MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements that are based on current expectations and involve various risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements. We encourage you to review the "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" sections in this report.
Overview
We are a a rapidly-growing U.S.-based energy technology company delivering scalable energy storage solutions. We are presently transitioning from being a storage manufacturer into an integrated energy solutions leader. Since our founding in 2018 solely as a manufacturer of high-performance energy storage systems for residential and small commercial applications, we have evolved into a much more diversified storage technology company. Currently, our strategy is centered around building a multi-market energy solutions platform serving customer markets in the following three areas: (i) Residential; (ii) Commercial & Industrial ("C&I"); and (iii) Utility-Scale.
In January 2026, we formed NVP, a joint venture with the U.S. affiliate of a foreign entity to jointly own and operate a new utility-scale battery manufacturing facility in the State of Georgia. We have an 80% ownership interest in the joint venture company, with the U.S. affiliate of the foreign entity having a 20% ownership interest (subject to service-based vesting and forfeiture provisions). In accordance with the joint venture agreements, as amended in April 2026, we made our initial capital contribution to the joint venture of $7,000,000 in January 2026 and $8,000,000 in May 2026 and are obligated to make additional capital contributions of up to $25,000,000 through June 30, 2027. We recently completed an underwritten public equity offering in the net amount of $26.3 million and we are expecting to use a substantial portion of the net proceeds of that offering to fund our remaining capital contributions to NVP in the coming year. The plant will be constructed in phases with the initial phase expected to be completed at the end of our fiscal 2027 first quarter leading to limited production of batteries for sale to customers. Upon completion, this new facility is anticipated to provide the capacity for us to greatly expand our line of new energy storage products as an integrated energy solutions leader and generate substantial amounts of both customer revenues and net operating cash flows over an extended period of time.
Results of Operations
Comparison of the Years Ended June 30, 2026 and 2025
Revenues - Revenues from contracts with customers for the year ended June 30, 2026 were $13,332,953 compared to $8,426,835 for the year ended June 30, 2025. Such increase in our revenues was primarily due to the continued expansion of various new sales channels outside of our traditional focus on the local installer market in the Southern California area. However, sales in both our traditional as well as our new channels began to substantially decline in early calendar year 2026 due to federal tax law changes.
Cost of Goods Sold - Cost of goods sold for the year ended June 30, 2026 were $11,194,754 compared to $6,920,130 for the year ended June 30, 2025. The cost of goods sold in both periods reflected the cost of procuring and assembling the component parts of our energy storage systems that were sold in each fiscal year and resulted in gross profits on such sales of approximately 16% and 18% in each year, with the decrease due to our recognition of a non-cash obsolescence reserve as of June 30, 2026 in the amount of $1,119,013, due to recent changes in the demand for our legacy products in the marketplace.
General and Administrative Expenses - General and administrative expenses for the year ended June 30, 2026 were $18,347,046 compared to $6,065,590 for the year ended June 30, 2025. Such increase was mainly due to our continuing rapid expansion of both our marketing and other product development expenses, including the hiring of a significant number of new employees. The addition of these personnel has resulted in a higher level of both cash compensation expense and other associated expenses, such as promotion and travel, as well as non-cash stock compensation expenses related to the Company's equity incentive programs. We have also experienced increases in various other corporate expenses such as legal, insurance, occupancy and software costs. Additionally, we incurred an increase in the non-cash provision for expected credit losses in our legacy business in the year ended June 30, 2026 of approximately $2,647,000 as well as incremental administrative expenses in NVP of approximately $1,296,000 from its startup in early January 2026 through June 30, 2026.
Research and Development Expense - Research and development expenses for the year ended June 30, 2026 were $1,556,043 compared to $157,305 for the year ended June 30, 2025. Such increase was largely due to the recent acceleration of our new product development efforts.
Depreciation and Amortization Expense - Depreciation and amortization expenses for the year ended June 30, 2026 were $376,827 compared to zero for the year ended June 30, 2025. Such fluctuation was largely attributable to our closing of an acquisition of intangible and tangible assets from Neubau Energy Inc., which closed in October 2025.
