Envision Solar International, Inc. (now identified in request as Beam Global) — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2016, filed November 14, 2016. The company designed and manufactured solar-powered products serving electric-vehicle charging, digital out-of-home advertising, and energy-security markets. Its principal products were EV ARC and Solar Tree systems.
The company reported approximately $1.71 million of contracted backlog at September 30, 2016 and expected to deliver most of it during the fourth quarter. It also reported a California state contract extended through June 2017 and anticipated a New York City EV-charging award in early 2017, subject to final award and execution.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $522,412 vs. $665,254 in 2015 | $1,207,226 vs. $1,365,127 in 2015 |
| Gross loss | $3,532 vs. $46,948 | $78,632 vs. $120,315 |
| Operating expenses | $614,586 vs. $412,675 | $1,634,861 vs. $1,247,428 |
| Net loss | $609,564 vs. $530,153 | $1,961,316 vs. $1,592,799 |
| Net loss per share | $0.01 basic and diluted | $0.02 basic and diluted |
Revenue declined 21.5% for the quarter and 11.6% year to date. Gross margin improved to approximately negative 0.7% for the quarter from negative 7.1%, and to approximately negative 6.5% year to date from negative 8.8%. The company attributed the improvement primarily to production efficiencies and direct gross profits on most EV ARC units, partly offset by losses on an early Solar Tree unit.
Operating expenses increased primarily because of higher stock-based compensation, director fees, consulting and investor-relations costs, sales commissions, additional personnel, promotional activity, and costs related to the move to a new manufacturing facility. Nine-month stock-based compensation included approximately $348,721, compared with $108,575 in 2015.
- Cash at September 30, 2016 was $80,695, compared with $32,451 at December 31, 2015.
- Cash used in operating activities was $1,439,269 for the first nine months, compared with $1,502,631 in 2015.
- Cash used in investing activities was $122,180, including equipment and patent expenditures.
- Cash provided by financing activities was $1,609,693, including $1,470,000 from common-stock sales and $200,000 of line-of-credit borrowings.
- Working-capital deficit was $2,128,103; stockholders’ deficit was $1,598,394; accumulated deficit was $34,563,249.
- Inventory increased to $789,385 from $422,175 at December 31, 2015, while accounts receivable declined to $271,636 from $831,617.
- Total liabilities were $3,468,248, including a fully drawn $1.0 million line of credit, $677,616 of related-party convertible notes, and a $134,857 embedded conversion-option liability.
Material changes versus the prior comparable period
- Quarterly revenue decreased because eight EV ARC units were delivered in 2016 versus ten in 2015; nine-month deliveries were also lower by three units.
- Gross losses narrowed as manufacturing processes matured, although the company remained gross-loss-making.
- Operating expenses and the quarterly net loss increased despite lower interest expense year to date.
- Nine-month interest expense fell to $205,485 from $345,906, largely because 2015 included $252,070 of debt-discount amortization; 2016 included approximately $105,000 of line-of-credit debt-issuance and guaranty-cost amortization.
- The embedded conversion-option adjustment produced a $46,865 loss year to date, compared with a $117,770 gain in 2015; the quarterly 2016 adjustment was an $86,813 gain.
- The company raised $1.47 million through private placements during the first nine months and issued 9.8 million shares, contributing to dilution. Shares issued or issuable and outstanding increased to 116,895,424 from 105,207,701 at year-end 2015.
- After quarter-end, the company issued an additional 2,333,333 shares for $350,000 and issued 500,000 shares valued at $75,000 for consulting services.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal earnings guidance. It expected continued sales growth, manufacturing efficiencies, lower unit costs, and potential gross profits on EV ARC sales as production volumes increased. Management also stated that it could not predict when, or whether, the company would achieve positive cash flow.
The filing raised substantial doubt about the company’s ability to continue as a going concern. Management expected continuing losses and stated that it needed additional equity and debt financing, debt-maturity renegotiations, and increased product sales. The filing expressly stated that available plans might not be sufficient to fund operating expenses or minimum liability payments for the following twelve months.
- Debt maturities included related-party convertible notes, a convertible note, and a vendor note due or extended through 2016. The $1.0 million line of credit was fully drawn with no additional availability.
- The company was obligated to issue 147,493 shares to Keshif Ventures in October 2016 under the line-of-credit guaranty arrangement.
- Revenue and accounts receivable were concentrated: three customers represented 66% of nine-month revenue, and three customers represented 92% of net accounts receivable.
- Potential dilution was substantial: outstanding at September 30 were convertible instruments convertible into 5,652,821 shares, options for 15,137,007 shares, and warrants for 27,905,155 shares, excluding other subsequently issued securities.
- Management identified material weaknesses in disclosure controls and internal control over financial reporting. Controls were considered ineffective as of September 30, 2016, including weaknesses involving segregation of duties, information communication, audit-committee financial expertise, and the absence of a formal code of conduct.
- The company disclosed no material pending litigation, apart from a workers’ compensation appeal involving a former employee.
- Subsequent to quarter-end, the CEO received a five-year employment agreement with a $250,000 annual salary, deferred compensation provisions, and 4.35 million stock options exercisable at $0.15 per share.
Most important facts for an investor to verify
- Whether the company obtained sufficient financing and renegotiated debt maturities after September 30, 2016.
- Whether the approximately $1.71 million backlog was delivered and collected as expected in the fourth quarter.
- Whether EV ARC and Solar Tree products achieved sustained positive gross margins and reduced cash operating losses.
- The final terms and dilution from subsequent equity, warrant, option, and deferred-compensation issuances.
- Whether the going-concern uncertainty was resolved and whether internal-control material weaknesses were remediated.
- The status and economics of the anticipated New York City award and the California state contract.
- Customer concentration, collectability of receivables, inventory realizability, and accrued interest and other overdue obligations.