SolarMax Technology Inc

Previous wording

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Data” and 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 elsewhere in our annual report on Form 10-K. All amounts in this report are in U.S. dollars, unless otherwise noted.

Current wording

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.

Previous wording

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. The gross proceeds of the offering were $18 million, prior to deducting the underwriting discounts, commissions and offering expenses payable by the Company. In addition, we granted the underwriters a 45-day option to purchase an additional 675,000 shares of common stock at the initial public offering price, less underwriting discounts and commissions, to cover over-allotments. 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.

Current wording

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.

Previous wording

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 in cost of revenues and $15.9 million is 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, represents the major portion of our $19.3 million loss for the three months ended March 31, 2024.

Current wording

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, represents the major portion of our $21.4 million loss for the six months ended June 30, 2024.

Previous wording

Our United States operations primarily consist of the sale and installation of photovoltaic and battery backup systems for residential and commercial customers, and sales of LED systems and services to government and commercial users. Prior to 2020, we also financed the purchase of solar equipment from us.

Current wording

Our United States operations primarily consist of the sale and installation of photovoltaic and battery backup systems for residential and commercial customers, and sales of LED systems and services to government and commercial users. Prior to 2020, we also provided financing for the purchase of solar equipment from us.

Previous wording

Our business in China is conducted through our subsidiaries, primarily ZHTH and ZHPV, and their subsidiaries. Our China operations consist primarily of identifying and procuring solar farm projects for resale to third parties and performing EPC services primarily for solar farm projects. Our China operations did not generate any revenue for the years ended December 31, 2023 and December 31, 2022. Our China segment last generated revenue for the year ended December 31, 2021, substantially all of which was generated in the second quarter of the year. As of the date of this report, we do not have any agreements relating to any projects in China.

Current wording

Our business in China is conducted through our subsidiaries, primarily ZHTH and ZHPV, and their subsidiaries. Our China operations consist primarily of identifying and procuring solar farm projects for resale to third parties and performing EPC services primarily for solar farm projects. Our China operations did not generate any revenue for the six months ended June 30, 2024 and the years ended December 31, 2023 and December 31, 2022. Our China segment last generated revenue for the year ended December 31, 2021, substantially all of which was generated in the second quarter of the year. As of the date of this report, we do not have any agreements relating to any projects in China.

Previous wording

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.

Current wording

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 decrease in revenue in both the three and six months ended June 30, 2024 from the comparable periods of 2023 reflect both a surge in revenue 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.

Previous wording

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 and supply chain issues, 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.

Current wording

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.

Previous wording

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 more solar systems. Thus, the effects of inflation may also affect the marketability of our solar systems to residential users.

Current wording

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.

Previous wording

Our cost of revenue per watt of solar systems, which makes up approximately 80% of our costs, increased approximately 27% during the three months ended March 31, 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 has grown as homeowners are seeking alternatives to what they see as high utility bills. 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. However, the changes in NEM 3.0 did not affect our business in 2023 as we believe homeowners purchased solar systems in anticipation of NEM 3.0, and our residential business is feeling the effects of the reduced value seen as a result of NEM 3.0. Our gross margin from United States operations decreased from 16.1% for the three months ended March 31, 2023 to 13.9% for the three months ended March 31, 2024, and increased from 16.7% for the year ended December 31, 2022 to 21% for the year ended December, 2023, and decreased from 19.8% for the year ended December 31, 2021 to 16.7% for the year ended December 31, 2022 as a result of the increase in the cost of raw materials. The effect of increased costs on our margin was reduced because we were able to increase prices. However, competitive factors limit the amount we can increase our prices, but our price increases reduced what would otherwise have been a decline in gross margin for the three months ended March 31, 2024 and for the year ended December 31, 2023, and, 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 significant decline in our gross margins and the results of our operations.

Current wording

Our cost of revenue per watt of solar systems, which makes up approximately 80% of our costs, increased approximately 51.1% during the six months ended June 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 15.0% for the six months ended June 30, 2023 to 1.2% for the six months ended June 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 six months ended June 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.