Other Income and Expense - Loss on debt exchanges for the year ended June 30, 2026 was $1,266,030 compared to zero for the year ended June 30, 2025, and resulted from three exchange agreements entered into with one of our lenders since October 2025. Interest expense for the year ended June 30, 2026 was $667,741 compared to $320,417 for the year ended June 30, 2025, reflecting interest attributable to a higher level of borrowings made under our lender credit arrangements obtained since September 30, 2024. Nonoperating credit loss in the year ended June 30, 2026 was $1,532,998 compared to zero for the year ended June 30, 2025, and resulted from a deemed uncollectible note receivable. Interest income for the year ended June 30, 2026 was $137,775 compared to $2,011 for the year ended June 30, 2025, due to a higher average level of investable cash in the year ended June 30, 2026.
Net Loss - Net loss for the year ended June 30, 2026 was $21,470,711 compared to $5,034,596 for the year ended June 30, 2025, representing the aggregate of the various revenue and expense categories indicated above. We have not recognized any income tax benefit for these net losses due to the uncertainty of our ultimate realization.
Liquidity and Capital Resources
Operating activities. Net cash used in operating activities in the year ended June 30, 2026 was $15,191,570 compared to $4,425,752 in the year ended June 30, 2025. This increase was largely due to the current period increase in our comparative net loss, primarily resulting from an increase in our previously noted cash operating expenses for personnel and related costs, as well as the relatively higher changes in our net working capital needs, including a recent increase in our outstanding accounts receivable.
Investing activities. Net cash used in investing activities in the year ended June 30, 2026 was $8,631,323, compared to zero in the year ended June 30, 2025. Such fluctuation was largely due to our initial capital expenditures on a jointly owned utility-scale battery manufacturing facility currently under construction in the State of Georgia (see "Other Developments" below) as well as the cash portion of our purchase price of an acquisition of intangible and tangible assets from Neubau Energy Inc., which closed in October 2025. Additionally, we made nonoperating investments in a third-party financing platform and a promissory note from a solar project development company.
Financing activities. Net cash provided by financing activities in the year ended June 30, 2026 was $48,380,032 compared to $4,234,161 in the year ended June 30, 2025. In the year ended June 30, 2026, we completed the following equity financings: (i) in November 2025, we entered into a private equity offering with an accredited investors group under which we issued a total of 5,200,000 shares of our common stock at an offering price of $2.50 per share for gross proceeds of $13,000,000, which closed in two tranches in December 2025 and February 2026; (ii) in January 2026, we closed a registered direct offering of a total of 2,100,841 shares of our common stock at an offering price of $4.76 per share resulting in net proceeds of $9,301,844; and (iii) in May 2026, we closed an underwritten public offering of a total of 13,896,946 shares, including the underwriter's overallotment of 1,701,824 shares, of our common stock at an offering price of $2.05 per share resulting in net proceeds of $26,326,721. Beginning in November 2024, we also made short-term borrowings from two private lenders and a commercial bank, primarily to finance inventory purchases. In the year ended June 30, 2026, we made borrowings from these lenders in the total amount of $8,067,612 and repayments in the amount of $8,230,879.
In the year ended June 30, 2025, we made borrowings from our two private lenders in the total amount of $5,606,343 and repayments in the amount of $2,619,582. In February 2025, we closed a private equity offering with accredited investors under which we issued a total of 543,500 shares of our common stock to the investors at an offering price of $2.00 per share resulting in gross proceeds of $1,087,000. In December 2024, we also received proceeds from the exercise of warrants issued in our August 2022 public offering in the amount of $160,400.
As of June 30, 2026, we had a balance of cash and restricted cash of approximately $25.4 million and net working capital of approximately $26.1 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, with our current credit sources and the proceeds of our equity financings in the year ended June 30, 2026, we will have sufficient cash to operate for at least the next 12 months (see "Other Developments" below).
