequently to the revenue adjustment described under “Material Weakness,” management added additional controls into its accounting processes and closing procedures and believes the additional controls will enable us to detect changes the error of this nature in the future. Further, the identified overstatement error has been remediated and corrected in the condensed consolidated financial statements for the periods ended September 30, 2024.
Other than the additional controls added to the revenue process to address the identified error caused by a unique situation and the underlying control deficiency uncovered during the three months ended September 30, 2024, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended September 30, 2024, the Company issued convertible notes in the principal amount of $5,500,000 to former limited partners of CEF and CEF II pursuant to exchange agreements with the former limited partners. These notes have a conversion price ranging from $0.66 per share to $9.07 per shares. The convertible notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as transactions not involving a public offering.
Item 5. Other Information
During the three months ended September 30, 2024, no officer or director adopted or terminated any contract, instruction or written plan for the purchase or sale of securities of the Company intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
Item 6. Exhibits
| Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS |
| Inline XBRL Instance Document. |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document. |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SOLARMAX TECHNOLOGY, INC |
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Date: November 14, 2024 | By: | /s/ David Hsu |
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| David Hsu, Chief Executive Officer |
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| (Principal Executive Officer) |
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| By: | /s/ Stephen Brown |
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| Stephen Brown, Chief financial Officer |
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| (Principal Financial Officer) |
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