NeoVolta Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NeoVolta Inc. Index to Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 206 ) 29 Balance Sheets as of June 30, 2022 and 2021 30 Statements of Operations for the years ended June 30, 2022 and 2021 31 Statements of Stockholders’ Equity for the years ended June 30, 2022 and 2021 32 Statements of Cash Flows for the years ended June 30, 2022 and 2021 33 Notes to the Financial Statement 34 28 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of NeoVolta, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of NeoVolta, Inc. (the “Company”) as of June 30, 2022 and 2021, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ MaloneBailey, LLP www.malonebailey.com We have served as the Company’s auditor since 2018 Houston, Texas September 27, 2022 29 NEOVOLTA INC. Balance Sheets June 30, 2022 2021 Assets Current assets: Cash and cash equivalents $ 330,385 $ 425,681 Accounts receivable 1,317,738 1,128,444 Inventory 2,238,208 1,662,140 Prepaid insurance and other current assets 239,001 45,926 Total current assets 4,125,332 3,262,191 Total assets $ 4,125,332 $ 3,262,191 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 205,600 $ 53,510 Accrued interest payable 53,436 3,918 Other accrued liabilities 127,356 36,821 Convertible notes payable 1,068,000 – Total current liabilities 1,454,392 94,249 Convertible notes payable (net of unamortized discount of $- 0 - and $ 41,307 as of June 30, 2022 and 2021, respectively) 53,716 19,308 Total liabilities 1,508,108 113,557 Commitments and contingencies (Note 5) – – Stockholders' equity: Common stock, $ 0.001 par value, 100,000,000 shares authorized, 21,977,251 and 19,640,888 shares issued and outstanding 21,978 19,641 Additional paid-in capital 18,394,641 13,169,363 Accumulated deficit ( 15,799,395 ) ( 10,040,370 ) Total stockholders' equity 2,617,224 3,148,634 Total liabilities and stockholders' equity $ 4,125,332 $ 3,262,191 See Accompanying Notes to Financial Statements. 30 NEOVOLTA INC. Statements of Operations Year Ended June 30, 2022 2021 Revenues from contracts with customers $ 4,473,514 $ 4,823,510 Cost of goods sold 3,806,381 4,175,795 Gross profit 667,133 647,715 Operating expenses: General and administrative 6,353,920 8,255,865 Research and development 68,503 42,801 Total operating expenses 6,422,423 8,298,666 Loss from operations ( 5,755,290 ) ( 7,650,951 ) Other income (expense): Interest expense ( 49,544 ) ( 24,521 ) Gain on forgiveness of debt – 29,600 Total other income (expense) ( 49,544 ) 5,079 Net loss $ ( 5,804,834 ) $ ( 7,645,872 ) Weighted average shares outstanding - basic and diluted 20,554,985 17,889,327 Net loss per share $ ( 0.28 ) $ ( 0.43 ) See Accompanying Notes to Financial Statements. 31 NEOVOLTA INC. Statements of Stockholders' Equity Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity Balance at June 30, 2020 14,421,528 $ 14,422 $ 5,714,482 $ ( 2,394,498 ) $ 3,334,406 Issuance of common stock for conversion of debt and accrued interest 3,604,830 3,605 19,106 – 22,711 Stock compensation expense 1,614,530 1,614 7,435,775 – 7,437,389 Net loss – – – ( 7,645,872 ) ( 7,645,872 ) Balance at June 30, 2021 19,640,888 $ 19,641 $ 13,169,363 $ ( 10,040,370 ) $ 3,148,634 Issuance of common stock for conversion of debt and accrued interest 1,098,630 1,099 5,823 – 6,922 Stock compensation expense 1,237,733 1,238 5,306,571 – 5,307,809 Adjustment for change in accounting principle – – (87,116 ) 45,809 (41,307 ) Net loss – – – ( 5,804,834 ) ( 5,804,834 ) Balance at June 30, 2022 21,977,251 $ 21,978 $ 18,394,641 $ ( 15,799,395 ) $ 2,617,224 See Accompanying Notes to Financial Statements. 32 NEOVOLTA INC. Statements of Cash Flows Year Ended June 30, 2022 2021 Cash flows from operating activities: Net loss $ ( 5,804,834 ) $ ( 7,645,872 ) Adjustments to reconcile net loss to net cash used in operations: Stock compensation expense 5,307,809 7,437,389 Amortization of beneficial conversion feature – 21,780 Gain on forgiveness of debt – ( 29,600 ) Changes in current assets and liabilities Accounts receivable ( 189,294 ) ( 737,332 ) Inventory ( 576,068 ) ( 108,844 ) Prepaid expenses and other current assets ( 193,075 ) 104,089 Accounts payable - others 152,090 49,850 Accrued expenses 140,076 24,917 Net cash flows used in operating activities ( 1,163,296 ) ( 883,623 ) Cash flows from financing activities: Proceeds from convertible notes payable 1,068,000 – Net cash flows from financing activities 1,068,000 – Net decrease in cash and cash equivalents ( 95,296 ) ( 883,623 ) Cash and cash equivalents at beginning of period 425,681 1,309,304 Cash and cash equivalents at end of period $ 330,385 $ 425,681 Supplemental disclosures of cash flow information: Cash paid for interest $ – $ – Cash paid for income taxes $ – $ – Supplemental non-cash financing activities: Convertible notes payable and accrued interest converted to common stock $ 6,922 $ 22,711 Adjustment of debt discount related to adoption of new accounting principle $ 87,116 $ – See Accompanying Notes to Financial Statements. 