Through its US subsidiaries, SolarMax designs, installs and sells/finances PV solar energy systems and backup battery systems for residential and commercial customers and sales/installs LED systems in California. 

Unlike the US, which is focused on residential and small business installations, the China segment is focused on larger scale solar farm projects (30-100MW). SolarMax’s China business is conducted through ZHTH, which is engaged in project development and ZHPV, which provides EPC services for solar farms. The Company’s main activities in China are:

-   Through ZHTH: identifying, procuring and selling solar farm projects primarily to subsidiaries of a related party that hold permits to solar farm projects and to third party developers;

-   Through ZHPV: performing EPC services pursuant to solar farm project EPC contracts; and to a much lesser extent performing O&M services for solar farm projects and sales and installation of residential and commercial photovoltaic systems.

The project subsidiaries established by ZHTH are typically sold to buyers at net asset value so no material gains/losses are generated from these sales.  ZHPV performs EPC services for buyers who purchase a project subsidiary and also performs EPC services as a general contractor for a solar farm owner that already owns a permit. Upon completion of a solar farm, ZHPV also provides O&M services through its subsidiaries.

Management

SolarMax was founded by, managed and is controlled by the same group of individuals – David Hsu, Ching Liu and Simon Yuan who own a substantial equity interest in the Company (10%, 6.2% and 5.5%, respectively with total insider ownership at 36.5%) and serve on the BoD. David Hsu serves as Chairman of the Board and Corporate Governance Chair, Ching Liu serves as EVP – Chief Strategy Officer and Treasurer and Secretary of the Board, and Simon Yuan (who previously served as CFO) serves as the Audit Committee Chair. The Co-founders have set up a web of other entities and interrelated companies that transact with SolarMax.

The employment agreements with David Hsu and Ching Liu were amended in 2017 to provide for bonus compensation (70% in restricted stock and 30% in cash) based on a specified percentage of consolidated revenue achieved in each year which creates an incentive to further inflate revenues.

SolarMax Red Flags – There are probably more not mentioned here

Solar Max has made several failed attempts to go public via a traditional IPO since 2013 and this is the only way for management and insiders to dump their shares. ALAC has not published any investor materials on the target but information is available in the latest S-1 filed earlier this year (here) and in lawsuits by the former CFO of the Company alleging fraud (here). The public information available raises a number of red flags about SolarMax. Some of major ones are highlighted below.

(1)       Abuse of the EB5 investor scheme through a web of companies owned by the SolarMax Co-Founders

SolarMax has been largely financed by loans from the sale of EB5 visas to Chinese investors EB5 Loans through two Regional Centers beneficially owned and managed by the co-founders. The Inland Empire Renewable Energy Regional Center (“IERE”), located in Riverside, Calif. where SolarMax is headquartered was designated as an EB-5 Regional Center by USCIS in June 2011 authorizing it to offer investment opportunities in exchange for permanent residency status to foreign investors who invest at least $500,000 toward job-creating projects. The IERE, which is owned and managed by David Hsu, Ching Liu, and Simon Yuan has been used to target Chinese investors and pool and direct EB5 investment funds to SolarMax. The money has been loaned to SolarMax through two investment limited partnerships Clean Energy Fund LP (“CEF”) and Clean Energy Funding II LP (“CEF II”) where IERE acts as the general partner. IERE also acts as a general partner of a third limited partnership, Clean Energy Center (“CEC”) which received a $13m loan to SMX Property LLC, another entity owned by the co-founders, in order to purchase and renovate the office building located at 3080 12^th Street Riverside, CA.

Essentially SolarMax’s co-founders have been channeling EB5 investor funds to a Regional Center, which they owned, profiting from admin fees charged to investors and channeling the remaining funds into their own companies including SolarMax and SMX Property LLC which takes lease payments from SolarMax.

CEF I and CEF II have provided SolarMax’s US subsidiaries with a total of $55m in secured loans under two loan facilities - $45m to SREP from CEF and $13m to LED. As of September 30, 2019, SolarMax had fully maxed out the CEF I and had $2.5m available to use under CEF II. These loans typically have a 4-year term and can be extended until investors have met all the requirements under the EB5 program for permanent resident status (I-829 approval date). Given the terms of the loan financing offered to residential customers by SolarMax which average 7 years, it is logically not feasible for the Company to repay EB5 investors within the 4-year time frame. 

In January 2020, LPs accounting for $23m of these loans had their petitions approved which triggers the maturity of these loans, $22m of LPs had a pending status for their petitions and the remaining $10.5m was scheduled to mature 2020-2021. Basically, if SolarMax is unable to find new EB5 investors it will be unable to repay the outstanding loans to CEF I and CEF II. So in Q4 2019, SolarMax issued to 11 LPs of CEFI  $5.5m of convertible notes, which convert into common stock at 80% of the IPO price. The Company is probably using the public listing as a way to repay some of its existing EB5 liabilities through the issuance of converts.

SolarMax has also employed several methods to divert funds from SREP and other US subsidiaries to SolarMax Technology (parent holding company), which is outside the EB5 purview. In the past, as detailed in the lawsuit, SREP has entered into fake procurement contracts with sham entities controlled by individuals linked to the co-founders to ultimately channel cash to the parent.

Starting in 2016, SolarMax Technology, executive directors implemented a hefty management fee based on 10% of the subsidiary’s revenue. In 2016, 2017 and 2018, SolarMax Technology received management fee income of $3.1m, $3.3m and $3.2m, respectively. Furthermore, all of the Company’s lease agreements are from real estate owned by the Company’s co-founders.

(2)        Financials reveal dependency on related parties

SolarMax’s financial performance in the US and in China has been volatile. The explanation for this is a large portion of the Company’s revenues are derived from sales to related party customers rather than from external customers, particularly in China. Similarly, the Company’s significant suppliers for panels are also related parties or possibly connected to the Company.

The 2015 lawsuit alleges that in the 2011 and 2012 (prior to China entry), SolarMax engaged in round trip transactions with sham middleman entities to inflate US sales figures reported approximately $50m of phantom revenue on its 2011 and 2012 audited financial statements.

It appears that the Company may be still engaging in similar transactions through various related party entities.