Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated 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 for the year ended December 31, 2025. All amounts in this report are in U.S. dollars, unless otherwise noted.

Reverse Stock Split

On August 4, 2026, the Company amended its Amended and Restated Articles of Incorporation by filing a Certificate of Change with the Secretary of State of Nevada to effect a one-for-12 reverse stock split of the common stock, which became effective on August 13, 2026 and to effect a proportionate reduction of its authorized common stock from 297,225,000 shares to 24,768,750 shares, which is 1/12 of the number of previously authorized shares.

As a result of the reverse split, the number of outstanding shares of common stock was reduced from 56,906,572 shares to 4,742,167 shares of common stock. The ownership percentage of each stockholder will remain unchanged other than as a result of fractional shares. Proportional adjustments are made to both the number of shares of common stock issuable upon exercise of outstanding options or the conversion of outstanding convertible notes, as well as to the applicable exercise or conversion price.

The reverse split supported the Company's effort to regain compliance with the minimum bid price requirement for maintaining the listing of its common stock on the Nasdaq Capital Market. On March 3, 2026, the Company received a notice from Nasdaq that the Company does not meet Nasdaq's continued listing requirement that the Company maintain a minimum bid price of $1.00 per share. The Nasdaq rules provide that the Company has a compliance period of 180 calendar days to regain compliance. This period expired on August 31, 2026. The closing bid price of the Company's common stock was at least $1.00 per share for ten consecutive business days prior to August 31, 2026.

Share and per share information in this Form 10-Q has been retroactively revised to reflect the reverse stock split as if it had occurred on January 1, 2025.

Nasdaq Notice

On June 22, 2026, the Company received a notice from Nasdaq that the Company does not meet the continued listing requirement that the Company maintain a minimum market value of listed securities of $35.0 million. The Nasdaq rule provides that the Company has a compliance period of 180 calendar days to regain compliance. This period expires on December 21, 2026. Nasdaq calculates the market value of listed securities by multiplying the most recent total shares outstanding by the closing bid price of the common stock. In the event the Company does not regain compliance with this rule prior to the expiration of the compliance period, it will receive written notification that its securities are subject to delisting. The reverse split does not address the minimum market value of listed securities. In the event that the Company does not meet the minimum market value of listed securities, the common stock will be delisted from Nasdaq and it will be traded on the Over-the Counter Market. If the Company's common stock is traded on the over-the-counter market, as an OTC traded stock, it will be less attractive to investors than a Nasdaq listed security, which means it will be more difficult for the Company to raise money. Many brokerage firms prefer not to deal with OTC traded securities. As a result, it is likely to be more difficult for the Company to enter into major EPC projects, and it may affect the willingness of Companies who have entered into EPC contracts with the Company to proceed with the projects.

Impact of Tariffs and Trade Policy

Recent changes in U.S. trade policy have resulted in the implementation or threatened implementation of tariffs on certain imported goods, particularly those manufactured in China and other countries. These tariffs have increased the cost of certain raw materials and components used in our products. While we have taken steps to mitigate the impact, including working with suppliers and adjusting our pricing strategy, the tariffs are expected to result in higher input costs for our operations for the remainder of 2026. For the six months ended June 30, 2026, the tariffs did not have material effects on our cost of revenue.

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To the extent that the United States government imposes tariffs on products imported from China or any other foreign country and we are not able to obtain comparable products at a lower cost from domestic suppliers, our costs of these products may increase, and, depending on the tariff, such increase may be substantial. Such increases may impact both our ability to sell our systems and the price we are able to charge for systems which we sell, which could impair our margins.

We continue to monitor developments in international trade policy and may further seek to adjust our supply chain and sourcing strategies in response to evolving conditions.

Regulatory Changes, Inflation and Supply Chain Issues

The federal residential solar tax credit, officially known as the Residential Clean Energy Credit, expired on December 31, 2025. This means that homeowners who had solar energy systems installed and placed into service by this date will qualify for a 30% federal tax credit on the cost of the system. After December 31, 2025, there is no federal tax credit available for new residential solar installations. This represents a significant change from the previous plan laid out in the Inflation Reduction Act, which would have seen the credit gradually phase out until it expired in 2034. This change in the tax law may significantly reduce the incentive of residential users to install solar systems.

With the recent inflationary pressures combined with the world-wide supply chain issues, which have been accentuated by the war with Iran and the closing of the Strait of Hormuz, which severely reduced the worldwide flow of oil and increased the price of fuel, fertilizer and other products which resulted in inflationary pressures and supply chain issuer, that are affecting many domestic and foreign companies, and we expect that the inflationary pressures and supply chain issues will continue to affect our ability to sell our products, the price at which can sell products and our gross margin. To the extent that we are not able to raise our prices or to the extent that we cannot accurately project our costs when we set our prices, our gross margin and the results of our operations will be impacted.

Polysilicon is an essential raw material in the production of solar power products, principally solar panels. The costs of silicon wafers and other silicon-based raw materials have accounted for a large portion of the costs associated with solar panels. Although the price of silicon had declined in recent years, increases in the price of polysilicon have resulted in increases in the price of wafers, leading to increases in our costs. Due to the volatile market prices, we cannot assure you that the price of polysilicon will remain at its current levels particularly in view of inflationary pressures, especially if the global solar power market gains its growth momentum. Moreover, in the event of an industry-wide shortage of polysilicon, we may experience late or non-delivery from suppliers, and it may be necessary for us to purchase silicon raw materials of lower quality that may result in lower efficiencies and reduce its average selling prices and revenues. We currently are able to obtain the raw material we request, although the prices pay are increasing as a result of the inflationary pressures.

The inflationary pressures that are affecting us are not unique to our industry, and relate to the cost of raw materials, labor costs generally and the price at which we can sell our products. Because solar energy can be seen as a way to provide a homeowner with relief from the increasing utility prices for electricity, the market for solar systems generally, and our business specifically, has enabled us to sell solar systems. Thus, the effects of inflation may also affect the marketability of our solar systems to residential users and potential BESS customers which are also impacted by the effects of NEM 3.0 and the elimination of the federal residential tax credit at December 31, 2025.

Compensation costs per employee, excluding stock-based compensation, for sales, marketing and administrative personnel in our United States operations decreased approximately 6.7% for the six months ended June 30, 2026 compared to the same period in 2025. The decrease in 2026 reflected the lay-off of a portion of our employees resulting from a slowdown after we had completed installation of the increased 2023 backlog resulting orders placed in 2023 in advance of NEM 3.0 becoming effective in April 2023, as discussed below under "Effects of NEM 3.0." The increase in 2023 also reflected 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 meet competition which would result 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.

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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.

Effects of NEM 3.0

Net metering is a billing mechanism that credits solar energy system owners for the electricity that they add to the electricity grid. If the owner of a solar system generates more electricity than it consumes, the excess electricity is sold back to the grid. The California Public Utilities Commission has adopted the current net metering regulations, known as NEM 3.0, which became effective in April 2023. NEM 3.0 features a 75% reduction in export rates (the value of excess electricity pushed onto the grid by solar systems) from the rate set forth in the previous net metering regulations, NEM 2.0, thereby reducing the overall savings and increasing the payback period of home solar installations. The changes under NEM 3.0, which are likely to result in reduced benefits for most residential solar users, could alter the return on investment for solar customers.

