Business Context and Reporting Period
This unaudited Form 10-Q identifies the registrant as Envision Solar International, Inc., not Beam Global. It covers the three and six months ended June 30, 2011, filed August 15, 2011. The company develops solar parking arrays, solar-integrated building systems, electric-vehicle charging products, and related design, construction, and project-management services.
The company operated as a single segment and had 48,079,690 shares issued or issuable and outstanding at June 30, 2011; 48,174,285 shares were reported as issuable or outstanding as of August 12, 2011.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Revenue | $299,896 | $568,384 |
| Gross profit | $98,680 | $94,530 |
| Gross margin | 32.9% | 16.6% |
| Operating expenses | $568,099 | $1,054,590 |
| Loss from operations | $(469,419) | $(960,060) |
| Net income (loss) | $381,450 | $(946,537) |
| Net margin | 127.2% | (166.5)% |
| Cash used in operating activities | Not separately provided | $(1,159,456) |
The second-quarter net income was driven primarily by a $994,984 noncash gain from the change in fair value of the embedded conversion-option liability. For the six-month period, the comparable noncash gain was $331,136. Interest expense was $178,128 for the quarter and $350,026 year to date, including substantial amortization of debt discounts.
At June 30, 2011, cash was $367,354, current assets were $726,742, and current liabilities were $3,788,117. Working capital was negative $3,061,375, compared with negative $3,755,543 at December 31, 2010. Total assets were $891,742, while stockholders’ deficit was $2,896,375.
Debt and related obligations included $927,913 of convertible notes payable, net of discount; $96,758 of convertible notes payable to a related party, net of discount; $235,547 of other notes payable, net of discount; and a $632,795 embedded conversion-option liability. The company also reported $1,073,342 of accounts payable, $109,145 of related-party accounts payable, and $546,324 of accrued expenses.
Financing activities provided $1,462,736 during the first six months, principally from a private placement. The company issued 4,906,430 common shares for $1,717,251 and paid $254,515 in offering costs.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased to $299,896 from $6,456; six-month revenue increased to $568,384 from $169,082.
- Second-quarter gross profit increased to $98,680 from $6,456. Six-month gross profit declined to $94,530 from $119,179 because a project completed in the first quarter incurred losses from inaccurate prior cost estimates and unforeseen site conditions.
- Operating expenses increased 31.0% for the quarter and 8.6% year to date, primarily from higher labor, consulting, marketing, travel, and research and development costs.
- Second-quarter results changed from a $448,834 net loss to $381,450 net income, primarily because of the noncash fair-value gain on the embedded conversion-option liability.
- Six-month net loss increased to $946,537 from $909,871, as higher operating and interest expenses more than offset increased revenue and the noncash derivative gain.
- Cash used in operations increased to $1,159,456 from $409,377, partly because of a $197,003 increase in costs and estimated earnings in excess of billings on uncompleted contracts.
- Cash increased from $64,074 at December 31, 2010 to $367,354 at June 30, 2011, primarily because equity financing more than offset operating cash consumption.
- The embedded conversion-option liability decreased from $963,931 to $632,795, producing a $331,136 noncash gain.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management planned to raise an additional $3 million to $5 million during the second half of 2011 and expected to rely on new and existing projects to generate revenue and operating profits. The filing provides no formal revenue or earnings guidance and states that there is no assurance the company will achieve profitability or raise sufficient financing.
The filing includes substantial doubt regarding the company’s ability to continue as a going concern. The company had significant operating losses, negative working capital, an accumulated deficit of $20,739,504, a stockholders’ deficit of $2,896,375, insufficient capital for current needs, and a note payable in default. The financial statements contain no adjustments that might result from the outcome of this uncertainty.
- A former-officer note of $34,246 was in default as to principal and interest.
- The company owed $108,296 under a landlord judgment and had accrued $177,180 under a former-vendor settlement.
- A shareholder-related litigation settlement left an accrued liability of $70,000 at June 30, 2011; additional shares were issued in July and August 2011 to complete the settlement.
- Accounts receivable were concentrated with two customers representing 53% and 47% of the balance. Three customers represented 44%, 41%, and 14% of six-month revenue.
- The company’s disclosure controls and internal control over financial reporting were deemed ineffective. Material weaknesses included inadequate segregation of duties, the absence of an audit-committee financial expert, and the lack of a formal code of business conduct and ethics.
- Convertible debt, options, and warrants created substantial potential dilution. At June 30, 2011, convertible debt was convertible into 4,905,087 shares, and outstanding options and warrants covered millions of additional shares.
- Subsequent to quarter-end, the company appointed new CEO Desmond Wheatley and CFO Chris Caulson, adopted a 30-million-share 2011 Stock Incentive Plan, and granted significant option awards. It also approved additional shares and warrants for marketing, investor-relations, and financial-advisory services.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Envision Solar International, Inc., whereas the request metadata names Beam Global.
- Assess the going-concern risk, including the $3.06 million working-capital deficit, $1.16 million six-month operating cash burn, debt defaults, and dependence on additional financing.
- Separate operating performance from noncash derivative accounting: second-quarter net income was largely attributable to the $994,984 fair-value gain.
- Review debt maturities, conversion terms, discounts, related-party obligations, and the $632,795 Level 3 derivative liability.
- Evaluate project accounting estimates, including the percentage-of-completion method and the $197,003 costs and estimated earnings in excess of billings.
- Quantify dilution from the private placement, convertible debt, options, warrants, and post-quarter-end equity awards.
- Review the unresolved legal and settlement obligations and the subsequent stock issuances used to satisfy them.
- Investigate the disclosed material weaknesses and whether corrective actions were implemented after the filing date.