Business Context and Reporting Period
Envision Solar International, Inc. (now associated with Beam Global) filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company designs and manufactures solar-powered EV charging, digital advertising, energy-security, and disaster-preparedness products, including EV ARC™ and Solar Tree® systems.
The company operated in one reportable segment. Its common stock outstanding was approximately 125.5 million shares as of May 10, 2017.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $370,689 | $345,919 | +$24,770, approximately 7.2% |
| Cost of revenue | $374,543 | $391,680 | Down $17,137 |
| Gross loss | $(3,854) | $(45,761) | Improved by $41,907 |
| Gross margin | Approximately (1.0%) | Approximately (13.2%) | Improved |
| Operating expenses | $668,989 | $483,634 | Up $185,355, approximately 38.3% |
| Loss from operations | $(672,843) | $(529,395) | Worsened by $143,448 |
| Net loss | $(619,573) | $(737,292) | Improved by $117,719 |
| Basic and diluted loss per share | $(0.01) | $(0.01) | No reported change |
| Cash flow from operations | $18,457 provided | $280,607 used | Improved by $299,064 |
Revenue primarily reflected delivery of five EV ARC™ units and an ARC Mobility trailer. Management reported contracted backlog of approximately $500,000 at March 31, 2017, with most expected to be delivered over the next several quarters.
Operating expenses increased primarily because of higher personnel costs, a $35,000 discretionary CEO bonus, increased rent for a larger facility, additional utilities, higher travel costs, and increased consulting expenses. Stock-based compensation included in operating expenses was $69,486, compared with $120,264 in the prior-year quarter.
Other income included a $107,081 gain from the change in fair value of an embedded conversion option liability. The related convertible debt was converted into equity during the quarter, eliminating the liability. Interest expense declined to $53,981 from $60,864.
Liquidity, Capital Structure, and Debt
- Cash was $45,168 at March 31, 2017, compared with $8,568 at December 31, 2016.
- Working capital deficit was $844,701. Total assets were $1.48 million, total liabilities were $2.68 million, and stockholders’ deficit was $1.20 million.
- Accounts receivable declined to $467,801 from $1.16 million, while inventory increased to $352,682 from $271,802.
- The Silicon Valley Bank line of credit was amended effective March 30, 2017, increasing the commitment to $1.5 million, extending maturity to March 1, 2020, and requiring interest-only payments through December 2017 followed by 27 monthly principal payments. The outstanding balance at March 31 was $1.0 million, including $166,667 classified as current.
- An additional $500,000 under the amended line was funded on April 7, 2017; no further availability remained after that funding.
- A $600,000 convertible note plus $104,709 of accrued interest was converted into 4,698,060 common shares at $0.15 per share, eliminating that debt and the associated derivative liability.
- The company issued 200,000 shares for $30,000 in cash, 15,000 shares for professional services, and 187,500 shares for director compensation during the quarter.
- Past-due obligations included a $100,000 convertible note, with $72,685 of accrued interest, and a $43,033 vendor note, with $19,219 of accrued interest.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 7%, while the gross loss narrowed substantially because of lower direct costs and the absence of certain high transportation costs incurred in the 2016 period.
- Despite improved gross performance, operating expenses rose approximately 38%, causing the operating loss to increase.
- Net loss improved because of the $107,081 derivative fair-value gain and lower interest expense.
- Operating cash flow shifted from a $280,607 use of cash to an $18,457 source, primarily due to collections of accounts receivable and working-capital movements.
- Financing cash inflow fell to $22,324 from $496,270 because the prior-year period included greater equity proceeds and $200,000 of line-of-credit borrowings.
- Weighted-average shares increased to 122.4 million from 107.6 million, reflecting equity issuances and debt conversions.
Guidance, Outlook, Risks, and Unusual Items
Management expects continued efforts to reduce production costs, achieve scale economies, expand sales personnel and channels, and convert government and large-enterprise opportunities. The company cited California and New York government contracts, including New York orders beginning in the second quarter of 2017, as potential sources of future sales. No quantitative revenue or earnings guidance was provided.
Management stated that EV ARC™ pricing remained below the company’s full production cost at current volumes, although it expects higher volumes, process improvements, and component cost reductions to support future gross profits. The company also reported lengthy sales cycles, particularly with government and large organizations.
The filing states that substantial doubt exists about the company’s ability to continue as a going concern for twelve months from the filing date. The company had recurring losses, limited working capital, a large accumulated deficit, and insufficient capital to meet current cash needs. Management plans to seek private equity and debt financing, renegotiate maturities, and increase sales, but stated that financing may not be available on acceptable terms or may be insufficient.
Additional risks include customer and revenue concentration, competition, demand fluctuations, loss of solar incentives, technology obsolescence, inability to commercialize products, debt repayment requirements, potential shareholder dilution, and reliance on future sales growth. Four customers accounted for approximately 83% of first-quarter revenue, and four customers represented approximately 86% of accounts receivable.
Internal control over financial reporting and disclosure controls were deemed ineffective as of March 31, 2017. Reported material weaknesses included the lack of an audit committee financial expert, inadequate segregation and communication controls, and the absence of a formally adopted code of business conduct and ethics.
Subsequent events included a $15,000 private placement, issuance of 234,302 shares valued at $37,500 to related party Keshif Ventures for its continued loan guaranty, and the April funding under the expanded bank line.
Important Facts for Investors to Verify
- Whether the company obtained sufficient additional financing and successfully renegotiated past-due or near-term debt obligations.
- Whether the New York and California government contracts convert into sustained order volume and whether the approximately $500,000 backlog was delivered as expected.
- Whether EV ARC™ and Solar Tree® products achieve consistently positive gross margins at higher production volumes.
- The company’s ability to maintain liquidity after the $500,000 bank draw and meet required payments beginning in 2018.
- The effect of continued equity issuances, warrants, options, and convertible instruments on shareholder dilution.
- Remediation of the disclosed material weaknesses in internal controls.
- The concentration and collectability of accounts receivable and revenue from a small number of customers.