Previous wording

Compensation costs per employee, excluding stock-based compensation, for sales, marketing and administrative personnel in our United States segment increased approximately 19% for the three months ended March 31, 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.

Current wording

Compensation costs per employee, excluding stock-based compensation, for sales, marketing and administrative personnel in our United States segment increased approximately 19% for the six months ended June 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.

Previous wording

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. We believe that the proceeds of our initial public offering will provide us with funding to assist us in dealing with the effects of inflation on our business.

Current wording

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.

Previous wording

The following tables set forth information relating to our operating results for the three months ended March 31, 2024 and 2023 (dollars in thousands) and as a percentage of revenue:

Current wording

The following tables set forth information relating to our operating results for the three and six months ended June 30, 2024 and 2023 (dollars in thousands) and as a percentage of revenue:

Previous wording

Revenues for the three months ended March 31, 2024 were $5.8 million, a decrease of $7.1 million or 55% from $12.9 million in the three months ended March 31, 2023, all of which was generated by the United States segment. The decrease resulted primarily from a $7.4 million decrease in solar energy and battery sales. In our United States segment, our revenue from solar systems decreased from $12.1 million for the three months ended March 31, 2024 to $4.6 million for the three months ended March 31, 2024. The decrease in revenue in the three months ended March 31, 2024 reflects an increased interest by residential users of solar systems in early 2023 in anticipation of the implementation of NEM 3.0, as a result of which we generated a backlog of orders starting in early, all of which were filled during 2023. In addition, our revenues in the three months ended March 31, 2024 were impacted by unusually heavy and frequent rains in California, which affected both the residential users’ desire to purchase a solar system and our ability to install solar units. The decrease in the solar energy and battery sales in the United States segment in the three months ended March 31, 2024 reflects a 65% decrease in in the number of systems completed and a 74% decrease in the wattages deployed. The number of completed systems and the wattages deployed in the three months ended March 31, 2023 reflects incremental business resulting from customers signing solar contracts for solar systems prior to the April 2023 NEM 2.0 deadline in California. The decreases in the three months ended March 31, 2024 were impacted adversely by unusually frequent rain resulting in our inability to complete as many solar systems during the current period and an increase in interest rates since the same period last year. During the three months ended March 31, 2024 and 2023, our battery only sales were $238,000 and $387,000, 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 non-installment sales to decrease in 2024, but we believe we will offset most, or all, of the decrease with commercial sales and sales through third party leasing companies which can offer favorable terms to customers compared to third party financing during a time of high interest rates.

Current wording

Revenues for the three months ended June 30, 2024 were $4.5 million, a decrease of $10.3 million or 69.8% from $14.8 million in the three months ended June 30, 2023, all of which was generated by the United States segment. The decrease resulted from a $10.8 million decrease in solar energy and battery sales, offset with a $595,000 increase in LED sales. In our United States segment, our revenue from solar systems decreased from $14.0 million for the three months ended June 30, 2023 to $3.1 million for the three months ended June 30, 2024, a 77.6% decrease. As a result 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 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 June 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 are also experienced by the entire solar industry. The decrease in the solar energy and battery sales in the three months ended June 30, 2024 reflects a 74.7% decrease in the number of systems completed and a 83.6% decrease in the wattages deployed. The number of completed systems and the wattages deployed in the three months ended June 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. The decrease in the three months ended June 30, 2024 were also impacted adversely by an increase in interest rates and economic inflation, contributing to decreases in consumer demand for solar energy systems. During the three months ended June 30, 2024 and 2023, our battery sales were $374,000 and $347,000, respectively. Battery sales refer to the sale of batteries sold other than as part of a solar system.

Previous wording

During the three months ended March 31, 2024 and continuing through the date of this quarterly report, we did not generate any revenue in the China segment because there are no projects under construction as a result of the strict lockdown in China through the end of 2022 resulting from the resurgence of the pandemic, as a result of which we have not been able to negotiate new contracts with SPIC since the last project, which was completed in June 2021. Because we currently do not have any projects under contract for our China segment, we have neither revenue nor cost of revenue for our China segment for the three months ended March 31, 2024.