33 NEOVOLTA INC. Notes to Financial Statements June 30, 2022 (1) Business and Summary of Significant Accounting Policies Description of Business – NeoVolta Inc. (“we”, “our” or the "Company") is a Nevada corporation, which was formed on March 5, 2018. The Company is a designer, seller and manufacturer of Energy Storage Systems (ESS) which can store and use energy via batteries and an inverter at residential sites. The Company completed a public offering of shares of its common stock pursuant to Regulation A in May 2019 (see Note 3), and began assembling and selling its proprietary ESS units through wholesale customers, primarily in California, in the fiscal year ended June 30, 2020. In August 2022, the Company completed an underwritten public offering of its equity securities resulting in its common stock and warrants becoming listed on a national exchange (see Note 7). Basis of Presentation – The accompanying financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Cash and Cash Equivalents – The Company considers all highly liquid accounts with original maturities of three months or less at the date of acquisition to be cash equivalents. Periodically, the Company may carry cash balances at financial institutions in excess of the federally insured limit of $250,000. The amount in excess of the FDIC insurance at June 30, 2022 was $ 80,385 . Inventory – Inventory consists of batteries and inverters purchased from Asian suppliers and delivered to a location near the Company’s offices, for assembly into ESS units. Inventory is stated at the lower of cost or net realizable value, cost being determined using the first-in, first out (FIFO) method. The Company periodically reviews the value of items in inventory and records an allowance to reduce the carrying value of inventory to the lower of cost or net realizable value based on its assessment of market conditions, inventory turnover and current stock levels. Inventory write-downs are charged to cost of goods sold. No inventory reserve was required as of June 30, 2022. The following table presents the components of inventory as of June 30, 2022 and 2021: Schedule of inventory June 30, 2022 2021 Raw materials $ 1,845,973 $ 1,245,945 Work in process 22,768 416,195 Finished goods 369,467 – Total $ 2,238,208 $ 1,662,140 Revenue Recognition – The Company recognizes revenue in accordance with Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). 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 contact 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 34 The Company generates revenues from contracts with customers, consisting of a relatively small number of wholesale dealers and installers, primarily in California. In the year ended June 30, 2022, two such dealers represented approximately 20 % each of the Company’s revenues whereas in the year ended June 30, 2021, four such dealers represented approximately 18 %, 15 %, 13 % and 10 % of the Company’s revenues. As of June 30, 2022, one dealer represented 33 % of the Company’s accounts receivable. As of June 30, 2021, three dealers represented an aggregate of 54 % of the Company’s accounts receivable. Under its present contracts with customers, the Company’s sole performance obligation is the delivery of products to the customer. Since all of the Company’s revenue is currently generated from the sales of similar products delivered to customers in domestic locations, no further disaggregation of revenue information for the years ended June 30, 2022 and 2021 is provided. Allowance for Doubtful Accounts – The Company recognizes an allowance for doubtful accounts whenever a loss is expected to be incurred in the realization of a customer’s account. As of June 30, 2022, no allowance for doubtful accounts has been recorded. Income Taxes – The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of reported assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company accounts for uncertain tax positions in accordance with the provisions of Accounting Standards Codification (“ASC”) 740-10 which prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, on its tax return. The Company evaluates and records any uncertain tax positions based on the amount that management deems is more likely than not to be sustained upon examination and ultimate settlement with the tax authorities in the tax jurisdictions in which it operates. Stock Compensation Expense – Employee and non-employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. Loss Per Common Share – Basic loss per common share is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. As of June 30, 2022, the Company had outstanding common stock equivalents of 9,404,867 shares related to convertible notes, including accrued interest, issued in May 2018, and 267,000 shares related to convertible notes issued in October 2021 (see Notes 2 and 7). Research and Development Costs – Research and development costs are expensed as incurred. Use of Estimates – Management has made a number of estimates and