In January 2024, we laid off a portion of our employees associated with the design and installation of residential solar systems in response to a slowdown in demand after NEM 3.0 took effect in April 2023. The layoff represented approximately 25% of our residential solar system design and installation team. Approximately half of the employees who were laid off had been hired in late 2022 to help install our growing backlog of residential solar systems under contract in anticipation of NEM 3.0, and the contracts representing that backlog were completed during 2023. We may need to revise our pricing metrics to reflect the change resulting from NEM 3.0 in order for the purchase of a solar system to be economically attractive to the customer, which may result in lower prices and reduced margins. Although we anticipate the near-term impact of NEM 3.0 on residential solar contracts will be offset by commercial solar contracts for which we use third-party subcontractors to complete the installations, we cannot assure you that our overall business will not be impacted by the effects of NEM 3.0. Our decrease in revenue for solar sales in the year ended December 31, 2024 from the year ended December 31, 2023 reflects both a surge in 2023 revenue in anticipation of the effectiveness of NEM 3.0 in April 2023 and a sharp decline in 2024 revenue resulting from the effectiveness of NEM 3.0.

Overview

We are an integrated solar and renewable energy company. A solar energy system retains the direct current (DC) electricity from the sun and converts it to alternating current (AC) electricity that can be used to power residential homes and commercial businesses. The solar business is based on the ability of the users of solar energy systems to save on energy costs and reduce their carbon imprint as compared with power purchased from the local electricity utility company. We were founded in 2008 to engage in the solar business in the United States, where our business is primarily conducted. Our primary business consists of 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.

Since the third quarter of 2025, our principal business was EPC services in connection with the construction of BESS systems. On July 31, 2025, we entered into the Longfellow Contract to develop a BESS facility. Based on the contract terms, the contract is expected to generate revenues of approximately $120.1 million and interest income of $7.2 million from a financing component related to milestone payments that extend beyond the project completion date. Longfellow will own and operate the facility, which will be located in Pecos County, Texas and is expected to have a storage capacity of 430 megawatt-hours. Due to a change order being discussed but still not approved, the BESS facility is expected to be completed by March 2028, although we cannot assure you that this completion date will be met or that the costs will not be greater than we anticipate. The change order, which is being finalized, may affect the price of the project and our costs. To the extent that our costs for the project increase as a result of tariffs, the war with Iran, supply chain issues or other factors, any change in the price of the project would be subject to the approval of Longfellow. To the extent that we cannot adjust our prices to reflect such additional costs, our gross margin on the project will be impacted. We have committed to make a $5.0 million capital contribution to Longfellow, in which we have an 8% equity interest. Our capital contribution for this equity interest is $5.0 million, which was due no later than December 31, 2025. Longfellow agreed to defer our payment obligation, but has not agreed to a specific date by which we must make payment to obtain our equity interest. Our cash flow from the project and the timing of our work on the project is affected by the timing of payments from Longfellow, which is affected by Longfellow's funding for the project. Accounts receivable from Longfellow were $9.4 million at both June 30, 2026 and December 31, 2025.

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On December 31, 2025, we entered into three EPC contracts for large-scale BESS systems, two in Puerto Rico and one in Corpus Christi, Texas. Pursuant to an EPC contract with Naguabo BESS LLC, a Texas limited liability company ("Naguabo"), we will develop a BESS facility in Ceiba Municipality, Puerto Rico. The contract is expected to generate revenues of approximately $122.3 million. Naguabo will own and operate the facility, which is expected to have a storage capacity of 320 megawatt-hours. We are to have a 9% membership interest in Naguabo. Pursuant to an EPC contract with Yabucoa BESS LLC, a Texas limited liability company ("Yabucoa"), we will develop a BESS facility in Humacao Municipality, Puerto Rico. The contract is expected to generate revenues of approximately $35.9 million. Yabucoa will own and operate the facility, which is expected to have a storage capacity of 80 megawatt-hours. We are to have a 9% membership interest in Yabucoa. Pursuant to an EPC contract with Navboot Holdco, LLC, a Delaware limited liability company ("Navboot"), we will develop a BESS facility in Corpus Christi, Texas. The contract is expected to generate revenues of approximately $258.1 million. Navboot will own and operate the facility, which is expected to have a storage capacity of 600 megawatt-hours. Cash flow from long-term EPC projects is dependent upon the timing of payments from project owners which may be affected by the owners' debt and equity financing for the project. We have not commenced work on any of these projects and we cannot assure you as to whether or when we will begin to perform these services.

In the fourth quarter of 2023, we began to work with several independent dealers which form our dealer network. Our dealer network is comprised of independent licensed sales companies that sell our products pursuant to non-exclusive agreement. The dealers sell our products as well as products sold by our competitors. The dealer handles the sales process, and once the sales agreement with the customer is signed, we install the solar system pursuant to an installation agreement with customer. The dealers earn a commission which is included in cost of revenue. Our increase in revenues from solar systems for the six months ended June 30, 2026 over the comparable period in 2025 was primarily from sales through our dealer network.

In 2024 and 2025, the California Public Utilities Commission (CPUC) launched a $280 million statewide initiative called the Self-Generation Incentive Program ("SGIP") to help California's low-income utility customers install battery storage and solar panel systems. We began participating in SGIP as an installer in 2025. In February 2026, SGIP administrators temporarily paused payments to installers and in May 2026 resumed the payments with a ruling to impose strict cost documentation requirements and review. As a result, we experienced a delay in collecting receivables on SGIP installations during the six months ended June 30, 2026. In the six months ended June 30, 2026, revenues from SGIP projects were approximately $7.1 million, or 47.7% of our solar energy sales and 28.4% of our total revenues. At June 30, 2026, receivables from SGIP installations accounted for approximately $6.7 million, or 37.2%, of our accounts receivable. Our sales for the SGIP were made primarily through our dealer network.

During the six months ended June 30, 2026 and 2025, approximately 75% and 58%, respectively, of our revenues from residential solar and battery contracts, and 45% and 48% of our total revenues were generated through the dealer network program. We believe that our participation in the dealer network enhances our ability to attract residential customers.

In June 2026, we entered into a transformer sale agreement with Longfellow Solar I LLC ("LF Solar") for the supply, delivery, testing and commissioning of two main power transformers for a solar project owned by LF Solar, and received the initial deposit payment of $602,402. The fixed contract value for equipment and services is approximately $6.0 million, excluding shipping, customs duties, tariffs and other import-related costs. The transformers are custom-manufactured equipment with delivery expected during 2027.

In June 2026, we entered into an amended purchase agreement with D Volt Co., a Texas corporation to purchase equipment and services for approximately $5.3 million. At the execution of the agreement, we paid the initial deposit payment of $602,402. The agreement requires milestone payments through manufacturing, testing, shipment, and commissioning. Title and risk of loss transfer upon delivery to our designated carrier in Shanghai, China.

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We plan to launch an initiative to address the need for commercial solar powered EV charging stations in California. We believe that there is a significant market for EV charging stations in California. As of the date of this quarterly report, we have not taken any steps other than an evaluation of the market for charging stations in California. Before we can commence this business, we will need to obtain financing for the projects. If we do enter this business, we may either construct EV stations for our own account or perform the EPC services for a third party pursuant an agreement with the third party. We cannot give any assurance that we will commence the business of constructing and/or operating EV stations, that, if we seek to enter this business, we will obtain any necessary financing, that we will price any EPC services we may perform in a manner to enable us to generate a gross profit from the services or that we can or will operate this business profitably. If we enter this business and cannot operate it profitably our business will be materially and adversely affected.