Current wording

During the six months ended June 30, 2024 and continuing through the date of this quarterly report, we did not generate any revenue in the China segment because there are no projects under construction as a result of the strict lockdown in China through the end of 2022 resulting from the resurgence of the pandemic, as a result of which we have not been able to negotiate new contracts with SPIC since the last project, which was completed in June 2021. Because we currently do not have any projects under contract for our China segment, we have neither revenue nor cost of revenue for our China segment for the three and six months ended June 30, 2024 and 2023.

Previous wording

Our LED revenue increased by $351,000, or 53%, to $1.0 million for the three months ended March 31, 2024 from $667,000 for the three months ended March 31, 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 is therefore not as consistent as our solar business, and LED revenue tends to fluctuate period to period.

Current wording

Our LED revenue increased by $595,000 or 93.7% to $1.2 million for the three months ended June 30, 2024 from $635,000 for the three months ended June 30, 2023, and by $946,000, or 72.7%, to $2.2 million for the six months ended June 30, 2024 from $1.3 for the six months ended June 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.

Previous wording

We have not originated any loans to our solar customers since early 2020. As a result, our finance revenue for the three months ended March 31, 2024 and 2023 was $102,000 and $151,000, respectively, from our portfolio of solar loans. Finance revenue will decrease as loans in our portfolio are paid and not replaced by new loans.

Current wording

We have not originated any loans to our solar customers since early 2020. As a result, our finance revenue for the three months ended June 30, 2023 and 2023 was $93,000 and $140,000, respectively, and for the six months ended June 30, 2024 and 2023 was $195,000 and $291,000, respectively, from our portfolio of solar loans. Finance revenue will decrease as loans in our portfolio are paid and not replaced by new loans.

Previous wording

During the three months ended March 31, 2024, our United States operations 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. Excluding this one-time stock-based compensation expense cost of revenue for our United States segment decreased 54% from $10.8 million in the three months ended March 31, 2023 to $5.0 million in the three months ended March 31, 2024, primarily as a result of the corresponding decrease in revenue in the United States segment. Gross margin for the United States segment decreased to 13.9% for the three months ended March 31, 2024 from 16.1% in the three months ended March 31, 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. Our China segment had no revenue and no cost of revenue for the three months ended March 31, 2024 and 2023.

Current wording

During the six months ended June 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 for our United States segment decreased 69.5% from $12.7 million in the three months ended June 30, 2023 to $3.9 million in the three months ended June 30, 2024, and 62.4% from $23.5 million in the six months ended June 30, 2023 to $8.8 million in the six months ended June 30, 2024, primarily as a result of the decrease in revenue, although the decrease in cost of revenue was not as great as the decrease in revenue as discussed below. Gross margin decreased to 13.2% for the three months ended June 30, 2024 from 14.1% in the three months ended June 30, 2023, and 1.2% for the six months ended June 30, 2024 from 15.0% in the six months ended June 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. Our China segment had no revenue and no cost of revenue for the three months ended June 30, 2024 and 2023, and the six months ended June 30, 2024 and 2023.

Previous wording

As a result of these factors, our overall gross margin for the three months ended March 31, 2024 was (8)% compared to 16.1% in the three months ended March 31, 2023, primarily resulting from the recognition of the one-time stock-based compensation expense of approximately $1.3 million. Excluding the stock-based compensation expense, our overall gross margin for the three months ended March 31, 2024 was 13.9% compared to 16.1% in the three months ended March 31, 2023.

Current wording

Excluding the stock-based compensation expense, our overall gross margin for the three months ended June 30, 2024 would be 13.2% compared to 14.1% in the three months ended June 30, 2023, and for the six months ended June 30, 2024 was 13.6% compared to 15.0% in the six months ended June 30, 2023.

Previous wording

Sales and marketing expenses for the three months ended March 31, 2024 decreased for our United States segment to $165,000, a decrease of $85,000, or 34%, from $250,000 in the comparable period of 2023. Sales and marketing expenses in the United States were 2.9% of revenue for the three months ended March 31, 2024 compared to 1.9% for the three months ended March 31, 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. Due to the nature of our EPC business in our China segment, the EPC contracts for solar farm projects are generally obtained through customer relationship with just a few corporate customers, with substantially all revenues for our China segment since the second half of 2019 being generated by agreements with SPIC, Accordingly, our China segment did not incur sales and marketing expenses for the three months ended March 31, 2024 and 2023.

