NeoVolta Inc.: Form 10-Q for the period ended Dec 31, 2022

Introduction

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II. Other Information - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended June 30, 2022, filed with the Securities and Exchange Commission on September 27, 2022 (the “Annual Report”).

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited financial statements included above under “Part I - Financial Information” - “Item 1. Financial Statements”.

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “NEOV”, refer specifically to NeoVolta, Inc.

In addition, unless the context otherwise requires and for the purposes of this Report only:

• “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
• “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
• “Securities Act” refers to the Securities Act of 1933, as amended.

Overview

We are a designer, manufacturer, and seller of high-end Energy Storage Systems (or ESS), primarily our NeoVolta NV14 and NV 24, which can store and use energy via batteries and an inverter at residential or commercial sites. We were founded to identify new ways to leverage emerging technologies with the dynamic changes that are taking place in the energy delivery space. We primarily market and sell our products directly to our certified solar installers and solar equipment distributors. We are also pursuing agreements with residential developers, commercial developers, and other commercial opportunities. Because we are purely dedicated to energy solar systems, virtually all of our current resources and efforts go into further developing our flagship NV14 and NV 24 products, while focusing on specific industry needs for our next generation of products. We believe we are unique in the marketplace due to our low cost, our innovative battery chemistry, our product versatility and our commitment to installer service. Because of these factors, we believe NeoVolta is uniquely equipped to establish itself as a major player in the energy storage market.

In May 2019, we completed a public offering of 3,500,000 shares of our common stock at an offering price of $1.00 per share for gross proceeds of $3.5 million pursuant to Regulation A of the Securities Act.. We used the proceeds of the offering to ramp up production, marketing, and sales of our NV14 product line. In that regard, we have used the proceeds from the offering to fund the marketing, production and distribution of our products, which commenced in July 2019 through a group of wholesale customers in California, as well as to provide additional working capital for other corporate purposes. We have expanded to include one wholesale distribution customer in Nevada. As of the current date, we have had successful installations of our products in the additional States of Arizona, Nevada, Georgia, Utah, Florida, Puerto Rico, Oklahoma, Texas, Colorado, Wyoming, Tennessee, and Missouri.

As further discussed below under “Underwritten Public Offering,” we completed an underwritten public offering of our equity securities in the form of Units in August 2022. We sold a total of 1,121,250 Units in the offering at an offering price to the public of $4.00 per Unit. The gross proceeds of the offering were $4,485,000 and the net proceeds, after deduction of underwriting discounts and other offering costs, were approximately $3,780,000. We are using the proceeds of this public offering to increase our current production capacity, expand our product portfolio, enlarge our product marketing and sales efforts, and for other general corporate purposes.

Underwritten Public Offering

In early August 2022, we completed an underwritten public offering of our equity securities in the form of Units with each Unit consisting of one share of common stock and one warrant (the “Warrants”) to purchase one share of common stock at an exercise price of $4.00 per share. The shares of common stock and the Warrants comprising the Units were immediately separated at closing of the offering and each is now independently listed on the NASDAQ Capital Market under the symbols “NEOV” and “NEOVW,” respectively. Each Warrant became exercisable on the date of issuance and will expire five years from the date of issuance.

Between the initial closing of the offering and the underwriters’ exercise of the overallotment option, we sold a total of 1,121,250 Units in the offering at an offering price to the public of $4.00 per Unit. The gross proceeds of the offering, including the underwriters’ exercise of the overallotment option, were $4,485,000 and the net proceeds, after deduction of underwriting discounts and other offering costs, were approximately $3,780,000. We are using the proceeds of this public offering to increase our current production capacity, expand our product portfolio, enlarge our product marketing and sales efforts, and for other general corporate purposes.

In conjunction with the public offering, all holders of the Company’s 2018 convertible notes in the total amount of $59,251, including accrued interest, converted their debt into a total of 9,404,867 shares of common stock at the stated conversion rate, and all holders of the Company’s 2021 convertible notes in the total amount of $1,068,000 converted their debt into a total of 267,000 shares of common stock at the stated conversion rate. As a result of the simultaneous conversion of both sets of convertible notes, the Company has fully eliminated its convertible debt.

Results of Operations

The following discussion reflects the Company’s revenues and expenses for the three and six month periods ended December 31, 2022 and 2021, as reported in our financial statements included in Item 1.

