NeoVolta Inc.: Form 10-Q for the period ended Mar 31, 2024

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, 2023, filed with the Securities and Exchange Commission on September 22, 2023 (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, NV14-K, 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 our current resources and efforts go into further developing our flagship NV14, NV14-K, 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 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, Utah, Colorado, Wyoming, Texas, Oklahoma, Missouri, Tennessee, Alabama, Georgia, Florida, and Puerto Rico.

As further discussed below under “Liquidity and Capital Resources,” 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.

On April 14, 2023, California implemented Net Energy Metering 3 (NEM3) for subsequent new solar installations. NEM3 reduces the amount of NEM credit for each kilowatt (KW) of solar power sent to the utility from a rate of approximately $0.20 per KW to $0.09 per KW (each Utility varies). NEM3 effectively increases the average solar Return of Investment (ROI) from 5-6 years to 10-12 years (each Utility varies). Effectively, the Company believes that solar installation in California currently makes little financial sense without also including a battery system. Installing NeoVolta nets a ROI of 4-6 years. We estimate that NEM3 reduced our sales from the enactment date in December 2022 continuing through the recently competed quarter ended March 31, 2024, as solar installers worked off their permitted NEM2 installs. We expect our sales to gradually increase going forward.

Results of Operations

The following discussion reflects the Company’s revenues and expenses for the three and nine month periods ended March 31, 2024 and 2023, as reported in our financial statements included in Item 1.

Three months ended March 31, 2024 versus three months ended March 31, 2023

Revenues - Revenues from contracts with customers for the three months ended March 31, 2024 were $283,900 compared to $629,010 for the three months ended March 31, 2023. Such decrease was primarily due to various macroeconomic and regulatory factors including the negative impact of new utility regulations in the State of California that we believe has caused a temporary economic disincentive for residential utility customers to acquire our energy storage systems since the December 2022 enactment date and continuing through the three months ended March 31, 2024.

Cost of Goods Sold - Cost of goods sold for the three months ended March 31, 2024 were $117,755 compared to $537,261 for the three months ended March 31, 2023. 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 period. The resulting improvement in our reported gross profit in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, however, was largely due to the reversal in the three months ended March 31, 2024 of an inadvertent overcharge of $93,000 that was made to Cost of goods sold in the three months ended December 31, 2023.

General and Administrative Expense - General and administrative expenses for the three months ended March 31, 2024 were $756,118 compared to $723,271 for the three months ended March 31, 2023. Such increase was primarily due to a higher allowance for expected credit losses in the three months ended March 31, 2024 of $340,000, compared to $300,000 in the three months ended March 31, 2023, partially offset by a decrease in stock compensation expense related to the Company’s equity incentive programs.

Research and Development Expense - Research and development expenses for the three months ended March 31, 2024 were $10,392 compared to $1,290 for the three months ended March 31, 2023. Such fluctuation was largely due to timing differences in the level of the Company’s recent product development efforts.

Other Income and Expense - Interest income for the three months ended March 31, 2024 was $10,892 compared to zero for the three months ended March 31, 2023. This increase was due to rising money market rates which have enabled the Company to earn interest on its investable cash in the three months ended March 31, 2024.

Net Loss - Net loss for the three months ended March 31, 2024 was $589,473 compared to $632,812 for the three months ended March 31, 2023, 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.

Nine months ended March 31, 2024 versus nine months ended March 31, 2023

Revenues - Revenues from contracts with customers for the nine months ended March 31, 2024 were $2,065,858 compared to $2,733,951 for the nine months ended March 31, 2023. Such decrease was primarily due to various macroeconomic and regulatory factors including the negative impact of new utility regulations in the State of California that we believe has caused a temporary economic disincentive for residential utility customers to acquire our energy storage systems since the December 2022 enactment date and continuing through the nine months ended March 31, 2024.

Cost of Goods Sold - Cost of goods sold for the nine months ended March 31, 2024 were $1,572,668 compared to $2,302,380 for the nine months ended March 31, 2023. 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 period. Due to efficiencies that we have realized from taking over responsibility for manufacturing of our products from a contract operator since last year, we have improved gross profit to $493,190 in the nine months ended March 31, 2024 compared to $431,571 in the nine months ended March 31, 2023.

General and Administrative Expense - General and administrative expenses for the nine months ended March 31, 2024 were $2,085,976 compared to $2,716,428 for the nine months ended March 31, 2023. Such decrease was due to a reduction in stock compensation expense related to the Company’s equity incentive programs, partially offset by a higher allowance for expected credit losses in the nine months ended March 31, 2024 of $670,000, compared to $380,000 in the nine months ended March 31, 2023.

Research and Development Expense - Research and development expenses for the nine months ended March 31, 2024 were $10,392 compared to $29,936 for the nine months ended March 31, 2023. Such fluctuation was largely due to timing differences in the level of the Company’s recent product development efforts.

Other Income and Expense - Interest income for the nine months ended March 31, 2024 was $28,946 compared to zero for the nine months ended March 31, 2023. This increase was due to rising money market rates which have enabled the Company to earn interest on its investable cash in the nine months ended March 31, 2024. Interest expense for the nine months ended March 31, 2024 was zero compared to $4,134 for the nine months ended March 31, 2023. This decrease resulted from the conversion of our 2018 and 2021 convertible notes in conjunction with the closing of our public equity offering in August 2022.

Net Loss - Net loss for the nine months ended March 31, 2024 was $1,574,232 compared to $2,318,927 for the nine months ended March 31, 2023, 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 nine months ended March 31, 2024 was $988,827 compared to $650,600 in the nine months ended, March 31, 2023, reflecting a modest decrease in the impact of changes in working capital on net operating cash flow in the current fiscal year period.

Financing activities. Net cash provided by financing activities in the nine months ended March 31, 2024 was zero, compared to $3,780,405 in the nine months ended March 31, 2023. As further discussed below, our net cash provided by financing activities in the nine months ended March 31, 2023 was entirely attributable to the successful completion of an underwritten public offering of our equity securities in early 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 $1,120,035, including accrued interest, automatically 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 fully eliminated its convertible debt.

As of March 31, 2024, we had a cash balance of approximately $1.0 million and net working capital of approximately $5.1 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.

Assembly Inventory Purchase

In April 2023, we made a bulk purchase of raw materials inventory from our contract manufacturer by making a cash payment to that company in the net amount of approximately $1.3 million. This transaction was completed pursuant to an amendment of our Master Supply Agreement with our contract manufacturer. In addition to the purchase of the raw materials inventory from our contract manufacturer, this amendment provided for the eventual assumption by us of full responsibility from our contract manufacturer for the manufacturing of our proprietary Energy Storage Systems (“ESS”) units. Pursuant to the amendment, we assumed such responsibility for the manufacturing process surrounding our ESS units from our contract manufacturer on June 1, 2023. In conjunction with assuming this responsibility, we hired the two employees of our contract manufacturer who previously performed contract manufacturing services for us. We are expecting to hire additional “assemblers” in the fairly near future.

Other Developments

In calendar year 2022, we 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.

Additionally, we continue to monitor current international developments occurring in Ukraine and Israel. However, we do not believe that they will have a significant impact on either the domestic markets for our products or the international supply chains for our product components, which are largely sourced from Asia.

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, 2023, as filed with the SEC on September 22, 2023, 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 March 31, 2024, 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.

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.

Changes in Internal Controls over Financial Reporting

There was no change in our internal controls over financial reporting that occurred during the quarter ended March 31, 2024, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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, 2023, as filed with the SEC on September 22, 2023 (the “Form 10-K”), under the heading “Risk Factors”, 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, 2023, 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.