Results of Operations

The following tables set forth information relating to our operating results for the three and six months ended June 30, 2026 and 2025 (dollars in thousands) and as a percentage of revenue:

		Three Months Ended June 30,																Six Months Ended June 30,
		2026								2025								2026								2025
		Dollars				%				Dollars				%				Dollars				%				Dollars				%
Revenues:
Large-scale EPC contracts (U.S.)		$	809				7.9	%		$	-				0.0	%		$	6,010				24.0	%		$	-				0.0	%
Solar energy sales			7,273				71.0	%			5,891				85.6	%			15,366				61.3	%			11,687				84.6	%
LED sales			2,125				20.7	%			911				13.2	%			3,608				14.4	%			1,970				14.3	%
Financing			37				0.4	%			81				1.2	%			90				0.3	%			153				1.1	%
Total revenues			10,244				100.0	%			6,883				100.0	%			25,074				100.0	%			13,810				100.0	%
Cost of revenues:
Large-scale EPC contracts (U.S.)			756				7.4	%			-				0.0	%			6,007				24.0	%			-				0.0	%
Solar energy sales			5,268				51.4	%			5,528				80.3	%			10,531				41.9	%			10,043				72.7	%
LED sales			1,806				17.6	%			750				10.9	%			3,076				12.3	%			1,744				12.6	%
Total cost of revenues			7,830				76.4	%			6,278				91.2	%			19,614				78.2	%			11,787				85.3	%
Gross profit			2,414				23.6	%			605				8.8	%			5,460				21.8	%			2,023				14.7	%
Operating expenses:
Sales and marketing (US)			50				0.5	%			71				1.0	%			92				0.4	%			150				1.1	%
General and administrative (US)			2,306				22.5	%			2,136				31.0	%			4,946				19.7	%			4,537				32.9	%
General and administrative (China)			253				2.5	%			166				2.4	%			520				2.1	%			261				1.9	%
China legal judgment			4,264				41.6	%			-				0.0	%			4,264				17.0	%			-				0.0	%
Total operating expenses			6,873				67.1	%			2,373				34.4	%			9,822				39.2	%			4,948				35.9	%
Income (loss) from operations (US)			58				0.6	%			(1,602	)			(23.3	)%			422				1.7	%			(2,664	)			(19.3	)%
Income (loss) from operations (China)			(4,517	)			(44.1	)%			(166	)			(2.4	)%			(4,784	)			(19.1	)%			(261	)			(1.9	)%
Equity in income (loss) of solar project companies			(42	)			(0.4	)%			144				2.1	%			(282	)			(1.1	)%			130				0.9	%
Gain on debt extinguishment			13				0.1	%			(314	)			(4.6	)%			54				0.2	%			(314	)			(2.3	)%
Interest income			9				0.1	%			227				3.3	%			20				0.1	%			347				2.5	%
Interest expense			(249	)			(2.5	)%			(363	)			(5.3	)%			(547	)			(2.2	)%			(732	)			(5.3	)%
Other income (loss), net			46				0.5	%			70				1.1	%			123				0.5	%			129				1.0	%
Income (loss) before income taxes			(4,682	)			(45.7	)%			(2,004	)			(29.1	)%			(4,994	)			(19.9	)%			(3,365	)			(24.4	)%
Income tax provision (benefit)			(26	)			(0.3	)%			(106	)			(1.5	)%			(32	)			(0.1	)%			(170	)			(1.2	)%
Net income (loss)			(4,656	)			(45.4	)%			(1,898	)			(27.6	)%			(4,962	)			(19.8	)%			(3,195	)			(23.2	)%
Currency translation adjustment			(34	)			(0.4	)%			3				0.1	%			(22	)			(0.1	)%			3				0.1	%
Comprehensive income (loss)		$	(4,690	)			(45.8	)%		$	(1,895	)			(27.5	)%		$	(4,984	)			(19.9	)%		$	(3,192	)			(23.1	)%

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Three and Six Months Ended June 30, 2026 and 2025

The following table set forth information relating to our revenue and gross profit results for the three and six months ended June 30, 2026 and 2025 (dollars in thousands):

		Three Months Ended June 30,												%				Six Months Ended June 30,												%
		2026				2025				Change				Change				2026				2025				Change				Change
Revenue:
Large-scale EPC contracts (U.S.)		$	809			$	-			$	809			-		%		$	6,010			$	-			$	6,010			-		%
Solar energy sales (US)			7,273				5,891			$	1,382				23.5	%			15,366				11,687				3,679				31.5	%
LED sales (US)			2,125				911				1,214				133.3	%			3,608				1,970				1,638				83.1	%
Financing (US)			37				81				(44	)			(54.3	)%			90				153				(63	)			(41.2	)%
Total revenues			10,244				6,883				3,361				48.8	%			25,074				13,810				11,264				81.6	%
Cost of revenue:
Large-scale EPC contracts (U.S.)			756				-				756			-		%			6,007				-				6,007			-		%
Solar energy sales			5,268				5,528				(260	)			(4.7	)%			10,531				10,043				488				4.9	%
LED sales			1,806				750				1,056				140.8	%			3,076				1,744				1,332				76.4	%
Total cost of revenues			7,830				6,278				1,552				24.7	%			19,614				11,787				7,827				66.4	%
Gross profit		$	2,414			$	605			$	1,809				299.0	%		$	5,460			$	2,023			$	3,437				169.9	%

Revenues

Revenues for the three months ended June 30, 2026 were $10.2 million, an increase of $3.4 million or 48.8% from $6.9 million in the three months ended June 30, 2025. The increase resulted from revenue of $809,000 from the Longfellow Contract to develop a battery energy storage system ("BESS") facility in Texas, a $1.4 million increase in solar energy and battery sales, a $1.2 million increase in LED sales, offset by a $44,000 decrease in financing revenue. We did not have any large-scale EPC sales prior to the third quarter of 2025. Our revenue from residential and commercial solar energy and battery sales increased from $5.9 million for the three months ended June 30, 2025 to $7.3 million for the three months ended June 30, 2026, a 23.5% increase, primarily as a result of the sales growth related to the SGIP program for low income residential homeowners that began in the latter half of 2025. The increase in the solar energy and battery sales in the three months ended June 30, 2026 reflects a 13.7% increase in the number of systems completed and a 53.8% increase in the wattages deployed. During the three months ended June 30, 2026 and 2025, our battery only sales were $181,000 and $864,000, respectively. Battery sales refer to the sale of batteries sold other than as a part of a solar system.

Revenues for the six months ended June 30, 2026 were $25.1 million, an increase of $11.3 million or 81.6% from $13.8 million in the six months ended June 30, 2025. The increase resulted from revenue of $6.0 million from the large-scale EPC contract with Longfellow to develop a BESS facility in Texas, a $3.7 million increase in solar energy and battery sales, a $1.6 million increase in LED sales, offset by a $63,000 decrease in financing revenue. We did not have any large-scale EPC sales prior to the third quarter of 2025. Our revenue from residential and commercial solar energy and battery sales increased from $11.7 million for the six months ended June 30, 2025 to $15.4 million for the six months ended June 30, 2026, a 31.5% increase, primarily as a result of the sales growth related to the SGIP program for low income residential homeowners that began in the latter half of 2025. The increase in the solar energy and battery sales in the six months ended June 30, 2026 reflects a 29.8% increase in the number of systems completed and a 38.5% increase in the wattages deployed. During the six months ended June 30, 2026 and 2025, our battery only sales were $359,000 and $1.2 million, respectively. Battery sales refer to the sale of batteries sold other than as a part of a solar system.