Three months ended December 31, 2022 versus three months ended December 31, 2021

Revenues - Revenues from contracts with customers for the three months ended December 31, 2022 were $567,105 compared to $1,035,127 for the three months ended December 31, 2021. Such decrease was primarily due to the pendency of the April 2023 effective date of new utility regulations in the State of California that we believe is presently causing an economic disincentive for residential utility customers to acquire our energy storage systems prior to the effective date of those regulations (see “Item 1A. Risk Factors” for a discussion of the new utility regulations).

Cost of Goods Sold - Cost of goods sold for the three months ended December 31, 2022 were $473,159 compared to $861,706 for the three months ended December 31, 2021. The cost of goods sold in both periods reflected the cost of procuring and assembling the component parts of the energy storage systems that were sold in each fiscal year and resulted in gross profits on such sales of approximately 17% in both periods.

General and Administrative Expense - General and administrative expenses for the three months ended December 31, 2022 were $1,073,729 compared to $4,137,495 for the three months ended December 31, 2021. Such decrease was primarily due to the reduction in the expense recorded for the fair value of incentive shares of common stock earned by the Company’s executive officers under their new employment contracts, effective in March 2022.

Research and Development Expense - Research and development expenses for the three months ended December 31, 2022 were $7,746 compared to $62,250 for the three months ended December 31, 2021. Such fluctuation was due to a decrease in the level of the Company’s recent product development efforts.

Interest Expense - Interest expense for the three months ended December 31, 2022 was zero compared to $3,530 for the three months ended December 31, 2021. This decrease resulted from the conversion of our 2018 and 2021 convertible notes in conjunction with the closing of our public offering in August 2022.

Net Loss - Net loss for the three months ended December 31, 2022 was $987,529 compared to $4,029,854 for the three months ended December 31, 2021, representing the aggregate of the various revenue and expense categories indicated above. The Company has not recognized any income tax benefit for these net losses due to the uncertainty of its ultimate realization.

Six months ended December 31, 2022 versus six months ended December 31, 2021

Revenues - Revenues from contracts with customers for the six months ended December 31, 2022 were $2,104,941 compared to $2,634,731 for the six months ended December 31, 2021. Such decrease was primarily due to the pendency of the April 2023 effective date of new utility regulations in the State of California that we believe is presently causing an economic disincentive for residential utility customers to acquire our energy storage systems prior to the effective date of those regulations (see “Item 1A. Risk Factors” for a discussion of the new utility regulations).

Cost of Goods Sold - Cost of goods sold for the six months ended December 31, 2022 were $1,765,119 compared to $2,222,700 for the six months ended December 31, 2021. The cost of goods sold in both periods reflected the cost of procuring and assembling the component parts of the energy storage systems that were sold in each fiscal year and resulted in gross profits on such sales of approximately 16% in both periods.

General and Administrative Expense - General and administrative expenses for the six months ended December 31, 2022 were $1,993,157 compared to $4,494,053 for the six months ended December 31, 2021. Such decrease was primarily due to the reduction in the expense recorded for the fair value of incentive shares of common stock earned by the Company’s executive officers under their new employment contracts, effective in March 2022.

Research and Development Expense - Research and development expenses for the six months ended December 31, 2022 were $28,646 compared to $66,503 for the six months ended December 31, 2021. Such fluctuation was due to a decrease in the level of the Company’s recent product development efforts.

Interest Expense - Interest expense for the six months ended December 31, 2022 was $4,134 compared to $9,536 for the six months ended December 31, 2021. This decrease resulted from the conversion of our 2018 and 2021 convertible notes in conjunction with the closing of our public offering in August 2022.

Net Loss - Net loss for the six months ended December 31, 2022 was $1,686,115 compared to $4,158,061 for the six months ended December 31, 2021, representing the aggregate of the various revenue and expense categories indicated above. The Company has not recognized any income tax benefit for these net losses due to the uncertainty of its ultimate realization.

Liquidity and Capital Resources

Operating activities. Net cash used in operating activities in the six months ended December 31, 2022 was $688,093, compared to $475,923 in the six months ended December 31, 2021, reflecting a modest increase in net working capital requirements in the current fiscal year period.

Financing activities. Net cash provided by financing activities in the six months ended December 31, 2022 was $3,780,405, compared to $1,068,000 in the six months ended December 31, 2021. As further discussed below, our net cash provided by financing activities in the six months ended December 31, 2022 was entirely attributable to the successful completion of an underwritten public offering of our equity securities in early August 2022. Our net cash provided by financing activities in the six months ended December 31, 2021 resulted from the issuance of our convertible notes payable to a group of accredited investors in October 2021 in the amount of $1,068,000. Such notes were ultimately converted into common stock in conjunction with the closing of our public offering in August 2022.