assumptions in preparing these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. As a result of the continued spread of the COVID-19 coronavirus since early 2020, economic uncertainties have arisen which could impact business operations, supply chains, energy demand, and commodity prices that are beyond our control. Overall, we have not experienced a material adverse impact to our economic performance or ability to continue our business operations as a result of COVID-19. We continue to monitor COVID-19, but do not believe it will have a material unfavorable impact to our future financial performance at this time. 35 Related Parties - The Company accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”). A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that it might be prevented from fully pursuing its own separate interests is also a related party. Fair Value Measurements and Financial Instruments - ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 - Inputs that are both significant to the fair value measurement and unobservable. The carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying value of long-term debt approximates fair value since the related rate of interest approximates current market rates. At June 30, 2022 and 2021, the Company did no t have any financial assets or liabilities measured and recorded at fair value on the Company’s balance sheets on a recurring basis. Recent Accounting Pronouncements – From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, (“FASB”), or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption. The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements. 36 Effective as of July 1, 2021, the Company early adopted the provisions of ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ). As a result of the adoption of this new accounting principle, using the modified retrospective method, the Company no longer recognized a beneficial conversion feature associated with the issuance of any convertible debt. Accordingly, the Company adjusted the beneficial conversion feature associated with the convertible notes issued in 2018 as of July 1, 2021 by reversing the previously recorded cumulative amortization expense of $45,809 and the remaining unamortized balance of the debt discount of $41,307, with an offsetting adjustment to reduce additional paid-in capital, in the amount of $87,116 (see Note 2). Liquidity – These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern has been dependent upon the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations. As disclosed in Note 7, we completed a public offering of our equity securities in August 2022 that raised net total proceeds of approximately $ 3,855,000 . With the proceeds of this equity offering, we anticipate that we will have sufficient cash resources in order to operate our business for at least the next 12 months from the date these financial statements are issued. (2) Notes Payable On various dates beginning in May 2018, the Company entered into six unsecured convertible notes payable for aggregate proceeds of $104,688. Each note bears interest at 12% per annum and both principal and accrued interest are due at maturity five years from the date of issuance. These notes are convertible at any time, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.0063 per share. The Company performed an analysis to determine whether there was a beneficial conversion feature and noted none. The notes are structured to be converted into shares of the Company’s common stock at the conversion price, subject to a shareholder limitation of 4.99% of the Company’s outstanding common stock. This conversion feature resulted in the full repayment of the notes payable owed to two such note holders in conjunction with the closing of an IPO in May 2019 and left the four remaining note holders with a total outstanding principal balance of $87,116 (see Notes 3 and 7). Effective May 19, 2019, the remaining holders of the convertible notes payable agreed to prospectively amend the terms of the outstanding balance of their notes to reduce the interest rate from 12% per annum to 3.99% per annum and to change the interest accrual method from a compound to a simple basis. Due to this amendment, the Company was required to perform an updated debt modification analysis under ASC 470 and determined that the amendment qualified as an extinguishment of debt and therefore a beneficial conversion feature was required to be evaluated as of the date of the modification. Since the fair value of the Company’s common stock at the time of the amendment was sufficiently higher than the conversion price, it was determined that a beneficial conversion feature in the amount of $87,116 existed as of that date. Accordingly, the Company recorded a debt discount, offset by a credit to additional paid-in capital, in the amount of $87,116 as of May 19, 2019, and began amortizing the debt discount to interest expense over the remaining term of the notes. As of July 1, 2021, the Company adopted