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As a result of the continued relatively high interest rate environment and the expiration of the federal residential solar tax credit on December 31, 2025, we expect the revenue growth from our residential sales to level off in 2026 compared to the prior period. However, given the launch of the SGIP program for qualifying low-income households that began in June 2025, we were able to offset a significant portion of the decline of revenue growth from our residential sales in 2026 with residential sales that participated in the SGIP program, though we expect this will level off in 2026. We are also looking to offset the potential residential sales decrease with commercial sales and sales of large-scale EPC projects. On July 31, 2025, we entered into an EPC contract with Longfellow to develop a BESS facility. Based on terms of the agreement, the contract is expected to generate revenues and finance income of approximately $127.3 million for us and we expect to complete the work by March 2028. During the three months ended June 30, 2026, we recognized $809,000 in revenues related to this project. Total revenue recognized on the Longfellow Contract from the project inception through June 30, 2026 was $66.2 million, and we expect to recognize approximately $54.0 million of revenue on Longfellow for the remainder of 2026 and 2027.

Our LED revenue increased by $1.2 million or 133.3% to $2.1 million for the three months ended June 30, 2026 from $911,000 for the three months ended June 30, 2025, and increased $1.6 million or 83.1% to $3.6 million for the six months ended June 30, 2026 from $2.0 million for the six months ended June 30, 2025, primarily resulting from the increase in the number of LED projects with a higher average sales price. LED revenues include LED product sales and LED consulting revenues which 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. Revenue from our LED business fluctuates period to period.

We have not originated any loans to our solar customers since 2022. As a result, our finance revenue for the three months ended June 30, 2026 and 2025 was $37,000 and $81,000, respectively, and for the six months ended June 30, 2026 and 2025 was $90,000 and $153,000, respectively, from our portfolio of solar loans. Finance revenue decreases as loans in our portfolio are paid since we are not making any new loans.

Cost of revenue and gross profit

Our cost of revenue for the three months ended June 30, 2026 was $7.8 million, an increase of $1.6 million, or 24.7% from $6.3 million for the three months ended June 30, 2025. Our cost of revenue for the six months ended June 30, 2026 was $19.6 million, an increase of $7.8 million, or 66.4% from $11.8 million for the six months ended June 30, 2025. The increase in cost of revenue was largely driven by the EPC revenue from EPC services pursuant to the Longfellow Contract. The remaining increase in cost of revenue was the result of the increased sales in the residential and commercial solar energy systems and LED sales.

The overall gross margin increased to 23.6% for the three months ended June 30, 2026 from 8.8% for the three months ended June 30, 2025, and increased to 21.8% for the six months ended June 30, 2026 from 14.7% in the six months ended June 30, 2025. During the three months ended June 30, 2026, our gross margin from the sale of residential and commercial solar energy systems as well as from our LED sales improved which offsets the decrease in the gross margin related to the Longfellow Contract. The current lower gross margin from the Longfellow Contract was primarily due to the costs recognized related to the Longfellow project. We recognize revenue, but not profit, on uninstalled materials. The revenue on uninstalled materials is recognized by us when the control is transferred equal to the cost of the uninstalled materials. This decrease in gross margin on the Longfellow Contract was partially offset by an increase in the gross margin from our sales of solar energy systems as well as from LED sales. We have no cost of revenue with respect to interest income on customer loans.

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Operating expenses

Sales and marketing expenses for the three months ended June 30, 2026 decreased to $50,000, a decrease of $21,000 or 29.9% from $71,000 in the comparable period of 2025. Sales and marketing expenses were 0.5% of revenue for the three months ended June 30, 2026 compared to 1.0% for the three months ended June 30, 2025. Sales and marketing expenses for the six months ended June 30, 2026 decreased to $92,000, a decrease of $58,000 or 38.4% from $150,000 in the comparable period of 2025. Sales and marketing expenses were 0.4% of revenue for the six months ended June 30, 2026 compared to 1.1% for the six months ended June 30, 2025. Our sales and marketing expenses fluctuate based on the types of marketing and promotion initiatives we deploy. Our dealer network enables us to reduce our sales and marketing costs. We expect to continue to be selective in our sales and marketing expenses for the remainder of 2026.

General and administration expenses for the United States operations for the three months ended June 30, 2026 increased $170,000 or 8.0%, to $2.3 million compared to $2.1 million for the three months ended June 30, 2025, representing 22.5% of revenue for the three months ended June 30, 2026 compared to 31.0% of revenue for the three months ended June 30, 2025. General and administration expenses for the United States operations for the six months ended June 30, 2026 increased $409,000 or 9.0%, to $4.9 million compared to $4.5 million for the six months ended June 30, 2025, representing 19.7% of revenue for the six months ended June 30, 2026 compared to 32.9% of revenue for the six months ended June 30, 2025. The increase during the six months ended June 30, 2026 is attributed to the increase in rent expense associated with our lease amendment for our Riverside office beginning on January 1, 2026, and the additional expense related to our investor relations advertising campaign. Our general increase, in general and administrative expenses in 2026 reflects the cost of compliance and other regulatory costs associated with being a public reporting company which is expected to continue for us. The decrease in the percentage of both sales and marketing and general and administrative expenses as a percentage of revenue in the six months ended June 30, 2026 reflects revenue of approximately $6.0 million from the Longfellow Contract.

General and administrative expenses relating to the China operations were $253,000 in the three months ended June 30, 2026 compared to $166,000 in the three months ended June 30, 2025, an increase of $86,000 or 51.9%. General and administrative expenses relating to the China operations were $520,000 in the six months ended June 30, 2026 compared to $261,000 in the six months ended June 30, 2025, an increase of 259,000 or 99.2%. Such increase during the three and six months ended June 30, 2026 is attributed to the court costs, travel costs, and legal fees associated with the ongoing litigation with SPIC to enforce the collection of the remaining receivable from SPIC.

China legal judgment

Our expenses in China for the three and six months ended June 30, 2026 reflected a charge of approximately $4.3 million related to farmland occupation tax litigation in the PRC for four photovoltaic projects completed in 2020 and 2021. The charge resulted from three adverse court judgments issued in June and August 2026 that determined that our subsidiary is responsible for the additional farmland occupation taxes.

We recorded the charge of $4.3 million because, as of June 30, 2026, management determined, based on court rulings in June and August 2026, that a loss was probable and reasonably estimable based on the judgments and other information available at that date. See Part II, Item 1. Legal Proceedings for discussion of the litigation.

Income (loss) from operations

As a result of the factors described above, our income from operations in the United States was $58,000 for the three months ended June 30, 2026, compared to a loss from operations of $1.6 million in the three months ended June 30, 2025, and income from operations of $422,000 for the six months ended June 30, 2026, compared to loss from operations of $2.7 million in the six months ended June 30, 2025, which is primarily attributed to the increase in our revenues and the related gross profit. Our loss from operations for our China operations was $4.5 million for the three months ended June 30, 2026, compared to a loss from operations of $166,000 in the three months ended June 30, 2025. Our loss from operations for our China operations was $4.8 million for the six months ended June 30, 2026, compared to a loss from operations of 261,000 in the six months ended June 30, 2025.

