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Financing Arrangements

3 Months Ended

Mar. 31, 2024

12. Financing Arrangements

As of March 31, 2024 and December 31, 2023, the Company had the following borrowings:

	March 31, 2024			December 31, 2023
	(Unaudited)
Unsecured loan from unrelated party at 6.0% fixed interest due June 30, 2024	$	2,000,000		$	2,000,000
Secured convertible notes payable at 4.0% per annum, due various dates through June 2027		15,250,000			16,250,000
EB-5 loans – see details below		15,000,000			17,000,000
Notes payable from SMX Property, a related party, at 8% per annum, due October 10, 2024		1,358,658			1,358,658
Total		33,608,658			36,608,658
Less: debt discount and debt issuance costs		(306,783	)		(300,232	)
Current portion		(19,938,658	)		(22,038,658	)
Noncurrent portion	$	13,363,217		$	14,269,768

Unsecured Loans

Unsecured loans include a loan of $2.0 million from an unrelated PRC individual at an interest rate of 6%, interest payable quarterly in arrears, a maturity date of June 30, 2024.

Related party EB-5 financings

The Company’s borrowings under the EB-5 program from related parties consisted of the following as of March 31, 2024 and December 31, 2023:

	March 31, 2024			December 31, 2023
	(Unaudited)
$45.0 million loan from Clean Energy Funding, LP	$	6,000,000		$	7,000,000
$13.0 million loan from Clean Energy Funding II, LP		9,000,000			10,000,000
Total		15,000,000			17,000,000
Less: current portion		(8,000,000	)		(10,000,000	)
Noncurrent portion	$	7,000,000		$	7,000,000

On January 3, 2012, Clean Energy Fund, LP (“CEF”) entered into a secured loan agreement with SREP, a wholly owned subsidiary of the Company. Under the secured loan agreement, CEF agreed to make loans to SREP in an amount not to exceed $45.0 million, to be used to finance the installment purchases for customers of the solar energy systems. A total of $45.0 million was lent. The loan accrues interest at 3% per annum, payable quarterly in arrears. Each advanced principal amount is due and payable 48 months from the advance date or the U.S. Immigration Form I-829 approval date if later. The I-829 petition includes evidence that the immigrant investors successfully met all U.S. Citizenship and Immigration Services requirements of the EB‑5 program. A UCC filing was filed on behalf of CEF, the secured party, to pledge the collateral for the loan, which is inventory and accounts. As of March 31, 2024 and December 31, 2023, the principal loan balance was $7.0 million and $8.0 million, respectively.

On August 26, 2014, Clean Energy Funding II, LP (“CEF II”) entered into a secured loan agreement with LED, a wholly-owned subsidiary of the Company, for up to $13.0 million. A total of $10.5 million was lent. The proceeds of the loan were used by LED for its operations. The loan accrues interest at fixed interest rate of 3.0% per annum, payable quarterly in arrears. Each advance of principal is due and payable in 48 months or the U.S. Immigration Form I-829 approval date if longer. As of March 31, 2024 and December 31, 2023, the remaining undrawn amount under the loan was $3.0 million.

The general partner of CEF and CEF II is Inland Empire Renewable Energy Regional Center (“IERE”). The principal owners and managers of IERE consist of the Company’s chief executive officer, its former executive vice president, who is a 5% stockholder, and one of its directors.

Convertible Notes

The Company has issued 4% secured subordinated convertible notes to former limited partners of CEF, 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 notes to CEF in the same amount, reducing the outstanding EB-5 loan balance. Payment of the notes is secured by a security interest in SREP’s accounts receivable and inventory. The convertible notes are payable in five 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, the Company’s initial public offering are convertible into common stock at a conversion price equal to 80% of the public stock price of the Company’s common stock as defined in the convertible note, which is $3.20 per share. The convertible notes made after the Company’s initial public offering are convertible into common stock at a conversion price equal to 80% of the average closing price of the Company’s common stock for the ten trading days preceding the date of the exchange agreement with the limited partner. 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 the Company’s initial public offering, as defined in the note, or for convertible notes issued after the initial public offering, six months after the conversion date.

All convertible notes prior to the Company’s initial public offering have two separate and distinct embedded features. They are: (1) optional conversion upon a public stock event as defined in the convertible note; and (2) redemption put feature upon fundamental transaction.

Commencing six months from the date the Company first receives proceeds from its public stock event for convertible notes made prior to the Company’s initial public offering, and from the date of the convertible note made after the Company’s initial public offering, until the convertible notes are no longer outstanding, the convertible notes and all unpaid accrued interest is convertible into shares of common stock, at the option of the holder, during five trading days commencing on the first, second, third, fourth, and fifth anniversaries of the original issuance date. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the then entire amount of the convertible notes balance outstanding including all unpaid principal and, with the consent of the Company, accrued interest payable by (y) the conversion price. The Company evaluated the embedded optional conversion feature in accordance with the guidance under ASC Topic No. 815, Derivatives and Hedging (“ASC 815”), and determined it is exempt from derivative accounting as the embedded feature is deemed to be indexed to the Company’s own stock and would be classified in stockholder’s equity if freestanding. Further, because the conversion price is a fixed discounted percentage per share price of a contingent future public stock event that has not been realized as of both the issuance date and December 31, 2023, the Company shall record the intrinsic value of the beneficial conversion feature calculated as of the issuance date of the convertible notes upon the realization of the contingent initial public offering event.

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 the Company, 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. The Company 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.

There were no redemptions for new convertible notes during the three months ended March 31, 2024 and 2023. During the three months ended March 31, 2024 and 2023, the Company recognized a gain on debt extinguishment in the amount of approximately $54,000 and $13,000, respectively related to limited partner interest in CEF who exchanged their limited partner interest for convertible notes.

Notes Payable to SMX Property, LLC

On October 10, 2022, SMXP made unsecured loan to the Company of $944,077 and $414,581, respectively, for which the Company issued its 8% promissory notes due October 10, 2024, with interest payable quarterly.

The $944,077 loan was used to pay the security deposit and lease obligations for one month owed to the new owner of the Company’s headquarters building under the new lease agreement.

The $414,581 note was issued in payment of lease obligations owing to SMXP by the Company for rent on the Company’s headquarters from June 1, 2022 to October 12, 2022.

Interest Expense

For the three months ended March 31, 2024 and 2023, interest expense incurred on the above long-term EB‑5 related party loans was approximately $122,000 and $133,000, respectively.

Total interest expense incurred (including interest on long-term related party loans) was approximately $384,000 and $399,000 for the three months ended March 31, 2024 and 2023, respectively. The weighted average interest rate on loans outstanding was 3.9% as of March 31, 2024 and December 31, 2023.

Principal maturities for the financing arrangements as of March 31, 2024 are as follows:

For the year ending December 31,	Bank and Other Unsecured Loans		EB-5 Loans – Related Party		Notes Payable – Related Party		Convertible Notes		Total
2024 (remainder of)	$	2,000,000	$	8,000,000	$	1,358,658	$	5,580,000	$	16,938,658
2025		-		3,000,000		-		5,390,000		8,390,000
2026		-		4,000,000		-		2,390,000		6,390,000
2027		-		-		-		990,000		990,000
2028		-		-		-		500,000		500,000
Thereafter								400,000		400,000
Total	$	2,000,000	$	15,000,000	$	1,358,658	$	15,250,000	$	33,608,658