The accompanying unaudited notes are an integral part of these
unaudited Condensed Consolidated Financial Statements
The accompanying unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
The accompanying unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
|
1.
|
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
Envision
Solar International Inc. (along with its subsidiary, hereinafter the “Company”, “us”, “we”,
“our” or “Envision”), a Nevada corporation, invents, designs, and manufactures solar products and proprietary
technology solutions targeting three verticals: electric vehicle charging infrastructure; out of home advertising infrastructure;
and renewable energy production and disaster preparedness. The Company focuses on creating renewably energized platforms for EV
charging, and media and branding which are attractive, rapidly deployed, and of the highest quality. Management believes that the
Company's chief differentiator is its ability to design and engineer architecturally accretive solar products which are a complex
integration of simple, commonly available engineered components. The resulting products are built to have the longest life expectancy
in the industry while also delivering valuable amenities and possible revenue opportunities for our customers. Management believes
that Envision's products deliver multiple layers of value such as: renewably energized EV charging; media, branding, and advertising
platforms; renewable and reliable energy production; architectural enhancement; reduced carbon footprint; reduction of heat islanding
and improved parking experiences through shading; high visibility "green halo" branding; reduction of net operating costs
through reduced utility bills; and revenue creation opportunities through the sales of digital out of home (DOOH) media.
Basis of Presentation
The interim
unaudited condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the Company’s management, all adjustments (consisting
of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly our results of
operations and cash flows for the three months ended March 31, 2016 and 2015, and our financial position as of March 31, 2016,
have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be
expected for the full year.
Certain information
and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from
these interim financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2015. The December
31, 2015 consolidated balance sheet is derived from those statements.
Principals of Consolidation
The unaudited
condensed consolidated financial statements include the accounts of Envision Solar International, Inc. and its wholly-owned subsidiary,
Envision Solar Construction Company, Inc. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited condensed consolidated
financial statements include the allowance for doubtful accounts receivable, valuation of inventory, depreciable lives of property
and equipment, estimates of costs to complete and earnings on uncompleted contracts, estimates of loss contingencies, valuation
of derivatives, valuation of beneficial conversion features in convertible debt, valuation of share-based payments, and the valuation
allowance on deferred tax assets.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Concentrations
Concentration of Credit Risk
Financial instruments that potentially
subject us to concentrations of credit risk consist of cash and revenues.
The Company
maintains its cash in banks and financial institution deposits that at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts from inception through March 31, 2016. As of March 31, 2016, there were no amounts
greater
than the federally insured limits.
Concentration of Accounts
Receivable
As of March
31, 2016, customers that each represented more than 10% of the Company’s net accounts receivable balance were as follows:
|
|
Customer A
|
29%
|
Customer B
|
29%
|
Customer C
|
14%
|
Customer D
|
14%
|
Customer E
|
13%
|
Concentration of Revenues
For the three months ended March
31, 2016, customers that each represented more than 10% of our net revenues were as follows:
|
|
Customer A
|
20%
|
Customer B
|
16%
|
Customer C
|
15%
|
Customer D
|
14%
|
Customer E
|
14%
|
Cash and Cash Equivalents
For the purposes
of the unaudited condensed consolidated statements of cash flows, the Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at March 31, 2016 and December
31, 2015 respectively.
Fair Value of Financial Instruments
The Company’s
financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and short term loans, are carried
at historical cost basis. At March 31, 2016, the carrying amounts of these instruments approximated their fair values because of
the short-term nature of these instruments. (See Note 6 for further discussion of fair value measurements.)
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Accounting for Derivatives
The Company
evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components
of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging”. The
result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded
as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the
statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liability at
the fair value of the instrument on the reclassification date.
Revenue Recognition
Revenues
are primarily derived from the direct sales of products in addition to construction contracts for the production and installation
of integrated solutions and proprietary products, and on a limited basis, lease income from the lease of our products. Revenues
may also consist of design fees for the design of solar systems and arrays, and revenues from sales of professional services.