On September 4, 2026, we entered into a note and security agreement with a private lending group for an amortizing, secured debt facility with an initial tranche of $20 million and an optional tranche of an additional $10 million. Under the terms of this note, we are required to make principal payments in the greater of $1,250,000 per month, or 7.5% of the "value traded" in the Company's common stock for the previous month, subject to a maximum amount of $2,000,000 per month. Outstanding borrowings under the note will accrue interest at the rate of 10% per annum and the note has a scheduled maturity date of no later than March 3, 2028. We have issued five-year warrants to the lenders to purchase an aggregate of 1,454,545 shares of our common stock at an exercise price of $3.30 per share, subject to adjustment in the event of future offerings below the exercise price.
Other Developments
In January 2026, we executed a series of joint venture agreements with the U.S. affiliate of a foreign entity for the formation of a new domestic limited liability company to jointly own and operate a planned utility-scale battery manufacturing facility in the State of Georgia. Pursuant to these agreements, the Company has an 80% ownership interest in the joint venture company, and the U.S. affiliate of the foreign entity has a 20% ownership interest.
In accordance with the joint venture agreements, we made our initial capital contribution of $7,000,000 in January 2026 and an additional capital contribution of $8,000,000 in May 2026, which is primarily to fund the initial purchase of equipment. Further, we are expected to make additional capital contributions to the joint venture company through June 30, 2027 in total amounts of up to $25,000,000, pursuant to the joint venture agreements. We presently anticipate funding our additional capital contributions largely from the proceeds of our underwritten public equity offering in the net amount of $26,326,721 which closed in May 2026 and, possibly, through future equity and debt financings, subject to market conditions. However, there can be no assurance that we will be successful in raising sufficient proceeds from such offerings in order to fully satisfy our obligations for the additional capital contributions to the joint venture company. To the extent that we may be unable to raise sufficient proceeds in order to fully satisfy our obligations for the additional capital contributions to the joint venture company, the parent company of the same foreign entity will be permitted to bring in one or more new members of the joint venture company to fund such additional capital contributions which would dilute our present 80% majority ownership of the joint venture company.
We continue to monitor current international developments occurring in Iran and Ukraine. 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.
Presently, our two main raw material components, batteries and inverters, are imported from different suppliers in China and, until recently, were subject to fairly low tariff rates that had been in effect for several years. Beginning in April 2025, the Trump Administration implemented a significant increase in tariff rates based on the authority of the International Emergency Economic Powers Act ("IEEPA") on all goods imported from China, although it was temporarily suspended for 90 days in April 2025 and the tariff rate was lowered in November 2025, subject to judicial review. In February 2026, the Supreme Court declared the tariffs to be unconstitutional based on the authority of IEEPA, therefore, the Administration is considering alternative approaches to implementing tariffs that it believes would be sustained in a judicial review. Prior to the tariff escalation in April 2025, we had anticipated the likelihood of facing such a tariff increase and began stockpiling our inventory of these two components, which we have continued to pursue in any subsequent periods of tariff abatements or reductions since then, in order to reduce the impact of the tariffs.
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
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our limited historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that certain accounting policies, particularly those related to the recognition of revenues arising from the sales of our ESS products to customers of our business, could potentially affect our judgments and estimates used in the preparation of our consolidated financial statements. With regard to revenue recognition, the Company recognizes revenue in accordance with Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted on July 1, 2019 using the modified retrospective method, with no impact to the Company's comparative consolidated financial statements. Revenues are recognized when control of the promised goods is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. Revenue is recognized based on the following five-step model:
| · | Identification of the contract with a customer |
| · | Identification of the performance obligations in the contract |
| · | Determination of the transaction price |
| · | Allocation of the transaction price to the performance obligations in the contract |
| · | Recognition of revenue when, or as, the Company satisfies a performance obligation |
See "Note 1. Business and Summary of Significant Accounting Policies" of the notes to our consolidated financial statements for the fiscal year ended June 30, 2026, set forth below under, "Index to Consolidated Financial Statements", for a further description of our accounting policies and estimates. None of those policies are deemed to be critical accounting policies nor critical accounting estimates. As reflected in Note 1, Management has determined that the Company operates in only one reportable segment, which is the development and commercialization of energy storage products.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We are using the extended transition period for any other new or revised accounting standards during the period in which we remain an emerging growth company.
We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our August 2022 offering, (b) in which we have total annual gross revenues of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
We are also a "smaller reporting company," meaning that the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Reports on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.