Current wording

Sales and marketing expenses for the three months ended June 30, 2024 decreased to $87,000, a decrease of $327,000 or 79.0% from $414,000 in the comparable period of 2023. Sales and marketing expenses were 2.0% of revenue for the 2024 compared to 2.8% for the three months ended June 30, 2023. Sales and marketing expenses for the six months ended June 30, 2024 decreased for our United States segment to $252,000, a decrease of $412,000, or 62.0%, from $664,000 in the comparable period of 2023. Sales and marketing expenses in the United States were 2.5% of revenue for the six months ended June 30, 2024 compared to 2.4% for the six months ended June 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. Due to the nature of our EPC business in our China segment, the EPC contracts for solar farm projects are generally obtained through customer relationship with just a few corporate customers, with substantially all revenues for our China segment since the second half of 2019 being generated by agreements with SPIC, Accordingly, our China segment did not incur sales and marketing expenses for the three and six months ended June 30, 2024 and 2023.

Previous wording

During the three months ended March 31, 2024, our United States operations recognized a one-time stock-based compensation expense of approximately $15.9 million in general and administrative expense as a result of performance options vesting upon our initial public offering. Excluding the stock-based compensation expense, general and administrative expenses for the United States segment for the three months ended March 31, 2024 remained flat to the same period in 2023 at approximately $2.1 million. General and administrative expenses were 21% of revenue for the three months ended March 31, 2023, compared to 36% for the three months ended March 31, 2024. We expected an overall increase in general and administrative expenses in 2024 as a result of 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.

Current wording

During the six months ended June 30, 2024, our United States operations recognized a one-time stock-based compensation expense of approximately $15.9 million in general and administrative expense as a result of performance options vesting upon our initial public offering in February 2024. Excluding the stock-based compensation expense, general and administrative expenses for the United States segment for the six months ended June 30, 2024 increased by $403,000 to $4.8 million compared to $4.4 million for the six months ended June 30, 2023. General and administrative expenses were 15.8% of revenue for the six months ended June 30, 2023, compared to 46.8% for the six months ended June 30, 2024. We expected an overall increase in general and administrative expenses in 2024 as a result of 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.

Previous wording

General and administrative expenses relating to the China segment were $252,000 in the three months ended March 31, 2024, as compared with $(754) in the three months ended March 31, 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.

Current wording

General and administrative expenses relating to the China segment were $175,000 in the three months ended June 30, 2024 compared to $250,000 in the three months ended June 30, 2023, and $427,000 in the six months ended June 30, 2024, as compared with $(504,000) in the six months ended June 30, 2023. During the six months ended June 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.

Previous wording

We recognized a one-time stock-based compensation expense for the three months ending March 31, 2024 of approximately $17.2 million as a result of elimination of a forfeiture provision in outstanding options to purchase 5,898,137 shares of common stock at an average exercise price of $5.01 as a result of the termination of the forfeiture provisions as a result of our completion of our initial public offering.

Current wording

We recognized a one-time stock-based compensation expense for the six months ended June 30, 2024 of approximately $17.2 million as a result of elimination of a forfeiture provision in outstanding options to purchase 5,898,137 shares of common stock at an average exercise price of $5.01 as a result of the completion of our initial public offering.

Previous wording

As a result of the factors described above, our loss from operations for the United States segment was $18.6 million, compared to a loss of $227,000 in the three months ended March 31, 2023.

Current wording

As a result of the factors described above, our loss from operations for the United States segment was $2.2 million for the three months ended June 30, 2024 , compared to a loss from operations of $661,000 for the three months ended June 30, 2023, and a loss from operations of $20.9 million for the six months ended June 30, 2024, compared to a loss of $888,000 in the six months ended June 30, 2023. Our loss from operations for the China segment was $175,000 for the three months ended June 30, 2024, compared to a loss from operations of $250,000 for the three months ended June 30, 2023, and a loss from operations of $427,000 for the six months ended June 30, 2024, compared to income from operations of $504,000 in the six months ended June 30, 2023.