Revenues from leases, design services
and professional services are recognized as earned.
Revenues
from inventoried product sales are recognized upon the final delivery of such product to the customer.
Any deposits
received from a customer prior to delivery of the purchased product and additionally, monies received for leases prior to a given
lease period, are accounted for as deferred revenue on the balance sheet. At March 31, 2016 and December 31, 2015, deferred revenue
amounted to $89,647 and $213,467 respectively. At March 31, 2016, the Company has received full or partial deposits for three undelivered
EV ARC™ units as well as being paid in full for the one year rental term of its sole lease which has approximately one month
remaining.
Revenues
and related costs on construction projects are recognized using the “percentage of completion method” of accounting
in accordance with ASC 605-35, “Construction-Type and Production-Type Contracts.” Under this method, contract revenues
are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total
estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor, allocable depreciation,
and other allocable indirect costs and are charged to the periods as incurred. All unallocable indirect costs and corporate general
and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer
are recorded as an asset in “costs and estimated earnings in excess of billings on uncompleted contracts.” Any billings
of customers in excess of recognized revenues are recorded as a liability in “Billings in excess of costs and estimated earnings
on uncompleted contracts.” However, in the event a loss on a contract is foreseen, the Company will recognize the loss when
such loss is determined.
For construction
contracts that do not qualify for use of the percentage of completion method, the Company accounts for construction contracts using
the “completed contract method” in accordance with ASC 605-35. Under this method, contract costs are accumulated as
deferred assets and billings and/or cash received are recorded to a deferred revenue liability account during the periods of construction,
but no revenues, costs or profits are recognized in operations until the period upon completion of the contract. Costs include
direct material, direct labor, subcontract labor and any allocable indirect costs. All unallocable indirect costs and corporate
general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen,
the Company will recognize the loss when such loss is determined. The deferred asset (accumulated contract costs) in excess of
the deferred liability (billings and/or cash received) is classified as a current asset under “Costs in excess of billings
on uncompleted contracts.” The deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated
contract costs) is classified under current liabilities as “Billings in excess of costs on uncompleted contracts.”
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
A contract
is considered complete when all costs except insignificant items have been incurred and the installation is operating according
to specifications or has been accepted by the customer.
The Company
may have contracts in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue
recognition. Cost estimates are reviewed periodically on a contract-by-contract basis throughout the life of the contract such
that adjustments to the profit resulting from revisions are made cumulative to the date of the revision. Significant management
judgments and estimates, including the estimated costs to complete projects, must be made and used in connection with the revenue
recognized in the accounting period. Current estimates may be revised as additional information becomes available.
The Company
includes shipping and handling fees billed to customers as revenues, and shipping and handling costs as cost of revenues. The Company
generally provides a standard one year warranty on its products for materials and workmanship but will pass on the warranties from
its vendors, if any, which generally cover at least such period. In accordance with ASC 450-20-25, the Company accrues for product
warranties when the loss is probable and can be reasonably estimated. At March 31, 2016, the Company has no product warranty
accrual given its lack of historical warranty experience.
Patents
Effective
January 2015, the company believes it is in a position to achieve future economic value benefits for its various patents and patent
ideas. All administrative costs for obtaining patents are accumulated on the balance sheet as a Patent asset until such time as
a patent is issued. The costs of these intangible assets are classified as a long term asset and amortized on a straight line basis
over the legal life of such asset, which is typically 20 years. In the event a patent is denied, all accumulated administrative
costs will be expensed in the period.
Stock-Based Compensation
The Company
follows ASC 718, “Compensation – Stock Compensation.” ASC 718 requires companies to estimate and recognize the
fair value of stock-based awards to employees and directors. The fair value of the portion of an award that is ultimately expected
to vest is recognized as an expense over the requisite service periods using the straight-line attribution method.
The Company
accounts for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “Equity-Based
Payments to Non Employees.”