Equity in income (loss) from unconsolidated entities

Equity in income (loss) from unconsolidated entities relates to our China operations and comprises the equity in income (loss) from three unconsolidated project companies in which we have a non-controlling 30% interest. The equity in income (loss) for the three months ended June 30, 2026 was a loss of $42,000 compared to an income of $144,000 in the three months ended June 30, 2025. The equity in income (loss) for the six months ended June 30, 2026 was a loss of $282,000 compared to an income of $130,000 in the six months ended June 30, 2025. The change from income in the three and six months ended June 30, 2025 to a loss in the same periods in 2026 results from lower revenue of the unconsolidated entities attributable to a change in electricity rate from a fixed rate to a variable rate.

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Gain (loss) on debt extinguishment

For the three months ended June 30, 2026, our gain on debt extinguishment was $13,000 related to the exchange of $500,000 of secured EB-5 notes payable to a related party for 4% convertible notes in the same principal amount. For the six months ended June 30, 2026, our gain on debt extinguishment was $54,000 related to the exchange of $2.0 million of secured EB-5 notes payable to a related party for 4% convertible notes in the same principal amount.

For the three and six months ended June 30, 2025, our loss on debt extinguishment was $314,000 and relates to the exchange of the $900,000 unsecured loan to shares of our common stock because the purchase price for the shares is less than its fair market value

Interest expense, net

Interest expense, net, for the three months ended June 30, 2026 was $240,000, an increase of $104,000, or 76.8%, from the three months ended June 30, 2025. Interest expense, net, for the six months ended June 30, 2026 was $527,000, an increase of $142,000, or 36.9%, from the six months ended June 30, 2025. For the three months ended June 30, 2026, total interest income declined $218,000 as a result of the payoff of held to maturity debt investments, whereas the total interest expense decreased by $114,000. For the six months ended June 30, 2026, total interest income declined $327,000 as a result of the payoff of held to maturity debt investments, whereas the total interest expense decreased by $185,000. The overall decline in interest expense corresponds to the decline in the two related party EB-5 loan balances as well as the decline in the convertible note balances as scheduled annual principal payments were made. Our interest expense in the six months ended June 30, 2026 primarily includes interest at 3% on two EB-5 loans from related parties in the United States with a total principal balance of $8.5 million at June 30, 2026, interest at 4% on convertible notes issued to former limited partners of CEF and CEF II in transactions in which former limited partners of CEF and CEF II accepted 4% convertible notes issued by SolarMax and the subsidiary that borrowed the funds from CEF with an aggregate principal balance of $16.1 million at June 30, 2026. 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 were issued in connection with cancellation of debt to CEF of an equal amount. The convertible notes are secured by the same collateral as the notes to CEF. Interest was recognized at the stated interest rate of 4%. Because the Company is in default in the payment of principal and interest on convertible notes in the principal amount of $13.7 million at June 30, 2026, if the holders of the notes exercise their rights to demand prepayment, interest at 12% per annum will be due. See the paragraph Event of Default on Convertible Notes in Note 14 to Consolidated Financial Statements.

Other income (expenses), net

During the three months ended June 30, 2026, other income was $46,000 consisting primarily of foreign currency transaction gains for our United States operations intercompany receivable denominated in RMB. During the three months ended June 30, 2025, other income was $70,000 consisting primarily of $131,000 of foreign currency transaction gains for our United States operations intercompany receivable denominated in RMB, offset with a loss on a solar asset disposal in the United States segment of $65,000.

During the six months ended June 30, 2026, other income was $123,000 consisting primarily of foreign currency transaction gains for our United States operations intercompany receivable denominated in RMB. During the six months ended June 30, 2025, other income was $129,000 consisting primarily of $228,000 of foreign currency transaction gains for our United States operations intercompany receivable denominated in RMB, offset with a loss on a solar asset disposal in the United States segment of $65,000 and a foreign currency elimination adjustment of $37,000.

Income tax benefit (provision)

For the three months ended June 30, 2026 and 2025, our United States operations reported an income tax expense of $2,000 and $0, respectively, attributable to the Texas franchise tax and other minimum state tax liabilities.

For the six months ended June 30, 2026 and 2025, our United States operations reported an income tax expense of $19,000 and $6,000, respectively, attributable to the Texas franchise tax and other minimum state tax liabilities.

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For our China operations, an income tax benefit of approximately $29,000 and $106,000 was reported for the three months ended June 30, 2026 and 2025, respectively. For our China operations, an income tax benefit of approximately $52,000 and $176,000 was reported for the six months ended June 30, 2026 and 2025, respectively. The decrease in our income tax benefit for the six months ended June 30, 2026, compared with the corresponding period in 2025, was primarily attributable to a valuation allowance true-up recorded in the prior-year period, with no comparable adjustment in the current-year period. The change in our effective income tax rate also reflects changes in pretax book income (loss) between the periods.

Net income (loss)

As a result of the foregoing, we had a consolidated net loss of $4.7 million, or $(0.98) per share (basic and diluted), for the three months ended June 30, 2026, compared with a consolidated net loss of $1.9 million, or $(0.50) per share (basic and diluted), for the three months ended June 30, 2025.

As a result of the foregoing, we had a consolidated net loss of $5.0 million, or $(1.05) per share (basic and diluted), for the six months ended June 30, 2026, compared with a consolidated net loss of $3.2 million, or $(0.85) per share (basic and diluted), for the six months ended June 30, 2025.

Currency translation adjustment

Although our functional currency is the U.S. dollar, the functional currency of our China subsidiaries is the RMB. The financial statements of our subsidiaries are translated to U.S. dollars using period end exchange rates for assets and liabilities, and average exchange rates for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and reflects changes in the exchange rates between U.S. dollars and RMB.

As a result of foreign currency translations, we reported net foreign currency translation gains (losses) of $(34,000) and $3,000 for the three months ended June 30, 2026 and 2025, respectively, and $(22,000) and $3,000 for the six months ended June 30, 2026 and 2025, respectively.

Liquidity and Capital Resources

The following tables show consolidated cash flow information for the six months ended June 30, 2026 and 2025 (dollars in thousands):

		Six Months Ended June 30,								$ Increase
		2026				2025				(Decrease)
Consolidated cash flow data:
Net cash provided by (used in) operating activities		$	(5,156	)		$	(380	)		$	(4,776	)
Net cash provided by (used in) investing activities			(469	)			138				(607	)
Net cash provided by (used in) financing activities			(11	)			1,553				(1,564	)
Net increase (decrease) in cash and cash equivalents and restricted cash			(5,808	)			1,131				(6,939	)
Net increase (decrease) in cash and cash equivalents and restricted cash excluding foreign exchange effect		$	(5,637	)		$	1,310			$	(6,947	)

Operating Activities

Net cash used in operating activities for the six months ended June 30, 2026 was $5.2 million, compared to net cash used in operating activities for the six months ended June 30, 2025 of $380,000. The cash used by operations for the six months ended June 30, 2026, resulting from our net loss of $5.0 million, non-cash expense of $974,000, and $1.2 million of cash used in our operating assets and liabilities.

Net cash used by operations for the six months ended June 30, 2025 of $380,000 resulted from net loss of $3.2 million, non-cash expense of $983,000, and $1.8 million of cash provided by our operating assets and liabilities.

We expect the fluctuations of working capital over time to vary based on the project status and the related project billings of the projects in progress.