a new accounting standard for convertible debt by reversing the previously recorded cumulative amortization expense of $45,809 and the remaining unamortized balance of the debt discount of $41,307, with an offsetting adjustment to reduce additional paid-in capital, in the amount of $87,116 (see Note 1). In the years ended June 30, 2022 and 2021, holders of certain convertible notes payable elected to convert portions of their notes, consisting of both principal and accrued interest, in the aggregate amounts of $ 6,922 and $ 22,711 , respectively, into equity. Based upon the stated conversion price of $0.0063 per share, these investors elected to convert or exchange such convertible notes payable into a total of 1,098,630 and 3,604,830 shares of common stock for the years ended June 30, 2022 and 2021, respectively (see Notes 3 and 7). 37 On October 18, 2021, the Company completed a new convertible debt offering with a group of accredited investors via the issuance of notes in the total amount of $ 1,068,000 . The unsecured notes bear interest at the rate of 6 % per annum and are due one year from the date of issuance. In the event, however, of a qualified public offering of the Company’s common stock pursuant to which the Company’s common stock becomes listed for trading on a national securities exchange, the principal amount of the notes and any accrued interest will be automatically converted into shares of the Company’s common stock at a conversion price of $4.00 of principal per share ( see Note 7 ) . As of June 30, 2022, the future maturities of all notes payable are as follows (see Note 7): Schedule of future maturities of long-term debt Year ending June 30, 2023 $ 1,068,000 Year ending June 30, 2024 53,716 Total long-term debt $ 1,121,716 As a result of the economic impact of the coronavirus pandemic in early 2020, the Company applied for and received a loan under the U.S. government sponsored Paycheck Protection Program (“PPP”) in May 2020 in the amount of $29,600. Under the terms of the PPP loan, the Company was allowed to apply to have the PPP loan forgiven provided that it met certain documentation requirements. The Company made such an application in late 2020 and the loan was subsequently forgiven in full, effective February 26, 2021. Accordingly, the Company recognized a gain on the forgiveness of debt for the year ended June 30, 2021 in the amount of $ 29,600 . (3) Equity Common Stock – In the years ended June 30, 2022 and 2021, holders of certain convertible notes payable elected to convert portions of their notes, consisting of both principal and accrued interest, in the aggregate amounts of $ 6,922 and $ 22,711 , respectively, into equity. Based upon the stated conversion price of $0.0063 per share, these investors elected to convert or exchange such convertible notes payable into a total of 1,098,630 and 3,604,830 shares of common stock for the years ended June 30, 2022 and 2021, respectively (see Notes 2 and 7). Stock Compensation Expense – In December 2019, the Company awarded a total of 700,000 shares of common stock to a company controlled by the Company’s Chief Executive Officer (“CEO”) and a marketing consultant. The Company valued the stock awards at a total amount of $ 700,000 , based on the above-noted public offering price of $1.00 per share. For the 500,000 shares awarded to a company controlled by the Company’s CEO, the Company immediately amortized $500,000 as a non-cash charge to expense as such shares were considered to have been earned by the CEO under the Company’s milestone incentive compensation program, as of December 31, 2019, notwithstanding that issuance of the shares was deferred until a later date (such shares were not issued until March 2022). For the 200,000 shares awarded to a marketing consultant, the Company amortized $200,000 as a non-cash charge to expense over his 24 month services agreement. In June 2020, the Company entered into new Board approved employment contracts with the Company’s two executive officers and also entered into a related contractor agreement with a company controlled by the Company’s CEO. Pursuant to such contracts, the company controlled by the Company’s CEO and the Company’s Chief Financial Officer, in his individual capacity, met the necessary milestones to earn a total of 1,600,000 incentive shares of common stock, with a fair value of $6,976,000, as of December 31, 2020. These shares, plus another 14,530 incentive shares earned by a wholesale dealer (see Note 5), were issued in February 2021. In the year ended June 30, 2021, the Company recognized non-cash stock compensation expense for the fair value of such shares, along with the final amortization expense attributable to shares previously granted to the marketing consultant, in the total amount of $ 7,437,389 , which also included the fair value of certain earned shares subsequently issued to other grantees. 