Fiscal 2011 Form 10-K Summary
Filing entity and period: The filing is for Envision Solar International, Inc. (now associated with Beam Global), a Nevada corporation developing solar parking structures, tracking systems and electric-vehicle charging infrastructure. The reporting period ended December 31, 2011; the filing was signed March 30, 2012. The company operated as a single segment and traded on the OTC Bulletin Board under “EVSI.”
Business Context
The company designs and manages turnkey deployment of Solar Tree structures, EnvisionTrak tracking systems, Solar Tree Socket products and CleanCharge solar charging stations. Manufacturing and field deployment are substantially outsourced, while design, engineering, intellectual-property development and project management are performed internally. Management cited a letter of intent intended to make Solar Tree structures available to 952 U.S. Cadillac dealerships, but the filing does not establish that this opportunity converted into firm revenue or orders.
Financial Performance and Position
| Metric | 2011 | 2010 | Change or commentary |
|---|---|---|---|
| Revenue | $2,303,142 | $347,447 | Up approximately 563% |
| Gross profit | $560,351 | $124,520 | Gross margin declined to 24.3% from 35.8% |
| Operating expenses | $3,571,558 | $1,710,767 | Increase primarily from stock-based compensation and higher operating activity |
| Loss from operations | $(3,011,207) | $(1,586,247) | Operating loss increased |
| Net loss | $(2,547,493) | $(2,360,851) | Loss increased approximately 8% |
| Basic and diluted loss per share | $(0.05) | $(0.06) | Weighted-average shares increased to 47.4 million |
| Cash used in operations | $(1,970,831) | $(1,112,794) | Operating cash burn increased |
| Cash from financing | $2,388,492 | $1,168,861 | Supported by debt and equity financing |
| Cash at year-end | $468,776 | $64,074 | Increase of $404,702 during 2011 |
| Total assets | $2,175,964 | $345,316 | Increase primarily from receivables and contract balances |
| Working-capital deficit | $(2,657,976) | $(3,755,543) | Deficit improved but remained substantial |
| Stockholders’ deficit | $(2,482,203) | $(3,557,790) | Deficit improved primarily from equity issuances and noncash items |
Gross profit increased in absolute dollars as two significant Solar Tree deployment contracts progressed, but margin declined because 2010 benefited from closeout of older projects. Operating expenses included $1,675,141 of stock-based compensation in 2011 versus $229,564 in 2010. Other income included a $266,073 gain on debt settlements and $963,931 of income from the change in fair value of an embedded conversion option liability; these non-operating and largely noncash items materially reduced the reported net loss.
Debt, Liquidity and Capitalization
- Current liabilities were $4,658,167 versus current assets of $2,000,191 at December 31, 2011.
- Short-term borrowings of approximately $2.62 million were scheduled to mature December 31, 2012, generally bearing interest from 9% to 10%; substantially all company and subsidiary assets secured one arrangement.
- Convertible notes had $2,355,943 of principal outstanding and $1,681,689 net carrying value after discounts. The balance included a $1.0 million Hickson note, Gemini notes and a $100,000 Pegasus note.
- The company raised $1,717,251 through private-placement stock sales and paid $254,513 in related offering costs. It also received $1.0 million of note proceeds.
- At December 31, 2011, 49,405,732 shares were issued or issuable and outstanding; 22,755,291 options and 10,537,003 warrants were outstanding, creating significant potential dilution.
- Accounts receivable increased to $1,444,974 net from $45,965, with 70% and 30% attributable to two customers. The filing also disclosed significant revenue concentration among several customers.
Material Changes and Subsequent Events
- Revenue grew sharply from $347,447 to $2.30 million as the company executed significant deployment contracts.
- The company adopted a 2011 Stock Incentive Plan reserving 30 million shares and granted 16,582,856 options during 2011, including 9,162,856 options to former executive chairman Robert Noble. Shareholder ratification was planned for 2012.
- On March 22, 2012, the $1.0 million Hickson convertible note and accrued interest were converted into 3,647,591 common shares, eliminating that debt but increasing share dilution.
- On January 1, 2012, the company granted 600,000 additional director options. In March 2012, it engaged Allied Beacon for capital-raising services, with cash and warrant-based compensation.
- The company extended several notes, including the Gemini, Pegasus, related-party and vendor notes, to December 31, 2012. Gemini’s interest rate was reduced to 10% and its conversion price to $0.20.
Outlook, Risks and Unusual Items
Management expected improved sales execution, higher gross margins, lower overhead and additional projects to support future growth. It planned to raise at least $2.2 million during the following twelve months and was conducting a private placement targeting $2.0 million. Management expressly stated that the company did not have sufficient capital to meet current cash needs and that additional financing might not be available on acceptable terms.
The independent accountant included a going-concern qualification. The company had recurring operating losses, negative operating cash flow, a working-capital deficit, stockholders’ deficit and accumulated deficit of $22,340,460. The financial statements contained no adjustments for the potential effects of failure to continue as a going concern.
- Material weaknesses existed in disclosure controls and internal control over financial reporting, including insufficient segregation of duties, lack of an audit committee financial expert and absence of a formal code of ethics.
- The company faced intense competition, dependence on customer financing and government incentives, permitting and utility-regulatory requirements, project-estimate risk, customer concentration and potential inability to commercialize its technology.
- Outstanding options, warrants and convertible securities could materially dilute existing shareholders.
- A former vendor pursued litigation seeking to impose liability on the parent company; management believed it had valid defenses. The company had accrued $184,171 for the underlying vendor settlement obligation.
- The company had a $113,004 accrued liability related to a former-landlord judgment and future lease payments of $210,014 for 2012 and 2013.
- Related-party transactions included capital-raising fees, debt-issue costs, consulting payables and warrants issued to entities or individuals connected with directors or officers.
Investor Verification Checklist
- Verify the current corporate name, ticker, capital structure and the effect of subsequent reverse-merger or corporate transactions.
- Reconcile reported revenue growth with executed contracts, customer collections, accounts receivable concentration and contract billings.
- Assess whether the company raised the planned additional capital and whether it achieved positive operating cash flow.
- Review the maturity, security, conversion terms and remaining balances of the Gemini, Pegasus and other debt instruments.
- Quantify dilution from outstanding options, warrants, convertible debt and subsequent equity issuances.
- Confirm resolution and potential exposure from the former vendor litigation, landlord judgment and other contingencies.
- Evaluate remediation of the disclosed material weaknesses and whether an audit committee financial expert and formal governance policies were established.
- Distinguish recurring operating performance from noncash stock compensation, debt-settlement gains and derivative fair-value gains.