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Non-cash adjustments changes for the six months ended June 30, 2026 primarily reflected:

	●	$411,000 net increase resulting from equity in losses from our equity investments.
	●	$368,000 net decrease related to the gain on debt extinguishment.
	●	$224,000 net decrease in depreciation and amortization expense which includes loan and debt discounts amortization.
	●	$133,000 increase in deferred income taxes.
	●	$104,000 net increase associated with loss provisions for bad debts, loan losses, inventories, warranty, customer care and production guaranty.
	●	$65,000 decrease in loss on disposal of property and equipment

Changes in operating assets and liabilities for the six months ended June 30, 2026:

	●	$8.6 million decrease in cash from a net increase contract assets related to projects for which the performance obligations have not been satisfied.
	●	$7.5 million decrease in cash from a net increase accounts receivable, other receivables and other current assets
	●	$4.0 million increase in cash from a net increase in accrued expenses and other payables and other liabilities.
	●	$8.3 million increase in cash from an increase accounts payable.
	●	$732,000 increase in cash from a decrease in inventories.
	●	$284,000 increase in cash from an increase in operating lease liabilities.
	●	$12,000 decrease in cash from an increase in customer loans receivable.
	●	$23,000 decrease in cash from an increase in other assets

Investing Activities

Net cash used by investment activities for the six months ended June 30, 2026 was $469,000 consisting of short-term advances of $2.4 million, proceeds from repayment of principal on short-term advances of $1.4 million, and debt repayments received on our held to maturity debt investments. Net cash used by investing activities for the six months ended June 30, 2025 was approximately $138,000, consisting of debt repayments received on our held to maturity debt investments.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2026 was $11,000, consisting of $1.1 million of cash proceeds from the issuance of shares of common stock in private offerings, offset by $1.1 million principal payments on convertible notes, and $7,000 payment on equipment leases.

Net cash provided by financing activities for the six months ended June 30, 2025 was $1.6 million, consisting of $2.0 million of cash proceeds from the issuance of shares of common stock in private offerings, offset by $250,000 principal payments on convertible notes, $138,000 payment of accrued legal settlement, and $9,000 payment on equipment leases.

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Cash and Cash Equivalents and Restricted Cash

The following table sets forth, our cash and cash equivalents and restricted cash held by our United States and China operations at June 30, 2026 and December 31, 2025 (dollars in thousands):

		June 30, 2026				December 31, 2025
U.S. Operations
Insured cash		$	404			$	909
Uninsured cash			302				1,899
			706				2,808
China Operations
Insured cash			233				309
Uninsured cash			1,500				5,130
			1,733				5,439
Total cash and cash equivalents and restricted cash			2,439				8,247
Less: Cash and cash equivalents			2,158				7,967
Restricted cash		$	281			$	280

We currently do not plan to repatriate any cash or earnings from any of our non-United States operations because we presently intend to utilize such funds within China as well as to pay China suppliers from whom we acquire materials we require for our U.S. operations. Therefore, we do not accrue any China exit taxes related to the repatriation. However, in the event that we terminate our China operations and repatriate the cash to the United States, we will owe such taxes.

Under applicable PRC law and regulations, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated after-tax profits, if any, each year, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital before they may pay dividends. We do not believe that this restriction will impair our operations since we do not anticipate that we will use the cash generated from our PRC operations in those operations and we do not plan to repatriate such funds to the United States.

We invested RMB 5.0 million, or approximately $688,000, in a 5% note due June 25, 2024 issued by Qingdao Xiaohuangbei Technology Co., Ltd. ("Qingdao"), a PRC-based company. The initial maturity date was extended initially to December 25, 2024 and further subsequently extended to December 31, 2025. All of the extensions were at the request of the respective makers of the notes. The note was paid in December 2025 and January 2026.

Borrowings and Stock Issuances

At June 30, 2026, our current liabilities included secured convertible notes in the principal amount of $14.2 million and secured notes to related parties of $6.5 million.

In January 2026, we issued 166,667 shares of common stock, at a discount of 25% from the market price on the date of the investment, at a price of $6.576. Under the Nasdaq regulations, we may not be able to raise any significant funding from the sale of common stock at a discount from market in the near future without stockholder approval.

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EB-5 Loans

On January 3, 2012, CEF entered into a loan agreement with SREP, one of our United States subsidiaries, pursuant to which CEF advanced $45.0 million. On August 26, 2014, CEF II entered into a loan agreement with LED, another United States subsidiary, for up to $13.0 million. CEF II advanced $10.5 million pursuant to the agreement. The loans from CEF and CEF II bear interest at 3% per annum. The loans are secured by a security interest in the accounts and inventory of the borrowing subsidiary. CEF and CEF II are limited partnerships, the general partner of which is Inland Empire Renewable Energy Regional Center, a related party. The limited partners of both CEF and CEF II are investors who are not related parties who made a capital contribution to CEF or CEF II pursuant to the United States EB-5 immigration program. The EB-5 immigrant investor visa is a federal program that grants green cards and a path to citizenship to foreign investors who invest at least $500,000 toward job-creating projects. Under this program, which is administered by the United States Customs and Immigration Service, entrepreneurs (and their spouses and unmarried children under 21) are eligible to apply for a green card (permanent residence) if they make the necessary investment in a commercial enterprise in the United States and plan to create or preserve ten permanent full-time jobs for qualified United States workers. We are a commercial enterprise that creates permanent full-time jobs in the United States.

The loans from CEF and CEF II become due, as to the investment of each limited partner, four years from the date of the loan and may be extended as may be necessary to meet applicable USCIS immigrant investor visa requirements, which will be the date that the limited partner is eligible for a green card. Under the limited partnership agreements for CEF and CEF II, the limited partners have the right to demand repayment of their capital account when the petition is approved, which demand may trigger a maturity of the loan from CEF or CEF II in the amount of the limited partner's investment. The initial four-year term of notes in the principal amount of $55.5 million, which were issued to CEF and CEF II, and had expired prior to December 31, 2023 and are on extension until the limited partners meet applicable immigrant investor visa requirements. We cannot determine the period of the extensions. As of June 30, 2026, limited partners whose capital contributions funded loans of $43.5 million had received their green card approval and their extensions expired and one limited partner whose capital contribution funded $500,000 had withdrawn from CEF II and the limited partner's capital contribution was returned. The petitions of limited partners of CEF whose capital contribution funded loans of $8.0 million are pending.

As the loans matured and the limited partners requested return of their capital contribution, we offered the limited partners, in lieu of the payment by the limited partnership, a convertible note with a term of five years, with 20% of the principal amount being due on each of the first, second, third, fourth and fifth anniversaries of the date of issuance. The notes are secured by the same assets that secured the notes issued to CEF. As of June 30, 2026, we had issued convertible notes in the principal amount of $44.0 million to former limited partners of CEF and CEF II, of which principal payments of $25.0 million had been made on the anniversary of the respective dates of issuance, and convertible notes in the principal amount of $3.0 million had been purchased by us for $2.1 million, leaving convertible notes in the principal amount of $16.1 million outstanding at June 30, 2026. As of June 30, 2026, notes to CEF and CEF II in the aggregate principal amount of $8.5 million were outstanding and convertible notes in the principal amount of $16.1 million were outstanding. The Company is in default in the payment of principal and interest on convertible notes in the principal amount of $13.7 million at June 30, 2026, and the holders of these notes have the right to demand prepayment and exercise their rights with respect to the collateral. See the paragraph Event of Default on Convertible Notes in Note 14 of Notes to Consolidated Financial Statements.