38 Pursuant to the above noted contract with a company controlled by the Company’s CEO, such company met the necessary milestones to earn a total of an additional 500,000 incentive shares of common stock as of December 31, 2021, with a then current value of $3,505,000. These shares, plus another 500,000 incentive shares previously earned by that company, were issued in the quarter ended March 31, 2022, at which time the agreement with the company controlled by the Company’s CEO was terminated and the CEO entered into a new employment agreement, as described in the following paragraph. In the year ended June 30, 2022, the Company issued a total of 1,237,733 shares of common stock to all grantees, including the aggregate 1,000,000 shares of common stock attributable to the company controlled by the CEO. In the year ended June 30, 2022, the Company recognized total non-cash stock compensation expense of $ 5,307,809 as follows: (i) $4,534,554 for the fair value of the 500,000 newly earned shares by the CEO controlled company plus the fair value of earned shares issued to several other grantees, including $278,750 for the amortized value of 50,000 shares attributable to a new independent director and $60,062 for 8,568 incentive shares earned by a wholesale dealer (see Note 5); and (ii) $773,255 for non-cash stock compensation attributable to the new employment contracts entered into with the two executive officers, as further described in the next two paragraphs. In February 2022, we entered into a new employment agreement with our CEO, effective April 1, 2022. The initial term of the employment agreement is one year and is automatically renewable for additional one-year terms unless either party chooses not to renew the agreement. The agreement provides for an initial annual salary of $165,000. Pursuant to the agreement, we issued our CEO a restricted stock unit (“RSU”) award for up to 150,000 shares of our common stock upon achieving the following milestones (which achievements shall be determined by the Board): (i) Milestone 1 - Successfully complete an uplisting of our common stock in 2022 and continue his employment with our company until January 1, 2023: 50,000 shares; and (ii) Milestone 2 - Produce 2,000 ESSs in 2022 and continue his employment with our company until January 1, 2023: 100,000 shares. In February 2022, we entered into a new employment agreement with our Chief Financial Officer (“CFO”), effective March 1, 2022. The initial term of the employment agreement is one year and is automatically renewable for additional one-year terms unless either party chooses not to renew the agreement. The agreement provides for an initial annual salary of $125,000. Pursuant to the agreement, we issued our CFO an RSU award for up to 300,000 shares of our common stock upon achieving the following milestones (which achievements shall be determined by the Board): (i) Milestone 1 - Successfully complete an uplisting of our common stock in 2022 and continue his employment with our company until January 1, 2023: 250,000 shares; and (ii) Milestone 2 - successfully complete and file the Company’s Form 10-K for the year ended June 30, 2023 no later than September 29, 2023 and continue his employment with our company until January 1, 2024: 50,000 shares. Based upon the Company’s assessment of the probability of the CEO and CFO ultimately achieving each milestone specified under the RSU awards indicated above, the Company has calculated the grant date value of such awards and is amortizing it as stock compensation expense over the underlying performance periods. As previously indicated, the Company has recognized stock compensation expense applicable to such RSU awards in the amount of $773,255 for the year ended June 30, 2022. Other Matters – In February 2019, the Company’s Board of Directors approved the establishment of a new 2019 Stock Option Plan with an authorization for the issuance of up to 2,500,000 shares of common stock. The Plan is designed to provide for future discretionary grants of stock options, stock awards and stock unit awards to key employees and non-employee directors. As of June 30, 2022, the Company has made awards totaling 450,000 shares for the RSU’s granted to two executives, as noted above, under the Plan. (4) Income Taxes The Company is subject to United States federal income taxes at an approximate rate of 21%. The reconciliation of the provision for income taxes at the federal statutory rate, compared to the Company’s income tax expense as reported, is as follows (rounded to nearest $00): Schedule of income tax expense Year Ended June 30, 2022 2021 Income tax benefit computed at statutory rate $ 104,400 $ 39,200 Change in valuation allowance ( 104,400 ) ( 39,200 ) Provision for income taxes $ – $ – 39 Significant components of the Company’s deferred tax assets at the currently enacted corporate income tax rate are as follows (rounded to nearest $00): Schedule of deferred taxes June 30, 2022 June 30, 2021 Deferred income tax assets: Net operating losses $ 414,600 $ 310,200 Valuation allowance ( 414,600 ) ( 310,200 ) Net deferred income tax assets $ – $ – The Company has