We completed an underwritten public offering of our equity securities in the form of Units in early August 2022. Each Unit consisted of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $4.00 per share. We sold a total of 1,121,250 Units in the offering at an offering price to the public of $4.00 per Unit. The gross proceeds of the offering, including the underwriters’ exercise of the overallotment option, were $4,485,000 and the net proceeds, after deduction of underwriting discounts and other offering costs, were approximately $3,780,000.

In conjunction with the public offering, all holders of our 2018 convertible notes in the total amount of $59,251, including accrued interest, converted their debt into a total of 9,404,867 shares of common stock at the stated conversion rate, and all holders of our 2021 convertible notes in the total amount of $1,068,000 converted their debt into a total of 267,000 shares of common stock at the stated conversion rate. As a result of the simultaneous conversion of both sets of convertible notes, the Company has fully eliminated its convertible debt.

As of December 31, 2022, we had a cash balance of $3.4 million and net working capital of approximately $7.2 million. Currently, we are not generating a break-even level of net operating cash flow from our net sales. However, we anticipate that demand for our products will ultimately increase over time and that we will have sufficient cash to operate for at least the next 12 months.

Recent Developments

As a result of the continued spread of the COVID-19 coronavirus since early 2020, economic uncertainties have arisen which could impact business operations, supply chains, energy demand, and commodity prices that are beyond our control. In calendar year 2022, we have experienced some negative impact of the COVID-19 pandemic on the sales of our assembled energy storage systems, primarily through a group of wholesale dealers and installers located in California. We continue to monitor COVID-19, but do not believe it will have a material unfavorable impact to our future financial performance at this time.

Off-Balance Sheet Arrangements

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We believe that certain accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. See “Note 1. Business and Summary of Significant Accounting Policies” of the Notes to Financial Statements set forth above and under “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended June 30, 2022, as filed with the SEC on September 27, 2022, for a further description of our critical accounting policies and estimates.

Information for this Item is not required as the Registrant is a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

Evaluation of disclosure controls and procedures

We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who is our principal executive officer, and Chief Financial Officer, who is our principal financial and accounting officer, to allow timely decisions regarding required disclosures.

As of December 31, 2022, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of the material weakness relating to the lack of segregation of duties, our disclosure controls and procedures as of the end of the period covered by this Quarterly Report were not effective. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. We will be required to hire additional personnel in order to remediate our material weakness.

Changes in internal controls over financial reporting

There was no change in our internal controls over financial reporting that occurred during the quarter ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. 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 its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2022, as filed with the SEC on September 27, 2022 (the “Form 10-K”), under the heading “Risk Factors”, except as set forth below, which are incorporated by reference herein and investors should review the risks provided in the Form 10-K prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Form 10-K for the year ended June 30, 2022, under “Risk Factors”, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.

The following are new risk factors which supplements the risk factors included in our Form 10-K:

Recent utility regulations enacted in the State of California in December 2022 are currently having a negative impact on the sales of our energy storage systems in that state.

On December 15, 2022, the California Public Utilities Commission (“CPUC”) unanimously passed a new statewide utility regulation known as Net Energy Metering 3.0 (“NEM 3.0”). This new regulation will become effective in 120 days after enactment, on April 14, 2023, and will significantly alter the net billing rates for residential solar production in the State of California and ultimately impact the monthly energy bill savings for homeowners. We believe that the passage of NEM 3.0 will provide a significant economic incentive for residential utility customers to acquire energy storage systems, such as those sold by NeoVolta, once NEM 3.0 becomes effective on April 14, 2023. In the meantime, however, there is an impediment for residential utility customers to acquire our energy storage systems, which are presently being grandfathered under a similar new regulation for solar panels, until the purchasing and installation of batteries can occur in advance of NEM 3.0 becoming effective on April 14, 2023. Therefore, we expect the negative impact that we are currently experiencing on our sales in the State of California to possibly continue through at least the first calendar quarter of 2023.

An increase in mortgage interest rates may result in a decrease in demand by homeowners for our residential energy storage systems.

Sales volume in our homeowner channel is partially dependent on the construction of new homes and the sale of existing homes in our residential markets. Many customers of our installation partners rely on mortgage loans from banks and other lenders in order to finance a substantial portion of the purchase price for their home, including any related improvements. Increased mortgage interest rates may lead to lower demand for new homes and a reduced number of homes available for solar origination through our homeowner channel. Additionally, increased interest rates may result in fewer secondary home sales, a reduction in the number of customers refinancing their mortgages and uncertainty about the economy.