Business Context and Reporting Period
The filing is Envision Solar International, Inc.’s unaudited Form 10-Q for the three and six months ended June 30, 2018. The company designs and manufactures solar-powered products for electric-vehicle charging, out-of-home advertising, and energy security. Products include EV ARC and Solar Tree systems, with EV-Standard and UAV ARC in development. The filing metadata identifies Beam Global, but the filing registrant is Envision Solar International, Inc.
Financial Results and Position
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $844,495 | $507,730 | $3,720,467 | $878,419 |
| Gross profit (loss) | $18,734 | $(13,106) | $53,034 | $(16,960) |
| Gross margin | 2.2% | (2.6%) | 1.4% | (1.9%) |
| Operating expenses | $573,151 | $545,292 | $1,182,320 | $1,214,281 |
| Loss from operations | $(554,417) | $(558,398) | $(1,129,286) | $(1,231,241) |
| Interest expense | $220,468 | $47,625 | $658,014 | $101,606 |
| Net loss | $(774,271) | $(604,332) | $(1,785,878) | $(1,223,905) |
Six-month revenue was primarily product sales of $3,706,103, compared with $874,819 in the prior-year period. The company delivered 55 EV ARC units in the first half of 2018 versus 12 EV ARC units and one ARC Mobility trailer in the comparable period. Contracted backlog was approximately $2.7 million at June 30, 2018.
- Cash at June 30, 2018 was $128,675, down from $403,475 at December 31, 2017.
- Operating activities provided $354,925 of cash in the first six months, versus $452,742 used in the prior-year period.
- Investing activities used $44,858, primarily for patent costs.
- Financing activities used $584,867, including repayments under the convertible line of credit, partially offset by $290,000 of common-stock proceeds.
- Total assets were $2.23 million and total liabilities were $3.67 million at June 30, 2018.
- Current liabilities were $3.55 million versus current assets of $1.79 million, producing a working-capital deficit of $1.77 million.
- Stockholders’ deficit was $1.44 million, compared with $349,262 at December 31, 2017.
- Debt included $1.47 million of current convertible notes, $339,233 under the convertible line of credit, $160,000 owed under a related-party convertible note, $100,000 of long-term convertible notes, and $24,798 of auto-loan obligations.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 66%, while six-month revenue increased 324%, driven by substantially higher EV ARC deliveries.
- The company moved from gross losses to modest gross profits in both the quarter and six-month period. Management attributed the improvement to positive direct margins on units sold and expects further improvement from higher production volumes, process improvements, and economies of scale.
- Despite improved gross profit and lower six-month operating expenses, the six-month net loss increased 46% because interest expense rose 548% to $658,014.
- The higher interest expense primarily reflected $560,900 of amortized debt discounts associated with warrants and beneficial conversion features issued in connection with 2017 lender financings.
- Inventory declined to $891,990 from $2.32 million, principally because 30 EV ARC units built in 2017 were delivered in early 2018. Accounts receivable increased to $689,359 from $5,946.
- Common shares outstanding increased to approximately 144.9 million at June 30, 2018 from approximately 141.8 million at December 31, 2017. Convertible notes, options, and warrants could create additional dilution.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects losses to continue and does not provide formal revenue or earnings guidance. Management believes increased sales and production volumes could improve gross margins, but it cannot predict when or whether the company will achieve positive cash flow.
- Going concern: Management states that the net loss, working-capital deficit, accumulated deficit of $40.06 million, and stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern for twelve months after issuance of the report.
- Financing dependence: The company expects to seek additional public, private, and debt financing and intends to renegotiate debt maturities. There is no assurance that financing will be available on acceptable terms or in sufficient amounts.
- Near-term debt: The $1.5 million secured lender note was due September 17, 2018 unless converted, and additional debt maturities and obligations required management attention. The company subsequently extended the Pegasus note to December 31, 2019 and the Evey note to July 1, 2019.
- Lease commitment: The headquarters and manufacturing facility sublease runs through August 2020, with monthly payments ranging from $46,800 to $50,619.
- Customer concentration: Three customers represented 48%, 22%, and 21% of net accounts receivable at June 30, 2018. Three customers represented 53%, 11%, and 11% of six-month revenue.
- Subsequent events: After quarter-end, the company borrowed net funds of $203,561 under its convertible line of credit, filed an S-1 registration statement for a proposed equity and warrant offering, and disclosed the resignation of a director with accelerated vesting of 125,000 shares.
- Internal controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2018. Material weaknesses included ineffective control-environment oversight, lack of an audit committee financial expert, and insufficient segregation and communication of duties.
- The filing reports no material pending legal proceedings and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the registrant and corporate identity, because the supplied metadata names Beam Global while the filing identifies Envision Solar International, Inc.
- Verify delivery timing, collectability of the $689,359 accounts receivable balance, and the sustainability of the approximately $2.7 million backlog.
- Review whether the company refinanced, converted, or repaid the $1.5 million lender note and other obligations that matured after June 30, 2018.
- Assess the company’s ability to raise capital and the potential dilution from financing offerings, convertible notes, options, and warrants.
- Evaluate whether modest positive gross margins can offset operating expenses, interest costs, facility commitments, and continuing losses.
- Review subsequent SEC filings for the proposed S-1 offering, any NASDAQ listing attempt, additional borrowings, and changes to the going-concern assessment.
- Monitor remediation of the disclosed material weaknesses in internal control and disclosure controls.