Beam Global (filing entity: Envision Solar International, Inc.) — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 14, 2015. The interim financial statements are unaudited. The company designs and manufactures solar-powered EV charging, advertising, renewable-energy, and disaster-preparedness products, including EV ARC™ and Solar Tree® systems.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $599,222 | $699,873 |
| Gross loss | $(67,194) | $(73,367) |
| Operating expenses | $331,559 | $834,753 |
| Loss from operations | $(398,753) | $(908,120) |
| Net loss | $(603,421) | $(1,062,646) |
| Net loss per share | $(0.01) | $(0.01) |
- Margins: Gross margins were negative at approximately 11.2% for the quarter and 10.5% for the six-month period. Operating margins were approximately negative 66.5% and negative 129.8%, respectively.
- Cash flow: Cash used in operating activities was $1,153,842 for the six months, compared with $1,286,562 in the prior-year period. Investing cash use was $167,245, primarily for manufacturing-facility equipment and EV ARC units. Financing provided $19,000.
- Liquidity: Cash declined to $78,467 from $1,380,554 at December 31, 2014. Current assets were $1,360,309 versus current liabilities of $3,386,851, producing a working-capital deficit of $2,026,542.
- Debt: Current liabilities included $956,325 of convertible notes, $92,616 of related-party convertible debt, $43,033 of notes payable, and a $194,874 embedded conversion-option liability. Accrued interest on the convertible notes was substantial, including $136,750 on the Gemini-related debt.
- Capitalization: Stockholders’ deficit was $1,577,208 at June 30, 2015, compared with $582,799 at year-end 2014. Approximately 98.9 million shares were issued or issuable and outstanding at June 30, 2015; options, warrants, and convertible debt represented additional potential dilution.
Material changes versus the prior comparable period
- Second-quarter revenue increased 42.1% year over year, while six-month revenue increased 12.1%. The 2015 revenue mix was primarily EV ARC deliveries rather than Solar Tree installation projects.
- Gross losses widened from $19,698 to $67,194 for the quarter and from $36,404 to $73,367 for the six-month period. Management attributed the losses primarily to Solar Tree project cost overruns and initial EV ARC manufacturing costs exceeding earlier selling prices.
- Operating expenses declined 37.8% for the quarter and 29.5% for the six-month period, largely because of lower stock-based compensation, rent, director compensation, and consulting costs.
- Six-month net loss improved from $1,917,246 to $1,062,646. Interest expense fell from $721,387 to $315,498, principally because the prior-year period included a $482,300 warrant-related charge; the 2015 period included higher debt-discount amortization.
- The embedded conversion-option liability declined from $355,611 to $194,874, producing $160,737 of other income for the six-month period. This is a non-cash fair-value adjustment and may fluctuate with the company’s stock price and valuation assumptions.
- Accounts receivable increased to $426,511 from $103,217, inventory increased to $733,047 from $347,903, and deferred revenue increased to $932,739 from $717,291, reflecting customer deposits and work in process for EV ARC units.
Guidance, outlook, risks, and unusual items
- Management reported approximately $1.5 million of backlog at June 30, 2015 and stated that it expected to execute most of it during the fiscal year. Subsequent orders included $691,240 from Caltrans.
- On June 12, 2015, the company received a one-year California Department of General Services contract, with two one-year renewal options, permitting California governmental entities to purchase EV ARC units. The contract’s evaluated initial-term amount was $16,427,225, but it contained no definitive purchase quantities. The initial Caltrans order was for 11 units totaling $691,240.
- The company delivered 11 EV ARC units during the quarter, including three under a 12-month lease. Management expected manufacturing efficiencies, lower component and labor costs, and higher volumes to improve gross margins, but no assurance was provided.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management expected continuing losses, had insufficient capital for current needs, and planned to seek private equity and debt financing and renegotiate debt maturities. The filing states that financing may be unavailable or may not be available on acceptable terms.
- Debt maturities included extensions to December 31, 2015 for the related-party convertible note, the Pegasus note, and the vendor note. Gemini and Chairman Robert Noble agreed to daily extensions of portions of the secured convertible debt while negotiating revised terms.
- Subsequent to June 30, 2015, the company issued approximately 2.366 million shares in a private placement for $355,000, according to the notes; the filing’s later disclosure states 2.366 million shares, while one section specifies 2,366,666 shares. This amount and share count should be reconciled.
- Disclosure controls and procedures were ineffective as of June 30, 2015. Material weaknesses included the absence of an audit committee financial expert, inadequate segregation of duties due to limited staffing, and the lack of a formal written code of conduct and ethics.
- Customer concentration was significant: three customers represented 51%, 20%, and 14% of accounts receivable at June 30, 2015, and three customers represented 31%, 30%, and 17% of six-month revenue.
- No material pending litigation was reported, other than a workers’ compensation appeals claim involving a former employee. The filing reported no material off-balance-sheet arrangements.
Key facts investors should verify
- Whether the California contract converts into actual purchase orders and the timing and collectability of the stated backlog and Caltrans order.
- Available cash, monthly cash burn, financing proceeds, and the company’s ability to refinance or extend debt due in 2015.
- Whether EV ARC manufacturing efficiencies and pricing changes produce sustained positive gross margins.
- The terms, ownership impact, and dilution from convertible notes, 29,219,441 warrants, 15,537,007 options, and approximately 7,707,443 shares issuable under convertible debt.
- Resolution of the going-concern uncertainty and whether additional capital is obtained on acceptable terms.
- Progress in remediating the disclosed material weaknesses in internal control and disclosure controls.
- Reconciliation of the subsequent private-placement share count and confirmation of the related cash proceeds.