Previous wording

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 March 31, 2024 was $60,000 compared to $68,000 in the three months ended March 31, 2023, a decrease of $8,000 or 12%. The change year over year correlates with the lower power production in the Guizhou region in China.

Current wording

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 June 30, 2024 was $239,000 compared to $367,000 in the three months ended June 30, 2024, a decrease of $(129,000) or 35.0%. The equity in income reported for the six months ended June 30, 2024 was $299,000 compared to $435,000 in the six months ended June 30, 2023, a decrease of $136,000 or 31.3%. 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.

Previous wording

Gain on debt extinguishment for the three months ended March 31, 2024 was $54,000 and relates primarily to an exchange of $2.0 million of 3% secured EB-5 notes payable to a related party to an equal principal amount of 4% convertible notes. The gain on debt extinguishment for the three months ended March 31, 2023 was $13,000.

Current wording

Gain on debt extinguishment for the three months ended June 30, 2024 was $222,000 and for the six months ended June 30, 2024 was $276,000. During the three months ended June 30, 2024, we exchanged six 3% secured EB-5 notes payable to related party in the total principal amount of $3.0 million to 4% convertible notes, resulting in gain on debt extinguishment of approximately $80,000, and settled $500,000 of 4% convertible note for a gain of approximately $142,000. During the six months ended June 30, 2024, we exchanged $5.0 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 $134,000, 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 June 30, 2023 was zero and for the six months ended June 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.

Previous wording

Interest expense, net, for the three months ended March 31, 2024 was $368,000 a decrease of $21,000, or 5%, from the three months ended March 31, 2023. Our interest expense in the three months ended March 31, 2024 primarily includes interest at 3% on two loans from related parties in the United States with a total principal balance of $15.0 million at March 31, 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 $15.25 million at March 31, 2024, and interest at 8% on promissory notes issued to SMX Property (a related party) in October 2022 with a principal balance of $1.4 million at March 31, 2024. 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.

Current wording

Interest expense, net, for the three months ended June 30, 2024 was $244,000, a decrease of $179,000 or 42.4%, from the three months ended June 30, 2023. Interest expense, net, for the six months ended June 30, 2024 was $612,000, a decrease of $201,000, or 24.7%, from the six months ended June 30, 2023. Our interest expense in the six months ended June 30, 2024 primarily includes interest at 3% on two loans from related parties in the United States with a total principal balance of $12.0 million at March 31, 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 $16.1 million at June 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 June 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.

Previous wording

During the three months ended March 31, 2023, other income was $640,000, consisting primarily of $321,000 of sublease income from four subtenants at the Riverside headquarters for the United States segment, $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.

Current wording

During the six months ended June 30, 2024, other expense was $306,000 consisting primarily of a $291,000 of foreign currency transaction loss 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 six months ended June 30, 2023, other expense was $82,000, 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.

Previous wording

For the three months ended March 31, 2024 and 2023, our United States segment reported an income tax expense of $6,000 for attributable to state minimum tax liabilities. For the China segment, an income tax benefit of approximately $1,200 and $207,000 was reported for the three months ended March 31, 2024 and 2023, respectively, arising from profitable operations subject to China income tax.

Current wording

For the China segment, an income tax benefit of approximately $115,000 and an expense of $491,000 was reported for the three months ended June 30, 2024 and 2023, respectively. For the China segment, an income tax benefit of approximately $116,000 and an expense of $284,000 was reported for the six months ended June 30, 2024 and 2023, respectively, arising from profitable operations subject to China income tax.

Previous wording

As a result of the foregoing, we had consolidated net loss of $19.3 million, or $(0.46) per share (basic and diluted), for the three months ended March 31, 2024, compared with a consolidated net income of $743,000, or $0.02 per share (basic and diluted), for the three months ended March 31, 2023.

Current wording

As a result of the foregoing, we had consolidated net loss of $2.2 million or $(0.05) per share (basic and diluted) for the three months ended June 30, 2024, compared with a consolidated net loss of $1.9 million or $(0.05) per share (basic and diluted) for the three months ended June 30, 2023.

