Beam Global (filed as Envision Solar International, Inc.) — Q3 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2015. The company designs and manufactures solar-powered EV charging, advertising, renewable-energy, and disaster-preparedness products, including EV ARC and Solar Tree systems. The filing identifies the registrant as Envision Solar International, Inc.; the provided metadata identifies Beam Global.
The interim financial statements are unaudited. The company operated in one reportable segment and had 105,138,257 common shares issuable or outstanding as of November 13, 2015.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $665,254 | $237,604 | $1,365,127 | $862,008 |
| Gross loss | $(46,948) | $(49,921) | $(120,315) | $(86,325) |
| Operating expenses | $412,675 | $559,153 | $1,247,428 | $1,742,527 |
| Operating loss | $(459,623) | $(609,074) | $(1,367,743) | $(1,828,852) |
| Net loss | $(530,153) | $(555,864) | $(1,592,799) | $(2,473,110) |
| Net loss per share | $(0.01) | $(0.01) | $(0.02) | $(0.03) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(1,502,631) | $(1,744,632) |
- Derived gross margin was approximately negative 7.1% in Q3 2015 and negative 8.8% for the first nine months, compared with approximately negative 21.0% and negative 10.0%, respectively, in the comparable periods.
- Cash was $116,340 at September 30, 2015, down from $1,380,554 at December 31, 2014.
- Current assets were $1,373,926 versus current liabilities of $3,195,109, producing a working-capital deficit of $1,821,183.
- Total assets were $1,808,086, while stockholders’ deficit was $1,387,023, compared with a deficit of $582,799 at year-end 2014.
- Inventory increased to $781,510 from $347,903, primarily reflecting work in process for EV ARC units. Accounts receivable increased to $393,626 from $103,217.
- Debt and debt-related liabilities included $689,616 of convertible notes payable to related parties, $100,000 of convertible notes, $43,033 of notes payable, $237,841 of embedded conversion-option liability, and substantial accrued interest.
Material changes versus the prior comparable period
- Q3 revenue increased approximately 180%, and nine-month revenue increased approximately 58%, primarily due to delivery of EV ARC units rather than Solar Tree installation projects.
- The company delivered ten EV ARC units in Q3 and twenty-one during the first nine months. Backlog was approximately $1.3 million at September 30, 2015.
- Gross losses persisted. Management attributed the losses to manufacturing learning-curve costs, manufacturing overhead, project cost overruns, tooling, upgrades, and initial EV ARC production costs exceeding selling prices.
- Operating expenses declined 26% in Q3 and 28% for the first nine months, largely because of lower stock-based compensation, director compensation, consulting, rent, and marketing costs.
- Interest expense declined to $345,906 for the first nine months from $878,570, primarily because 2014 included a $482,300 warrant-related debt-conversion inducement expense and certain debt-discount amortization ended in 2015.
- The company raised $680,000 through private-placement common-stock issuances during the first nine months and repaid $265,325 of convertible notes. Shares outstanding increased from 98,482,611 at year-end 2014 to 103,666,828 at September 30, 2015.
- In June 2015, Robert Noble acquired a 70.0066819% interest in a Gemini note. In September, the company paid $306,624 to retire the Gemini portion; the remaining $600,000 principal was subject to an extension that could be terminated by Mr. Noble on 48 hours’ notice.
Cash flow, liquidity, outlook, and risks
- Operating cash use was $1.50 million for the first nine months, while investing cash use was $201,258, including equipment, patent costs, and manufacturing-related expenditures. Financing activities provided $439,675.
- Management stated that the company did not have sufficient capital for current cash needs and expected to seek additional private equity and debt financing and renegotiate debt maturities.
- The filing includes a going-concern warning. Management stated that losses were expected to continue, financing might not be available on acceptable terms, and available funds might not cover operating expenses or minimum liability payments over the following twelve months.
- Management expected manufacturing efficiencies, higher volumes, lower labor and component costs, and increased pricing to produce positive gross margins in the future, but provided no formal earnings or revenue guidance.
- Management expected to deliver approximately twice as many EV ARC units in Q4 as in Q3 and believed it could eventually exceed two units per week. These are management expectations, not firm commitments.
- A California Department of General Services contract received in June 2015 had an evaluated initial-term amount of $16.4 million, but no committed purchase quantities. Orders from three agencies totaled approximately $900,000 at the filing date.
- After quarter-end, the company issued 900,000 shares for $135,000 and entered into a $1.0 million revolving credit facility with Silicon Valley Bank. The facility was secured by company assets and guaranteed by related shareholder Keshif Ventures, which received 571,429 shares and may receive additional shares for continuing the guarantee.
- Key risks include insufficient liquidity, continued operating losses, inability to obtain financing, debt maturities and potential acceleration, long sales cycles, manufacturing execution, customer concentration, competition, dependence on incentives and regulation, technology commercialization, and substantial future equity dilution.
- Disclosure controls were ineffective as of September 30, 2015. Reported material weaknesses included the absence of an audit committee financial expert, inadequate segregation of duties, and no formally adopted code of business conduct and ethics.
- No material pending litigation was reported, other than a workers’ compensation appeal involving a former employee. The filing reported no material off-balance-sheet arrangements.
Most important facts for an investor to verify
- Whether the post-quarter-end Silicon Valley Bank facility was funded, its borrowing availability, covenants, collateral terms, and actual outstanding balance.
- Whether the company obtained sufficient additional financing or successfully renegotiated the $600,000 related-party note and other obligations due in or around 2015.
- Conversion terms and potential dilution from convertible notes, options for approximately 15.3 million shares, and warrants for approximately 29.2 million shares outstanding at September 30, 2015.
- Whether EV ARC production achieved positive unit-level and consolidated gross margins, and whether management’s projected delivery increases were realized.
- Actual purchase orders and revenue recognized under the California contract, rather than the contract’s $16.4 million evaluated amount.
- Progress in remediating the disclosed material weaknesses in disclosure controls and internal control over financial reporting.
- Customer concentration: three customers represented 64% of nine-month revenue, and two customers represented 81% of accounts receivable.