Beam Global (formerly Envision Solar International, Inc.) — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three and six months ended June 30, 2017, and was filed August 14, 2017. The company designs and manufactures solar-powered products serving electric-vehicle charging, outdoor advertising, and energy-security markets. Key products include EV ARC and Solar Tree systems incorporating solar generation, battery storage, and proprietary tracking technology.
The company reported approximately $2.7 million of contracted backlog at June 30, 2017, which management expected to execute largely during 2017. The backlog included approximately $2.4 million of orders under a New York City contract. The California state contract for EV ARC products was extended through June 2018.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $507,730, versus $338,895 in 2016 | $878,419, versus $684,814 in 2016 |
| Gross loss | $(13,106), versus $(29,339) | $(16,960), versus $(75,100) |
| Gross margin | Approximately (2.6%), versus (8.7%) | Approximately (1.9%), versus (11.0%) |
| Operating expenses | $545,292, versus $536,641 | $1,214,281, versus $1,020,275 |
| Loss from operations | $(558,398), versus $(565,980) | $(1,231,241), versus $(1,095,375) |
| Net loss | $(604,332), versus $(614,460) | $(1,223,905), versus $(1,351,752) |
| Net loss margin | Approximately (119.0%) | Approximately (139.4%) |
| Net loss per share | $(0.00), versus $(0.01) | $(0.01), versus $(0.01) |
Second-quarter revenue increased approximately 50% year over year, while six-month revenue increased approximately 28%. Revenue was primarily generated by delivery of seven EV ARC units in the second quarter. The company continued to report gross losses, although the losses narrowed substantially from the prior-year periods. Management attributed the remaining losses to manufacturing overhead, warranty costs, and losses on certain units sold below cost.
Operating expenses increased approximately 19% in the first six months, driven primarily by higher sales personnel and commissions, rent and utilities for the larger facility, executive compensation, and stock-based compensation. Six-month stock-based compensation included approximately $191,146 of expense.
Cash Flow, Liquidity, Debt, and Capitalization
- Cash was $271,906 at June 30, 2017, compared with $8,568 at December 31, 2016.
- Cash used in operating activities was $452,742 for the six months, an improvement from $931,112 in the prior-year period. The improvement was aided by a $730,749 reduction in accounts receivable, partly offset by a $389,936 inventory build.
- Cash used in investing activities was $5,057, compared with $85,582 in 2016.
- Cash provided by financing activities was $721,137, including $245,000 from common-stock sales and $500,000 of borrowings under the company’s credit facility.
- Working capital was negative $763,046 at June 30, 2017. Current assets were $1.48 million and current liabilities were $2.24 million.
- Total liabilities were $3.42 million, compared with $3.44 million at year-end 2016. Stockholders’ deficit was $1.46 million.
- The Silicon Valley Bank facility was amended in March 2017, increasing the principal availability to $1.5 million, extending maturity to March 2020, and providing for interest-only payments through December 2017 followed by 27 monthly principal installments. The company drew an additional $500,000 in April.
- At June 30, term debt consisted of a $333,333 current portion and a $1.16 million long-term portion, net of debt discount. The company also had past-due notes of $100,000 and $43,033, plus related accrued interest.
- The company issued 1.63 million shares for $245,000 in cash during the six months and issued 4.70 million shares to convert $600,000 of principal and $104,709 of accrued interest on convertible debt.
Material Changes Versus the Prior Comparable Period
- Revenue increased, but the company remained unprofitable and continued to generate negative gross margins.
- Gross loss improved by $58,140 for the six months, while operating loss increased by $135,866 because of higher operating expenses.
- Net loss improved by $127,847 for the six months, primarily because the company recognized a $107,081 gain from eliminating the fair value liability associated with a convertible debt conversion. This was a non-cash and unusual item.
- Interest expense declined to $101,606 from $122,963, partly because a convertible debt facility was converted into equity.
- The company’s cash position improved materially, but primarily through equity issuance and additional borrowing rather than positive operating cash flow.
- Inventory increased to $693,895 from $271,802, principally reflecting work in process. Accounts receivable declined to $430,315 from $1.16 million.
- Common shares issued or issuable increased to 127.2 million from 120.1 million at year-end 2016, with additional dilution possible from options, warrants, and convertible instruments.
Outlook, Management Commentary, Risks, and Unusual Items
Management expected increased production volumes, process improvements, component-cost reductions, and better overhead absorption to support future gross profitability. The filing did not provide formal revenue or earnings guidance. Management stated that it could not predict when, or whether, the company would achieve positive cash flow.
The company disclosed substantial doubt about its ability to continue as a going concern for the twelve months following the filing. Management planned to seek additional operating capital through private equity and debt financing, renegotiate debt maturities, and increase product sales. The filing states that these actions might not provide sufficient funds to cover operating expenses or required debt payments.
- The company has an accumulated deficit of $36.46 million and expects operating losses to continue.
- Products have generally been priced below full production cost to develop customer relationships and gain market share.
- Sales cycles are long, particularly with governmental and large corporate customers, and backlog conversion is not guaranteed.
- Revenue and accounts receivable are concentrated: three customers represented 100% of accounts receivable at June 30, 2017, and four customers represented 75% of six-month revenue.
- The company had past-due debt, including the $100,000 convertible note and $43,033 vendor note, and intended to renegotiate debt due later in 2017.
- The company expected to issue 267,857 shares to Keshif Ventures in October 2017 for the continuing loan guaranty, with a contractual value of $37,500.
- Disclosure controls were deemed ineffective as of June 30, 2017. Material weaknesses included inadequate control-environment oversight, lack of an audit committee financial expert, insufficient segregation of duties, and no formally adopted code of conduct.
- No material pending litigation was reported.
Most Important Facts for Investors to Verify
- Whether the approximately $2.7 million backlog, including New York City orders, converted into recognized revenue and cash during subsequent periods.
- Whether the company obtained sufficient equity or debt financing to address the $763,046 working-capital deficit and ongoing operating cash burn.
- Whether EV ARC unit economics reached sustained positive gross margins after manufacturing and overhead costs.
- The status, repayment, or restructuring of the past-due notes and other obligations.
- The extent of dilution from subsequent equity issuances, debt conversions, options, warrants, and related-party transactions.
- Whether the disclosed material weaknesses in internal control and disclosure controls were remediated.
- The concentration and collectability of receivables and the realizability of the increased work-in-process inventory.