Convertible Notes

We have issued 4% secured subordinated convertible notes to former limited partners of CEF and CEF II, pursuant to exchange agreements with the limited partners. The limited partners accepted the notes in lieu of cash payments of their capital contribution which resulted in a reduction of SREP's and LED's notes to CEF and CEF II, respectively, in the same amount, reducing the outstanding EB-5 loan balance. Payment of the notes is secured by a security interest in SREP's and LED's accounts and inventory, which are the same assets as secure the original note to CEF and CEF II. The convertible notes are payable in equal installments on the first, second, third, fourth and fifth anniversaries of the date of issuance. The convertible notes made prior to, or on or about the date of, our initial public offering are convertible into common stock at a conversion price of $38.40, which is 80% of our initial public offering price of $48.00 per share. The convertible notes made after our initial public offering are convertible into common stock at a conversion price equal to 80% of the average closing price of our common stock for the ten trading days preceding the date of the exchange agreement with the limited partner which conversion prices range from $6.06 to $108.84, with an average conversion price of $39.54. The convertible notes may be converted into common stock at the first, second, third, fourth and fifth anniversaries of the date of issuance, but not earlier than six months from the date of our initial public offering or for convertible notes issued after the initial public offering, six months after the issuance of the notes.

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All convertible notes issued contained redemption put features that allow the holders of the convertible notes the right to receive, for each conversion share that would have been issuable upon conversion immediately prior to the occurrence of an effective change in control event defined as a fundamental transaction, the number of shares of common stock of the successor or acquiring corporation or of ours, if it is the surviving corporation, and any additional consideration receivable as a result of such fundamental transaction by a holder of the number of shares of common stock for which these convertible notes are convertible immediately prior to such fundamental transaction. We evaluated the redemption put feature contained in the convertible notes under the guidance of ASC 815 and concluded that the requirements for contingent exercise provisions as well as the settlement provision for scope exception in ASC 815-10-15-74 has been meet. Accordingly, the redemption put features contained in the convertible notes were not bifurcated and accounted for as freestanding derivative instruments.

During the three months ended June 30, 2026, the Company recognized a gain on debt of extinguishment in the amount of approximately $13,000, relating to the issuance of convertible note in the principal amount of $500,000 to former limited partners of CEF I and II in exchange for a $500,000 reduction of the note from CEF I and II. No gain or loss on debt extinguishment was recognized for the three months ended June 30, 2025 as there was no issuance of convertible notes in exchange for a reduction of the note from CEF I and II.

During six months ended June 30, 2026, the Company recognized a gain on debt of extinguishment in the amount of approximately $54,000, relating to the issuance of convertible note in the principal amount of $2.0 million to former limited partners of CEF I and II in exchange for a $2.0 million reduction of the note from CEF I and II. No gain or loss on debt extinguishment was recognized for the six months ended June 30, 2025 as there was no issuance of convertible notes in exchange for a reduction of the note from CEF I and II.

Default Event and Remedies Upon Event of Default

From April 2023 through June 30, 2026, we did not pay annual principal installment payments and related quarterly interest payments which is an event of default on convertible notes. As of June 30, 2026 and December 31, 2025, the aggregate principal amount of the notes in default was $13.7 million and $14.3 million, respectively. The default provisions of the notes provide that if an event of default occurs the outstanding principal amount of this note, plus accrued but unpaid interest and other amounts owing in respect thereof through the date of acceleration, shall become, at the noteholder's election, immediately due and payable in cash, and commencing five days after occurrence of any event of default that results in the eventual acceleration of the note, the interest rate on the note shall accrue at an interest rate of 12% per annum. Further, if an event of default occurs, the noteholders, together have rights to foreclose on the collateral securing the notes.

We accrued interest at the rate of 4% per annum since no noteholder has taken action to accelerate payment of principal and interest. Since we have accrued interest at 4% per annum on the outstanding notes, in the aggregate principal amount of $13.7 million, with respect to which there is an event of default but with respect to which the noteholders did not demand acceleration. Such accrued interest was approximately $350,387 at June 30, 2026. In the event that the holders of all of these note demand acceleration, the amount of interest on those at 12% would be approximately $2.2 million. The difference between the interest at 12% and the accrued interest at 4% as of June 30, 2026, together with any additional interest due subsequent to June 30, 2026 is a contingent liability of the Company. If any noteholders exercise their right to accelerate, the accrued interest at the default rate of 12% will be reflected as an interest expense in the period the note is accelerated.

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Contractual Obligations

Borrowings

Principal maturities for the financing arrangements as of June 30, 2026 are as follows (dollars in thousands):

For the year ending December 31,		EB5 Related Party Loans				Convertible Notes				Total
2026 (remainder of)		$	3,500			$	13,750			$	17,250
2027			3,000				500				3,500
2028			2,000				500				2,500
2029			-				500				500
2030			-				500				500
2031			-				300				300
Total		$	8,500			$	16,050			$	24,550

Operating Leases

On January 28, 2026, we entered into an amendment to the lease for our facilities at 3080 12th Street, Riverside, California. The amendment extends the expiration date of the lease from December 31, 2026 to December 31, 2033. The annual base rent during the term, as extended is $1,855,566 for 2026 and it increases annually until $2,282,112 for 2033. We will also pay certain operating expenses in the same manner as with the prior lease. The amendment provides for certain construction expenses, a portion of which are payable by the landlord and a portion of which are payable by us.

Future minimum lease commitments for office facilities and equipment for each of the next five years as of June 30, 2026, are as follows (dollars in thousands):

For the year ending December 31,		Total
2026 (remainder of)		$	970
2027			1,857
2028			2,032
2029			2,081
2030			2,142
Thereafter			6,649
Total		$	15,731

Employment Agreements

On October 7, 2016, we entered into an employment agreement with our chief executive officer, David Hsu, for a five-year term commencing January 1, 2017 and continuing on a year-to-year basis unless terminated by us or Mr. Hsu on not less than 90 days' notice prior to the expiration of the initial term or any one-year extension. The agreements provide for an annual salary with an increase of not less than 3% and an annual bonus in restricted stock and cash equal to a specified percentage of consolidated revenues for each year. Mr. Hsu's annual salary for 2025 was at the annual rate of $760,065, and his annual salary for 2026 is at the annual rate of $782,867. We also owed Mr. Hsu $675,000 as the cash payment in connection with his exchange of 1,348,213 restricted shares of common stock for options to purchase 1,428,432 shares of common stock at $5.01 per share and a cash payment of $675,000, which was initially payable by December 15, 2019 and was extended on December 31, 2025 and would be paid in twelve equal monthly installments. As of June 30, 2026, the full amount of $675,000 had been paid. In addition, at December 31, 2025, we owed Mr. Hsu $1,818,282, representing deferred salary from 2019, 2020, 2021, 2022, 2023, and 2024 and cash bonuses deferred from 2017 and 2018. Mr. Hsu waived his bonus for 2019, 2020, 2021, 2022, and 2023 as part of the suspension of incentive programs for key employees, and he agreed that the $1,818,282 deferred salary and bonus be paid in twelve equal monthly installments with the first payment becoming due on December 31, 2025. As of June 30, 2026, the remaining balance to be paid on Mr. Hsu's deferred compensation was $1,766,075.