The Company
estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model.
Net Loss Per Share
Basic net
loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during
the periods presented. Diluted net loss per common share is computed using the weighted average number of common shares outstanding
for the period, and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments or other common
stock equivalents.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Convertible
notes payable that are convertible into 5,424,950 common shares, options to purchase 15,137,007 common shares and warrants to purchase
29,219,441 common shares were outstanding at March 31, 2016. These shares were not included in the computation of diluted loss
per share for the three months ended March 31, 2016 because the effects would have been anti-dilutive. These options and warrants
may dilute future earnings per share.
Segments
The Company
follows ASC 280-10 for, "Disclosures about Segments of an Enterprise and Related Information." During 2015 and 2016,
the Company only operated in one segment; therefore, segment information has not been presented.
New Accounting Pronouncements
ASU 2016-02
In February
2016 the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02: “Leases (Topic 842)”
whereby lessees will need to recognize almost all leases on their balance sheet as a right of use asset and a lease liability.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company does not expect
this ASU to have a material impact on its consolidated financial statements.
ASU 2016-09
In March
2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-09:
"Compensation – Stock
Compensation (Topic 718)
-
I
mprovements
to Employee Share-Based Payment Accounting" which includes multiple provisions intended to simplify various aspects
of the accounting for share-based payments. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2016. The Company is in process of analyzing the impacts of this update but do not believe it will have a material
impact on its consolidated financial statements.
ASU 2015-03
In April 2015, the Financial Accounting Standards
Board issued Accounting Standards Update No. 2015-03,
"Simplifying the Presentation of Debt Issuance Costs,"
which
changes the presentation of debt issuance costs in financial statements. Under this guidance such costs would be presented as a
direct deduction from the related debt liability rather than as an asset. This guidance is effective for interim and annual reporting
periods beginning after December 15, 2015. This ASU did not have a material impact on its consolidated financial statements. The
Company is conforming to Standard Update 2015-15 related to the classification of debt issuance costs associated with lines of
credit.
As reflected
in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2016, the Company
had a net loss and net cash used in operations of $737,292 and $280,607 respectively. Additionally, at March 31, 2016, the Company
had a working capital deficit of $2,140,023, an accumulated deficit of $33,339,225 and a stockholders’ deficit of
$1,722,945
.
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company
has incurred significant losses from operations, and such losses are expected to continue. In addition, the Company has limited
working capital. In the upcoming months, Management's plans include seeking additional operating and working capital through a
combination of private and debt financings. There is no guarantee that additional capital or debt financing will be available when
and to the extent required, or that if available, it will be on terms acceptable to the Company. Further, the Company continues
to seek out sales contracts for new projects and product sales that should provide additional revenues and, in the long term, gross
profits. Additionally, Envision intends to renegotiate the debt instruments that currently become due in 2016. All such actions
and funds, if successful, may not be sufficient to cover monthly operating expenses or meet minimum payments with respect to the
Company’s liabilities over the next twelve months.
The unaudited
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Inventories are stated at the
lower of cost or net realizable value. Costs are determined using the first in- first out (FIFO) method. Inventory consists approximately
of the following:
|
|
March 31
|
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
Finished Goods
|
|
$
|
37,971
|
|
|
$
|
85,487
|
|
Work in Process
|
|
|
341,974
|
|
|
|
234,226
|
|
Raw Materials
|
|
|
261,828
|
|
|
|
130,245
|
|
Inventory Allowance
|
|
|
(18,463
|
)
|
|
|
(27,783
|
)
|
Total Inventory
|
|
$
|
623,310
|
|
|
$
|
422,175
|
|
The major components of accrued
expenses are summarized as follows:
|
|
March 31,
2016
|
|
|
December 31, 2015
|
|
Accrued vacation
|
|
$
|
147,627
|
|
|
$
|
135,940
|
|
Accrued officers’ salary
|
|
|
68,749
|
|
|
|
68,749
|
|
Accrued interest
|
|
|
164,659
|
|
|
|
142,261
|
|
Accrued insurance financing
|
|
|
24,116
|
|
|
|
–
|
|
Other accrued expenses
|
|
|
6,127
|
|
|
|
1,517
|
|
Total accrued expenses
|
|
$
|
411,278
|
|
|
$
|
348,467
|
|
In October
2015, the Company entered into a one year Loan and Security Agreement (the “LSA”) with Silicon Valley Bank (“Bank”),
pursuant to which the Bank agreed to provide the Company with a revolving line of credit in the aggregate principal amount of $1,000,000,
bearing interest at a floating per annum rate equal to the greater of three quarters of one percentage point (0.75%) above the
Prime Rate (as that term is defined in the LSA) or four percent (4.00%). The line of credit is secured by a second priority perfected
security interest in all of the assets of the Company in favor of the Bank.
