Beam Global (filed as Envision Solar International, Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 14, 2018. The interim financial statements are unaudited. The company designs and manufactures solar-powered products and technology for electric-vehicle charging, out-of-home advertising, and energy security.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2.876 million | $0.371 million | +676% |
| Gross profit (loss) | $34,300 | $(3,854) | Improved |
| Gross margin | 1.2% | (1.0%) | Improved |
| Operating loss | $(574,869) | $(672,843) | Improved 15% |
| Interest expense | $(437,546) | $(53,981) | Increased materially |
| Net loss | $(1.012 million) | $(619,573) | Loss increased 63% |
| Net loss margin | (35.2%) | (167.2%) | Improved due to revenue growth, but remained negative |
| Cash flow from operations | $466,138 | $18,457 | Improved |
| Cash at period end | $254,225 | $45,168 | Higher year over year |
Revenue was primarily generated by delivery of 42 EV ARC units, including 30 units to New York City, five to Pittsburgh, and three to Oakland. Product sales were $2.869 million; maintenance fees were $5,448; and professional services were $1,894.
Operating cash flow benefited substantially from the release of $1.817 million of inventory, but was partly offset by an $867,823 increase in accounts receivable and a $176,887 increase in prepaid assets. Investing cash use was $27,222, primarily for patent costs. Financing cash use was $588,166, primarily from repayments on the convertible line of credit, partially offset by $290,000 of common-stock proceeds.
Balance sheet, liquidity and debt
- Total assets were $2.284 million, down from $3.243 million at December 31, 2017.
- Current assets were $1.869 million versus current liabilities of $2.992 million, producing a working-capital deficit of $1.123 million and a current ratio of approximately 0.62.
- Cash was $254,225. Accounts receivable increased to $873,769, while inventory declined to $538,425 from $2.320 million.
- Total liabilities were $3.009 million, compared with $3.592 million at year-end 2017. Carrying amounts included $169,629 under the convertible line of credit, $207,116 of related-party convertible notes, $1.485 million of other convertible notes, and $27,316 of auto-loan debt.
- Stockholders’ deficit was $725,482, compared with $349,262 at December 31, 2017; accumulated deficit was $39.288 million.
- The $1.5 million secured convertible lender note was payable by September 17, 2018 to the extent not converted. The company stated that it intended to renegotiate debt maturities becoming due in 2018.
Material changes versus the prior comparable period
- Revenue increased sharply as unit deliveries rose from five EV ARC units and one ARC Mobility trailer in Q1 2017 to 42 EV ARC units in Q1 2018.
- Gross results improved to a modest profit, although the company continued to state that historical production volumes had generally not supported consistent gross profitability.
- Operating expenses declined to $609,169 from $668,989, primarily due to lower administrative labor, stock-option expense, rent, and investor-relations costs; director fees and marketing expenses increased.
- Net loss worsened because interest expense increased by $383,565, largely from amortization of debt discounts and warrant-related financing costs.
- The company issued 1,933,333 shares for $290,000 in a private placement and issued 937,500 shares valued at $140,625 for director services. Common shares outstanding increased to 144,706,495 from 141,835,662.
- The company adopted ASC 606 revenue recognition effective January 1, 2018 and reported no impact on the amount or timing of revenue.
Guidance, outlook, risks and unusual items
Management reported approximately $1.3 million of contracted backlog at March 31, 2018 and approximately $1.6 million of additional orders booked between April 1 and May 4, 2018. Management expected most of the backlog to be executed over the following quarters and anticipated improved margins from higher production volumes, process improvements, and economies of scale. No formal financial guidance was provided.
- The filing includes a going-concern warning. Management stated that substantial doubt exists about the company’s ability to continue as a going concern for twelve months after issuance of the report.
- Management expected continuing operating losses and planned to seek additional equity and debt financing, increase product sales, and renegotiate debt. The filing states that financing may not be available on acceptable terms or in sufficient amounts.
- Customer concentration was significant: two customers represented 69% and 15% of Q1 2018 revenue, while two customers represented 48% and 24% of March 31 accounts receivable.
- Interest expense included approximately $379,000 of amortized debt discounts associated with warrants issued to lenders, making the quarter’s reported loss materially worse than the operating loss.
- Convertible instruments, options, and warrants potentially represented substantial future dilution. At March 31, 2018, convertible notes were convertible into 9.1 million shares, and options and warrants covered approximately 21.7 million shares, all excluded from diluted loss per share as anti-dilutive.
- Disclosure controls and procedures were reported ineffective. Material weaknesses included ineffective control-environment oversight, inadequate segregation and communication processes, lack of an audit committee financial expert, and no formally adopted written code of business conduct and ethics.
- The company disclosed no material pending litigation and no material off-balance-sheet arrangements. Its headquarters and manufacturing facility lease runs through August 2020, with monthly payments ranging from $46,800 to $50,619.
- Subsequent to March 31, 2018, the company paid down the remaining $290,000 draw under its convertible line of credit.
Facts investors should verify
- Whether the reported backlog and subsequent orders convert into timely deliveries, collections, and sustainable positive gross margins.
- The company’s ability to raise capital and refinance or repay the secured convertible note and other past-due or maturing obligations.
- Accounts-receivable collectability given the concentration in two customers and the significant quarter-end balance.
- Whether production volume and cost reductions produce recurring gross profits after allocated manufacturing overhead.
- The magnitude and terms of future dilution from convertible debt, warrants, options, stock-based compensation, and additional financing.
- Progress in remediating the disclosed material weaknesses in internal control and disclosure controls.
- The implications of the explicit going-concern qualification for liquidity, financing access, and shareholder value.