Previous wording

As a result of foreign currency translations, which are non-cash adjustments, we reported net foreign currency translation losses of $208,000 for the three months ended March 31, 2024 and income of 221,000 for the three months ended March 31, 2023.

Current wording

As a result of foreign currency translations, which are non-cash adjustments, we reported net foreign currency translation losses of $65,000 and $622,000 for the three months ended June 30, 2024 and 2023, respectively, and losses of $273,000 and $401,000 for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

The following tables show consolidated cash flow information for the three months ended March 31, 2024 and 2023 (dollars in thousands):

Current wording

The following tables show consolidated cash flow information for the six months ended June 30, 2024 and 2023 (dollars in thousands):

Previous wording

Net cash used in operating activities for the three months ended March 31, 2024 was $6.4 million, compared to net cash provided by operating activities for the three months ended March 31, 2023 of $2.4 million. The cash flow used in operations for the three months ended March 31, 2024, resulting from our net loss of $19.3 million, were principally from increases of $17.1 million in stock-based compensation expenses, and $636,000 of decrease in customer loans. During the three months ended March 31, 2024, our operating assets and liabilities used $4.7 million in cash. Net cash provided by operations for the three months ended March 31, 2023 of $2.4 million resulted from net income of $743,000, increased by $4.3 million in cash from contract assets, $2.3 million increase in cash from other receivables and current assets, with an offset from $863,000 decrease in cash from accounts receivable, $429,000 decrease in cash from customer loans receivable, $445,000 decrease in cash from inventories, $58,000 decrease in cash from other assets, $826,000 decrease in cash from accounts payable, $23,000 decrease in cash from operating lease liabilities, $4.3 million decrease in cash from contract liabilities, $5.8 million decrease in cash from accrued expenses and other payables, and $331,000 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.

Current wording

Net cash used by operations for the six months ended June 30, 2023 of $1.4 million resulted from net loss of $1.1 million, increased by a $5.8 million decrease in cash from contract assets, $3.3 million decrease in cash from other receivables and current assets, with an offset from $713,000 increase in cash from accounts receivable, $2.1 million increase in cash from customer loans receivable, $1.3 million increase in cash from inventories, $28,000 increase in cash from other assets, $1.5 million increase in cash from accounts payable, $677,000 decrease in cash from operating lease liabilities, $5.1 million increase in cash from contract liabilities, $1.9 decrease in cash from accrued expenses and other payables, and $225,000 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.

Previous wording

Net cash used by investing activities for the three months ended March 31, 2024 was approximately $7.0 million, consisting of $7.0 million short-term investment in two promissory notes, offset by $14,000 of cash proceeds received from disposal of property and equipment. Net cash provided by investing activities for the three months ended March 31, 2023 was $22,000, consisting of cash received of $22,000 related to the disposal of property and equipment.

Current wording

Net cash used by investing activities for the six months ended June 30, 2024 was approximately $7.7 million, representing a portion of the net proceeds of our initial public offering, consisting of $7.7 million short-term investment in three promissory notes (of which $688,000 relates to the China segment), offset by $14,000 of cash proceeds received from disposal of property and equipment. Net cash used by investing activities for the six months ended June 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.

Previous wording

Net cash provided by financing activities for the three months ended March 31, 2024 was $15.6 million, consisting of $18.6 million of net cash proceeds from the initial public offering completed in February and March 2024, offset by $3.0 million principal payments on convertible notes in the United States segment, and $4,000 payment on equipment leases in the United States segment.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2024 was $14.2 million, consisting of $18.6 million of net cash proceeds from the initial public offering completed in February and March 2024, $0.9 million loan proceeds from a new short term borrowing, offset by $5.0 million principal payments on convertible notes in the United States segment, and $8,000 payment on equipment leases in the United States segment.

