Business Context and Reporting Period
This unaudited Form 10-Q was filed by Envision Solar International, Inc., not Beam Global, for the three months ended March 31, 2014. The company developed solar products and proprietary technology for electric-vehicle charging infrastructure, advertising and branding infrastructure, renewable-energy production, and disaster preparedness. Key products included Solar Tree structures, Solar Tree Socket, and the early-stage EV ARC autonomous renewable charger.
The company operated as a single segment and reported 83,083,467 shares issued or issuable and outstanding at March 31, 2014; 83,616,805 shares were reported as issued or outstanding as of May 15, 2014.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $202,659 | $155,528 | Up $47,131 |
| Cost of revenues | $219,365 | $195,746 | Up $23,619 |
| Gross profit (loss) | $(16,706) | $(40,218) | Improved $23,512 |
| Operating expenses | $650,505 | $512,900 | Up $137,605 |
| Loss from operations | $(667,211) | $(553,118) | Worsened $114,093 |
| Net loss | $(1,017,230) | $(1,045,767) | Improved $28,537 |
| Basic and diluted loss per share | $(0.01) | $(0.02) | Improved |
| Cash used in operating activities | $(458,583) | $(304,354) | Use increased $154,229 |
| Cash provided by financing activities | $894,000 | $1,693,137 | Down $799,137 |
Revenue increased primarily because the company had two active Solar Tree installation projects compared with one in the prior-year quarter. Gross margin remained negative, at approximately negative 8.2% of revenue versus approximately negative 25.9% in Q1 2013.
Operating expenses included $207,654 of stock-based compensation, compared with $114,080 in Q1 2013. Interest expense was $564,802, including a $482,300 non-cash expense for warrants issued to induce conversion of convertible debt. A $235,399 gain from the change in fair value of the embedded conversion option liability partially offset other expenses.
| Balance-sheet metric | March 31, 2014 | December 31, 2013 |
|---|---|---|
| Cash | $827,515 | $392,098 |
| Current assets | $984,708 | $629,284 |
| Current liabilities | $2,108,895 | $3,233,430 |
| Working capital | $(1,124,187) | Not clearly stated |
| Convertible notes payable, net of discount | $326,151 | $1,506,326 |
| Embedded conversion option liability | $524,427 | $281,265 |
| Stockholders’ deficit | $(1,028,131) | $(2,505,874) |
| Accumulated deficit | $(28,633,328) | $(27,616,098) |
Cash increased by $435,417 during the quarter, primarily from $927,500 of common-stock financing proceeds, partially offset by operating cash use and debt-related payments. One customer represented 96% of Q1 revenue and 94% of net accounts receivable. Cash held above federally insured limits was $757,193.
Material Changes Versus the Prior Comparable Period
- Revenue increased 30.3%, but operating expenses increased 26.8%, resulting in a larger operating loss.
- Gross loss narrowed because certain losses on direct projects had been recognized in the prior quarter; Q1 2014 losses primarily reflected manufacturing tooling costs.
- Operating cash use increased despite the lower net loss, reflecting working-capital changes and project-related balances.
- The company raised $927,500 through a private placement, issuing 6,183,333 shares at $0.15 per share and an equal number of three-year warrants.
- Gemini converted $550,000 of principal and $175,850 of accrued interest into common stock. The company also issued warrants and extended the Gemini debt maturity to June 30, 2015.
- The reported net balance of convertible notes declined substantially because of debt conversion and a $630,174 debt discount; the underlying Gemini note balance was $856,325 before discount.
- Common shares outstanding increased materially, and additional shares, warrants, options, and restricted stock created potential future dilution.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management reported contracted backlog of $662,137 at March 31, 2014, including an order for two additional EV ARC units. Management also stated that the company had secured or was awaiting final contract signatures on approximately $380,000 of additional orders after quarter-end. It expected EV ARC production economics, component-cost reductions, design improvements, and scale benefits could allow gross profit on future sales, possibly later in 2014. No formal quantitative revenue or earnings guidance was provided.
The company disclosed substantial doubt about its ability to continue as a going concern. It had a $1,017,230 quarterly net loss, a $1,124,187 working-capital deficit, a $28.6 million accumulated deficit, and a $1.0 million stockholders’ deficit. Management planned to seek private financing, other capital sources, additional debt financing, new contracts, and debt-maturity renegotiations, but stated that sufficient financing might not be available.
Principal risks included continuing losses, inadequate liquidity, inability to raise capital, inability to pay liabilities, long sales cycles, customer and revenue concentration, competition, reduced solar demand or incentives, technological obsolescence, execution and commercialization risk, stock-price volatility, and dilution from future equity, warrant, and option issuances.
The company’s disclosure controls and procedures were not effective as of March 31, 2014. Material weaknesses included an ineffective control environment, lack of an audit committee financial expert, inadequate segregation of duties, ineffective disclosure communication, and the absence of a formally adopted code of business conduct and ethics. Management reported no material litigation or material off-balance-sheet arrangements.
Subsequent to quarter-end, the company raised an additional $55,000 through a private placement, issued related warrants, appointed a new director, and granted that director restricted stock.
Investor Verification Priorities
- Verify that the filing relates to Envision Solar International, Inc. and reconcile this with the requested Beam Global issuer identification.
- Assess the going-concern qualification, near-term cash burn, debt maturities, and the company’s ability to obtain additional financing.
- Reconcile the reported convertible-debt balances with principal amounts, discounts, derivative liabilities, accrued interest, and the Gemini conversion and extension agreements.
- Evaluate customer concentration, project backlog, post-quarter-end orders, and the collectability of receivables.
- Review the negative gross margins, especially the stated EV ARC pricing below initial production cost and the assumptions supporting future profitability.
- Quantify dilution from outstanding convertible notes, options, warrants, restricted stock, and subsequent equity issuances.
- Review the material weaknesses in disclosure controls and the company’s remediation progress.