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Cash Requirements

We require substantial funds for our business, and we believe that the cash and cash equivalents and short-term investment, together with cash generated by our operations should enable us to meet our cash requirements for at least the twelve months from the date of this report. During the year ended December 31, 2025 and the six months ended June 30, 2026, we raised a total of approximately $7.7 million and $1.1 million, respectively, from the sale of common stock at a 25% discount from market. Under the Nasdaq regulations, the Company may not be able to raise any significant funding from the sale of common stock at a discount from market in the near future without stockholder approval. 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. 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. The proposed convertible notes would have a conversion price of 80% of the market price at the date of issuance of the convertible note. We also have obligations to Mr. Hsu described above, of which approximately $1.8 million is left to be paid . 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 our default on other convertible notes in the principal amount of $13.7 million at June 30, 2026, their perception of our performance and the performance of our common stock, including our low stock price and the possibility of our being delisted from Nasdaq, as well as their perception that they could get a more favorable result with litigation. We cannot assure you that such financing will be available on acceptable, if any terms, which would impair our ability to develop our business and pay our obligations. The low price of our common stock may make it difficult for us to issue convertible notes that are convertible at a discount from the market price of our common stock. Our financial statements for the six months ended June 30, 2026 has a going concern paragraph.

Critical Accounting Estimates and Policies

The accounting policies described below are considered critical to obtaining an understanding of our consolidated financial statements because their application requires the use of significant estimates and judgments by management in preparing the consolidated financial statements. Management estimates and judgments are inherently uncertain and may differ significantly from actual results achieved. Management considers an accounting estimate to be critical if the estimate requires significant assumptions and changes in the estimate or, the use of alternative estimates, could have a material impact on our results of operations or financial position. For more information on our accounting policies, see "Notes to Consolidated Financial Statements-Note 2. Basis of Presentation and Summary of Significant Accounting Policies."

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Revenue Recognition on Large-scale EPC Contracts

Nature of Estimates Required

A significant portion of our revenue is generated from large-scale EPC contracts. Revenue recognition for these contracts requires management to make significant estimates and judgments regarding the transaction price, the identification and combination of performance obligations, the estimated costs to complete the contracts and the measure of progress toward completion.

For large-scale EPC contracts that qualify for cost-to-cost input method under ASC 606, the percentage of completion is determined based on costs incurred to date relative to total estimated costs at completion. Revenue recognized in the reporting period is based on the resulting measure of progress and the estimated transaction price for the performance obligation.

Key Assumptions and Approach Used

The most significant judgment involved in recognizing revenue under the cost-to-cost method is the estimate of total costs required to complete the performance obligation. These estimates include expected equipment and material costs, subcontractor costs, labor costs, construction costs, engineering costs, commissioning costs, tariffs and other costs necessary to complete the project. We update our estimates of costs to complete throughout the construction period based on actual costs incurred, vendor and subcontractor information, project status, expected changes in scope, schedule and other available information.

Because revenue is recognized based on the estimated percentage of completion, changes in estimated costs to complete can have a significant effect on the amount of revenue and gross profit recognized in the current period. An increase in estimated costs to complete generally reduces the percentage of completion and expected gross profit and may result in a cumulative catch-up adjustment to revenue and gross profit. Conversely, a reduction in estimated costs to complete may increase the amount of revenue and gross profit recognized in the current period.

Our estimates are particularly sensitive for fixed-price EPC contracts because we generally bear the risk that actual costs may exceed the amounts contemplated in the contract price. The Longfellow Contract expressly provides that the turnkey work is a fixed-price obligation, subject to specified contractual adjustments and change orders.

In addition to estimated costs to complete, management is required to exercise judgment in evaluating potential changes in the transaction price, including approved and unapproved change orders, claims, liquidated damages, performance incentives and other contractual adjustments. Such amounts are included in the transaction price only when the applicable requirements of ASC 606 have been satisfied.

We also evaluate whether contractual payment terms contain a significant financing component. The determination of the financing component affects both the amount and timing of revenue and interest income that we recognize. Changes in the estimated timing of project completion, commercial operation or receipt of deferred payments, or changes in the applicable interest rate, could affect the amount of revenue and interest income recognized in future periods.

As of June 30, 2026, we had recognized an adjustment to the contractual consideration for the Longfellow Contract to reflect the significant financing component. The amount attributable to financing is not included in EPC revenue and is recognized as interest income over the applicable financing period.

Effect if Different Assumptions Used

We believe that the estimates and judgments described above are reasonable based on information available at the reporting date. However, because of the long-term nature and complexity of EPC projects, actual results may differ from management's estimates. Material changes in estimated costs, contract revenue or other assumptions could result in significant changes in revenue, gross profit and net income in the period in which the estimates are revised.

Allowance for credit and loan losses

Nature of Estimates Required

In adopting ASU 2016-13, we are required to estimate credit and loan losses based on a forward-looking methodology and, if needed, record a reserve for each of the following assets: accounts receivable, customer loans receivable and certain contract assets.

Key Assumptions and Approach Used

In determining the expected loss, we make assumptions based on historical collection experience, current and forecasted economic and business conditions, and a review of the status of each customer's financial asset account. Specifically, we estimate loss reserve based on the aging of the financial asset balances and the financial condition of customers and provide for specific allowance amounts for those customers that have a higher probability of default. With respect to our China operations, we review China's current and future economic conditions along with its political landscape, and how these factors may affect our receivable from SPIC, a state-owned entity. We regularly monitor collection status of these financial assets through account reconciliation, payment tracking, customer's financial condition and macroeconomics conditions.

Effect if Different Assumptions Used

We believe that assumptions not based on the use of historical collection experience, current and forecasted economic, political (China operations) and business conditions, and a review of the status of each customer's financial asset account would be contra to the requirements of ASU 2016-13 and a departure from GAAP.

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Income Taxes

Nature of Estimates Required

As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes for each jurisdiction in which we operate. This process involves estimating actual current period tax expense together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheets, including net operating loss and tax credit carryforwards. Certain estimates and assumptions are required to determine whether deferred tax assets can and will be utilized in future periods.

We take certain tax positions we believe are in accordance with the applicable tax laws. However, these tax positions are subject to interpretation by the Internal Revenue Service, state tax authorities, foreign tax authorities and the courts. We determine uncertain tax positions in accordance with the authoritative guidance.

Key Assumptions and Approach Used

In determining whether it is more likely than not that all or some portion of net operating loss and tax credit carryforwards can be utilized, we analyze the trend of GAAP earnings and then estimates the impact of future taxable income, reversing temporary differences and available prudent and feasible tax planning strategies based on currently enacted tax laws.

Accounting for tax obligations requires management judgment. We use judgment in determining whether the evidence indicates it is more likely than not, based solely on the technical merits, that a tax position will be sustained, and to determine the amount of tax benefits to be recognized. Judgment is also used in determining the likelihood a tax position will be settled and possible settlement outcomes. In assessing uncertain tax positions we consider, among others, the following factors: the facts and circumstances of the position, regulations, rulings, and case law, opinions or views of legal counsel and other advisers, and the experience gained from similar tax positions. We evaluate uncertain tax positions at the end of each reporting period and make adjustments when warranted based on changes in fact or law.

Effect if Different Assumptions Used

Should a change in facts or circumstances, including a change in enacted tax legislation, lead to a change in judgment about the ultimate realizability of a deferred tax asset, we would record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in the provision for income taxes.

Actual income taxes may differ from the estimated amounts which could have a significant impact on the liabilities, revenue and expenses recorded in the financial statements. Significant judgment is required to determine the tax treatment of particular tax positions that involve interpretations of complex tax laws. Such liabilities are based on judgment and a final determination could take many years from the time the liability is recorded. Furthermore, settlement of tax positions included in open tax years may be resolved by compromises of tax positions based on current factors and business considerations that may result in material adjustments to income taxes previously estimated. For a discussion of current and deferred taxes, net operating losses and tax credit carryforwards, accounting for uncertainty in income taxes, unrecognized tax benefits, and tax disputes, see Note 22 of "Notes to Consolidated Financial Statements."

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