Business Context and Reporting Period
The filing is a Form 10-K for the fiscal year ended December 31, 2018, filed March 20, 2019. Although the request metadata identifies Beam Global, the filing identifies the registrant as Envision Solar International, Inc. (OTC-QB: EVSI).
The company designs, manufactures, and sells solar-powered infrastructure primarily for electric-vehicle charging, outdoor media, and energy security. Revenue was derived mainly from sales of EV ARC units to government agencies and private enterprises. The company reported sales of approximately 90 EV ARC units in 2018, versus 20 units in 2017.
Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $6.162 million | $1.412 million | 336% increase |
| Gross profit/(loss) | $(192,100) | $(472,751) | 59% improvement |
| Gross margin | Approximately (3.1%) | Approximately (33.5%) | Improved |
| Operating expenses | $2.337 million | $2.228 million | 5% increase |
| Loss from operations | $(2.530) million | $(2.700) million | Improved |
| Interest expense | $1.089 million | $474,601 | 130% increase |
| Net loss | $(3.599) million | $(3.041) million | 18% increase in loss |
| Basic and diluted loss per share | $(0.02) | $(0.02) | No change reported |
| Cash used in operations | $(712,456) | $(3.437) million | Improved |
| Cash balance | $244,024 | $403,475 | Decreased |
| Working capital deficit | $(2.760) million | $(786,621) | Deficit widened |
| Total stockholders' deficit | $(2.481) million | $(349,262) | Deficit widened |
Approximate net and operating margins were negative 58.4% and negative 41.0%, respectively, in 2018. The filing does not provide a separate fourth-quarter income statement or fourth-quarter revenue amount.
At December 31, 2018, short-term borrowings were $2.863 million, net of unamortized discounts, and long-term borrowings were $286,528. Substantially all assets secured two short-term borrowing arrangements. Current liabilities totaled $5.681 million against current assets of $2.922 million.
Accounts receivable increased to $1.291 million from $5,946, while deferred revenue increased to $835,785 from $77,514. Inventory declined to $1.131 million from $2.320 million, primarily following deliveries of previously built units.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially as unit deliveries rose from 20 to approximately 90 EV ARC units.
- The gross loss narrowed, but the company remained unprofitable because fixed manufacturing overhead and total production costs exceeded selling prices at the reported production volumes.
- Operating expenses rose modestly, with higher sales commissions, marketing costs, and director compensation partly offset by lower stock-option and financial-advisory expenses.
- Interest expense more than doubled, primarily because of amortization of debt discounts and beneficial conversion features associated with debt and warrants.
- Operating cash burn improved significantly, but cash declined because financing proceeds were much lower than in 2017 and the company continued to fund operations and debt obligations.
- Stockholders' deficit expanded from $349,262 to $2.481 million, while the accumulated deficit reached $41.876 million.
- Management stated that design and production delays caused by operating-capital shortages reduced fourth-quarter production. Gross profit associated with units not produced and delivered in 2018 was expected to be recognized in 2019.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management cited approximately $4.4 million of contracted backlog at December 31, 2018 and a pipeline of approximately $27 million, including a California contract. The State of California renewed and expanded its contract, with an estimated value of more than $20 million, and New York City placed a $3.3 million order for 50 EV ARC units. The company was delivering 34 of those units after year-end.
Management expects higher production volumes, vendor negotiations, process improvements, and lower component costs to improve gross margins. It also plans to expand sales and marketing, recurring maintenance and service revenue, outdoor-media sponsorships, international operations, and new products including EV-Standard and UAV ARC. These are plans and opportunities rather than firm financial guidance; the filing provides no quantitative earnings or revenue forecast.
The company disclosed substantial doubt about its ability to continue as a going concern for at least twelve months from the report date. Management stated that it lacked sufficient capital for current needs and expected to rely on additional equity offerings, debt financing, refinancing, debt-maturity extensions, and increased product sales. The independent auditor included a going-concern qualification.
A $750,000 bridge note issued in August 2018 was due February 28, 2019. The company did not repay it at maturity and obtained a written forbearance agreement while negotiating an extension or repayment. A $1.5 million secured convertible note was also extended to the earlier of June 30, 2019 or the closing of a public offering. The company was seeking to refinance these and other obligations.
Additional risks include customer concentration, dependence on government contracts and incentives, long sales cycles, competition from grid-connected charging and subsidized infrastructure, raw-material tariffs and price volatility, potential dilution from convertible debt, options and warrants, and the ability to commercialize new products. One customer represented 50% of 2018 revenue and 82% of year-end accounts receivable.
Management concluded that disclosure controls and internal control over financial reporting were not effective because of material weaknesses, including inadequate segregation of duties, incomplete agreement-flow controls, insufficient information-communication controls, and deficiencies in certain IT controls. The company also reported no pending material litigation and no material off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Confirm that the filing issuer is Envision Solar International, Inc., not Beam Global, and verify any subsequent corporate name, ticker, or business changes.
- Verify the status, delivery schedule, collectability, and margin profile of the approximately $4.4 million backlog and the $3.3 million New York City order.
- Assess whether the company obtained sufficient equity or debt financing after the filing to address the going-concern uncertainty and 2019 maturities.
- Review the bridge-note forbearance, the $1.5 million secured convertible note extension, security interests, repayment premiums, and potential conversion dilution.
- Evaluate whether production volumes and cost reductions were sufficient to convert recurring gross losses into sustainable positive gross margins.
- Quantify dilution from approximately 20.9 million potential shares issuable under convertible debt, 14.8 million options, and 6.7 million warrants outstanding at December 31, 2018.
- Monitor remediation of the disclosed material weaknesses in internal control and any subsequent auditor or management updates.
- Consider customer and receivable concentration, dependence on government purchasing and incentives, and the still largely unlaunched outdoor-media and recurring-revenue initiatives.