Previous wording

Net cash provided by financing activities for the three months ended March 31, 2023 was $2.0 million, consisting of $3.5 million principal payments on convertible notes in the United States segment, $14,000 payments on other borrowings and equipment leases in the United States segment, and $2.3 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.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2023 was $640,000, consisting of $3.7 million principal payments on convertible notes in the United States segment, $27,000 payments on other borrowings and equipment leases in the United States segment, and $2.3 million payment to Uonone, offset by $6.8 million of proceeds from Uonone, related to legal settlement received by SolarMax on Uonone’s behalf in the China segment.

Previous wording

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 March 31, 2024, we had issued convertible notes in the principal amount of $36.5 million to former limited partners of CEF, of which principal payments of $19.75 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 $1.77 million, leaving convertible notes in the principal amount of $14.25 million outstanding. As of March 31, 2024, notes to CEF and CEF II in the aggregate principal amount of $15.0 million were outstanding.

Current wording

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 June 30, 2024, we had issued convertible notes in the principal amount of $36.5 million to former limited partners of CEF, of which principal payments of $19.75 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 $1.77 million, leaving convertible notes in the principal amount of $14.25 million outstanding. As of June 30, 2024, notes to CEF and CEF II in the aggregate principal amount of $12.0 million were outstanding.

Previous wording

We require substantial funds for our business, and we believe that the net proceeds from our initial public offering, 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 annual 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 June 30, 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 as well as their perception that they could get a more favorable result with litigation. If our current liabilities exceed the available cash, including the proceeds of our initial public offering, we will need to obtain alternative financing. We cannot assure you that such financing will be available on acceptable, if any terms, which would impair our ability to develop our business. Our financial statements for the year ended December 31, 2023 have a going concern paragraph.

Current wording

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 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. Our financial statements for the year ended December 31, 2023 have a going concern paragraph.

Previous wording

At least annually, we are required to assess the carrying value of our long-lived assets and related intangibles for impairment 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.

Current wording

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.

Previous wording

Our China segment did not complete any new projects in 2021, 2022 or 2023; however, we believe it is more likely than not the fair value of our China segment is greater than its carrying value because we believe that we will generate business in 2024 from SPIC and/or other PRC customers with which we are engaged in negotiations.

Current wording

Our China segment did not complete any new projects in 2021, 2022 or 2023; however, we believe it is more likely than not that the fair value of our China segment is greater than its carrying value because we believe that we will generate business in 2024 or early 2025 from SPIC and/or other PRC potential customers with which we are engaged in negotiations.

Previous wording

Because of the COVID restrictions, we were not able to complete negotiation for new projects with SPIC and with one other potential customer. In China, in order for us to generate business, we need to have face-to-face meetings with the representatives of SPIC or any other potential customers rather than remote meetings such as Zoom. These negotiations were initially deferred from late 2021 until 2022 and further deferred to 2023 as a result of COVID restrictions. We are now engaged in negotiations with respect to new projects for our China segment. In addition, our negotiations were impacted by a temporary spike in panel prices in China, which began to moderate in 2022. Despite the interruption of COVID in China, we believe that the macroeconomic conditions for the solar market in China continues to be strong. China remains the number one market in the world for photovoltaic systems, which includes the solar farms that our China segment designs and builds for third parties. As COVID restrictions eased in late 2022, discussions, negotiations, design work and permitting on potential projects resumed in the first quarter of 2023, although, as of the date of this annual report, we have not entered into any agreements.

Current wording

Because of the COVID restrictions, we were not able to complete negotiation for new projects with SPIC and with one other potential customer. In China, in order for us both to generate business and collect receivables, we need to have face-to-face meetings with the representatives of SPIC or any other potential customers rather than remote meetings such as Zoom. These negotiations were initially deferred from late 2021 until 2022 and further deferred to 2023 as a result of COVID restrictions. We are now engaged in negotiations with respect to new projects for our China segment. In addition, our negotiations were impacted by a temporary spike in panel prices in China, which began to moderate in 2022. Despite the interruption of COVID in China, we believe that the macroeconomic conditions for the solar market in China continues to be strong. China remains the number one market in the world for photovoltaic systems, which includes the solar farms of the type that our China segment designs and builds for third parties. As COVID restrictions eased in late 2022, discussions, negotiations, design work and permitting on potential projects resumed in the first quarter of 2023, although, as of the date of this report, we have not entered into any agreements.