Business Context and Reporting Period
Filed issuer: Envision Solar International, Inc. (the requested company is identified as Beam Global, but the filing text names Envision Solar International, Inc.). This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with comparative periods ended June 30, 2013.
The company develops solar products and proprietary technology for electric-vehicle charging infrastructure, out-of-home advertising, renewable energy production, and disaster preparedness. Products include Solar Tree structures and EV ARC autonomous renewable chargers.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $421,745 vs. $2,282 | $624,404 vs. $157,810 |
| Gross loss | $(19,698) vs. $(22,592) | $(36,404) vs. $(62,810) |
| Gross margin | (4.7%) vs. (990.0%) | (5.8%) vs. (39.8%) |
| Operating loss | $(552,567) vs. $(527,541) | $(1,219,778) vs. $(1,080,659) |
| Net loss | $(900,016) vs. $(708,992) | $(1,917,246) vs. $(1,754,759) |
| Net loss per share | $(0.01) vs. $(0.01) | $(0.02) vs. $(0.02) |
Six-month operating expenses were $1,183,374, including substantial stock-based compensation. Six-month interest expense was $721,387, including a $482,300 expense for warrants issued as an inducement to convert convertible debt. The six-month change in fair value of the embedded conversion option liability produced $46,066 of other income, compared with $463,661 of expense in the prior-year period.
Cash used in operating activities was $1,286,562 for the six months ended June 30, 2014, compared with $690,014 in the prior-year period. Financing activities provided $1,103,400, primarily from private equity placements. Cash declined to $208,687 from $392,098 at December 31, 2013.
Balance Sheet, Debt, and Liquidity
- Total assets were $840,065, including $297,299 of accounts receivable, $53,299 of inventory, and $134,450 of costs and estimated earnings in excess of billings on uncompleted contracts.
- Current liabilities were $2,396,021 versus current assets of $755,940, resulting in a working-capital deficit of $1,640,081.
- Stockholders’ deficit improved to $1,555,956 from $2,505,874 at December 31, 2013, principally reflecting equity issuances and debt conversions, partially offset by continued losses.
- Convertible notes payable, net of discount, declined to $452,186 from $1,506,326 after $550,000 of principal was converted into common stock and a $504,139 debt discount was recorded.
- The embedded conversion option liability increased to $713,760 from $281,265. This Level 3 liability is subject to significant valuation assumptions, including stock-price volatility.
- Other obligations included a $104,616 related-party convertible note, $73,033 of notes payable, $591,260 of accounts payable, and $387,822 of accrued expenses.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, primarily from two Solar Tree installation projects and delivery of two EV ARC products, but the company remained gross-loss-making.
- Six-month gross loss narrowed by $26,406, while operating loss increased by $139,119 and net loss increased by $162,487.
- Operating cash use increased by $596,548, and ending cash decreased by $1,133,012 versus June 30, 2013.
- Operating expenses rose $165,525, driven by higher sales consulting, stock-option, director consulting, promotional, and research-and-development costs, partially offset by lower payroll expense.
- Shares issued or issuable increased to 84,922,356 from 71,702,942 at December 31, 2013. The company also issued shares, options, and warrants through private placements, debt conversions, director compensation, and consulting arrangements, creating potential dilution.
- Contracted backlog at June 30, 2014 was approximately $295,000, including an EV ARC order.
Guidance, Outlook, Risks, and Unusual Items
Management stated that EV ARC pricing was below initial production cost at the company’s early production volumes. Management expects possible production economies, component-cost reductions, battery-cost improvements, and design changes could support gross profit on future sales, potentially later in 2014; no firm earnings or revenue guidance was provided.
The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern. Management planned to seek additional private and debt financing, renegotiate debt maturities, increase product sales, and pursue new projects. Management expressly stated that available financing may not be obtainable on acceptable terms and may not be sufficient to cover operating expenses and liabilities over the following twelve months.
- The company had accumulated deficit of $29,533,344 and stockholders’ deficit of $1,555,956 at June 30, 2014.
- Several debt instruments were due or required renegotiation during 2014, while the Gemini secured bridge note was extended to June 30, 2015.
- Revenue recognition for construction contracts depends on estimates of costs to complete and project profitability; revisions could materially affect reported results.
- Revenue and receivables were concentrated: three customers represented 100% of six-month revenue, and two customers represented 85% of accounts receivable.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2014. Reported material weaknesses included inadequate control environment, lack of segregation of duties, absence of an audit committee financial expert, and no formally adopted code of business conduct and ethics.
- EV ARC and other products remained at early commercialization stages, with risks from competition, uncertain demand, production costs, technology commercialization, dependence on financing, and potential shareholder dilution.
- Subsequent to quarter-end, the company raised $50,500 through a private placement and issued related warrants; it also granted restricted shares to a new director.
- The filing reported no material pending litigation and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the issuer identity because the filing is for Envision Solar International, Inc., not Beam Global.
- Review the going-concern disclosure, auditor qualification referenced by management, financing requirements, and near-term debt maturities.
- Assess whether the approximately $295,000 backlog converts into cash-generating revenue and whether EV ARC sales can achieve positive gross margins.
- Reconcile the substantial decline in cash with operating cash burn and the company’s continued dependence on equity and debt financing.
- Evaluate dilution from outstanding convertible notes, approximately 24.5 million options, approximately 16.5 million warrants, and additional securities issued during and after the quarter.
- Examine the valuation of the $713,760 embedded conversion option liability and the sensitivity of results to stock-price volatility.
- Review customer concentration, contract-cost estimates, related-party transactions, and the continuing material weaknesses in internal controls.