a cumulative tax operating loss carry forward as of June 30, 2022 of approximately $ 1,974,000 , with an indefinite expiration period. (5) Commitments and Contingencies Effective January 1, 2021, the Company secured new corporate and manufacturing office space under a sublease agreement with its contract manufacturer (see Note 6). Under the terms of the sublease agreement, the Company is required to make rental payments of $10,350 per month during the initial one-year term of the agreement. The sublease agreement is renewable upon mutual agreement of both parties for up to four additional years at a modest increase in the monthly rent, however, the Company is under is no obligation to renew it. Management has determined that the exercise of the renewal option is not reasonably certain and, as such, the Company has accounted for it as a short-term lease under ASC 842, Leases . Effective January 1, 2022, the Company elected to renew the agreement for another one year period. As indicated in Note 1, the Company sells its proprietary ESS units through wholesale dealers, primarily in California. In that regard, the Company has entered into agreements with several wholesale dealers operating in California and other states under which the Company has incentivized the dealers to achieve quarterly sales above targeted levels by agreeing to grant them shares of the Company’s common stock for exceeding such quarterly sales targets, subject to defined maximums. Pursuant to such agreements, one dealer met the necessary milestones to earn 14,530 incentive shares of common stock in December 2020, which were issued in February 2021, and also earned another 8,568 incentive shares of common stock in December 2021, which were issued in March 2022. From time to time in the ordinary course of our business, the Company may be involved in legal proceedings, the outcomes of which may not be determinable. The Company is not involved in any legal proceedings at this time. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable. (6) Related Party Transactions An executive officer of the corporate parent company of our contract manufacturer (see Note 5) was nominated to become a director of the Company in January 2022 and his appointment became effective upon our completion of a public offering in August 2022 (see Note 7). Pursuant to an agreement that we reached with our contract manufacturer prior to such nomination and appointment, we made payments to that company to assemble our energy storage systems during the year ended June 30, 2022 in the total amount of $ 857,025 . Additionally, we made contractual payments to that company for our rental of office space during the year ended June 30, 2022 in the total amount of approximately $ 126,000 . 40 (7) Subsequent Events On August 1, 2022, the Company completed an underwritten public offering of its equity securities in the form of Units with each Unit consisting of one share of common stock and one warrant (each, a “Warrant” and collectively, the “Warrants”) to purchase one share of common stock at an exercise price of $4.00 per share. The shares of common stock and the Warrants comprising the Units were immediately separated at closing of the offering and each is now independently listed on the NASDAQ Capital Market. Each Warrant became exercisable on the date of issuance and will expire five years from the date of issuance. At the initial closing, a total of 975,000 Units were sold in the offering at an offering price to the public of $4.00 per Unit. The gross proceeds of the offering were $3,900,000 and the net proceeds, after deduction of underwriting discounts and other offering costs were approximately $3,315,000. The Company granted the underwriter a 45-day option to purchase up to an additional 146,250 shares of common stock and/or 146,250 additional Warrants solely to cover any overallotments at the public offering price, less underwriting discounts and commissions. As of August 5, 2022, the underwriters had elected to exercise such option on both the common stock and Warrants resulting in additional net proceeds to the Company of approximately $540,000. The Company also granted the underwriter non-tradeable warrants to purchase a total of 58,500 shares of common stock at an exercise price of $4.40 per share for a period of five years. In conjunction with the public offering, all holders of the Company’s 2018 convertible notes in the total amount of $53,716 converted their debt into a total of 9,404,867 shares of common stock at the stated conversion rate, and all holders of the Company’s 2021 convertible notes in the total amount of $1,068,000 converted their debt into a total of 267,000 shares of common stock at the stated conversion rate (see Note 2). As a result of the closing of the public offering and the conversion of both sets of convertible notes, the Company has a total of 32,770,368 shares of common stock outstanding and has fully eliminated its convertible debt. 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.