Beam Global (filed as Envision Solar International, Inc.) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 14, 2019. The interim financial statements are unaudited. The company designs, manufactures, and sells solar-powered products for electric-vehicle charging, outdoor media, and energy security. Its principal products included the EV ARC and Solar Tree.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $1.786 million | $0.938 million | $4.616 million | $4.659 million |
| Gross profit | $0.341 million | $0.044 million | $0.349 million | $0.097 million |
| Gross margin | 19.1% | 4.7% | 7.6% | 2.1% |
| Operating expenses | $0.963 million | $0.519 million | $2.227 million | $1.702 million |
| Loss from operations | $(0.623) million | $(0.475) million | $(1.877) million | $(1.605) million |
| Net loss | $(0.610) million | $(0.607) million | $(2.544) million | $(2.392) million |
| Net loss per share | $(0.12) | $(0.21) | $(0.60) | $(0.83) |
- Revenue increased 90% year over year in Q3, helped by installation of two EV ARC HP DC fast-charging stations at California’s Camp Roberts Rest Area and deliveries of standard units.
- Nine-month revenue declined 1%, primarily because the later-than-expected public offering delayed product development and deliveries earlier in the year.
- Gross profit improved substantially, including higher margins on EV ARC HP products and the release of a $71,744 contract-loss accrual as units were delivered. Management attributed persistently low overall margins to low production volumes.
- Operating expenses rose 86% in Q3 and 31% for the nine-month period. Significant items included director share compensation, CFO severance and recruiting, Solar Tree research and development, investor/public relations, sales commissions, SEC and Nasdaq fees, consulting, and legal costs.
- Interest expense fell to $7,182 in Q3 from $148,316, primarily because debt was reduced after the public offering. Nine-month interest expense was $709,148, including a $75,000 Gemini note extension fee.
Cash flow, liquidity, and capitalization
- Cash was $5.292 million at September 30, 2019, compared with $244,000 at December 31, 2018. Total current assets were $8.263 million, including $1.696 million of inventory and $1.070 million of accounts receivable.
- Net cash used in operating activities was $3.444 million for the first nine months, versus $409,000 in the comparable period. The operating cash outflow reflected the net loss, lower deferred revenue, reductions in accounts payable and accrued expenses, and increased prepaid expenses.
- Net cash provided by financing activities was $8.544 million. The company received $13.201 million from its public offering, paid offering costs, repaid its convertible line of credit and other debt, and paid related financing costs.
- The April-May 2019 offering issued 2.2 million shares and warrants and generated approximately $8.5 million of net cash after offering costs and debt repayments. Shares and warrants began trading on Nasdaq under EVSI and EVSIW in April 2019.
- Total liabilities declined to $1.982 million from $5.968 million at year-end 2018. At September 30, the company had no outstanding convertible line of credit, convertible notes other than the related-party note, or Gemini note. Remaining debt consisted primarily of a $212,929 related-party convertible note and a $11,954 auto loan, including current and long-term portions.
- Management stated that the financing provided sufficient cash to fund liabilities and operations beyond the next twelve months from the filing date, although the company expects continued losses and cannot predict when, or if, it will achieve positive cash flow.
Material changes, outlook, and risks
- Common shares outstanding increased to 5,140,546 at September 30, 2019 from 2,906,630 at December 31, 2018, reflecting the public offering and other share issuances. The company completed a one-for-fifty reverse stock split in April 2019.
- Contracted backlog was approximately $1.2 million at September 30, 2019. Management noted that shipments may fluctuate materially between quarters based on order size and delivery timing.
- Management expects production volumes, process improvements, supplier negotiations, labor utilization, and overhead absorption to improve unit costs and margins. It also described plans to expand sales channels, add sales personnel, pursue federal funding opportunities for customers, and develop Solar Tree, EV-Standard, and UAV ARC products. No quantitative revenue or earnings guidance was provided.
- The company has historically incurred losses and generally relied on equity and debt financing. Management stated that additional financing may be required until operations generate positive cash flow.
- Customer concentration was significant: two customers represented 62% and 14% of Q3 revenue, and 49% and 24% of nine-month revenue. Three customers represented 47%, 25%, and 14% of accounts receivable at September 30.
- The company relied on one battery supplier, although it was qualifying additional sources. Cash deposits exceeding federal insurance limits totaled $4.886 million.
- The company had a single operating lease for its headquarters and manufacturing facility, expiring in August 2020, with monthly payments ranging from approximately $48,672 to $50,619.
- Management reported no material pending litigation and no material off-balance-sheet arrangements. However, disclosure controls were deemed insufficient, and a material weakness related to limited administrative staff, segregation of duties, and information communication remained in place. Management planned to add accounting staff and upgrade its enterprise resource planning system.
- Key stated risks included inadequate capital, inability to commercialize products or generate sufficient revenue, demand and competitive pressures, raw-material cost changes, customer financing constraints, inability to pay liabilities, quarterly volatility, litigation, and future shareholder dilution.
Investor verification points
- Verify the sustainability of the Q3 gross-margin improvement and whether higher production volumes actually reduce unit costs.
- Reconcile the $13.201 million offering proceeds with offering costs, debt repayments, share dilution, and the remaining $5.292 million cash balance.
- Assess operating cash burn of $3.444 million for the first nine months against the company’s stated ability to fund operations beyond twelve months.
- Review customer concentration, the $1.2 million backlog, delivery timing, and the extent to which backlog converts into revenue and cash.
- Monitor the remaining related-party convertible note, potential conversion dilution, options and 2.539 million outstanding warrants.
- Follow remediation of the material weakness in disclosure controls and segregation of duties.
- Evaluate dependence on a single battery supplier, cash held above insured limits, the lease obligation, and the company’s need for future financing.