The LSA contains certain
restrictions, subject to certain exceptions and qualifications, on the conduct of the Company and its subsidiary, including, among
other restrictions: incurring debt other than permitted indebtedness as defined, disposing of certain assets, making investments,
creating or suffering liens, completing certain mergers, consolidations and sales of assets, acquisitions, declaring dividends
to third parties, redeeming or prepaying other debt, and certain transactions with affiliates.
Under the
terms of the LSA, the Bank received a commitment fee of $2,500, reimbursement of Bank expenses for documentation of $10,000, and
a reimbursement of filing fees amounting to $1,836. These fees are recorded as Debt Issue Costs on the accompanying balance sheet
and are being amortized over the one year term of the line of credit.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
As a condition
to the extension of credit to the Company under the LSA, Keshif Ventures, LLC (“Keshif”), a related party shareholder
with more than 10% of the outstanding stock of the Company, agreed to guarantee all of the Company’s obligations under the
LSA pursuant to a Master Unconditional Limited Guaranty between Bank and Keshif (“Guaranty”). Keshif pledged cash equivalent
collateral to the Bank as security for the Guaranty. Keshif also agreed to subordinate to the Bank all of Company’s indebtedness
and other monetary obligations owing to Keshif pursuant to a Subordination Agreement (“Subordination Agreement”). In
consideration for the Guaranty, Envision issued 571,429 shares of its common stock, with a per share value of $0.15 (based on contemporaneous
cash sales prices) or $85,714 (the “Shares”) to Keshif pursuant to a stock purchase agreement (“SPA”).
These shares, along with legal costs associated with the issuance of this guaranty amounting to $11,435, are recorded as Debt Issue
Costs in the accompanying balance sheet and are being amortized over the one year term of the line of credit. Pursuant to the terms
of the SPA, for each six-month period from and after the six-month anniversary of October 29, 2015 (each, a “Measurement
Period”) that Keshif guarantees Borrower’s obligations under the LSA, Keshif will also receive the number of additional
shares of Envision’s common stock, rounded upward to the nearest whole number, equal to (a) two and one half percent (2.5%)
multiplied by the maximum outstanding principal amount of the LSA at any time during such Measurement Period, such amount to be
divided by (b) the twenty (20) day average closing price of the Company’s common stock, measured for the twenty (20) consecutive
trading days immediately prior to such Measurement Period, the quotient of which shall be multiplied by (c) a fraction, the numerator
of which is the number of calendar days during the Measurement Period which the Guaranty remained in effect and the denominator
of which is the number of calendar days in such Measurement Period. The Company also issued a side letter to Keshif (the “Side
Letter”), which in addition to confirming Keshif’s entitlement to the Shares, provided certain contractual rights to
Keshif in consideration for the Guaranty, including a covenant by the Company to provide financial statements and other periodic
reports to Keshif, an agreement to reimburse Keshif for payments made by Keshif to the Bank in accordance with the Guaranty (“Reimbursement
Obligation”), and the grant of a security interest, subordinated to the Bank under the Subordination Agreement, to secure
the Reimbursement Obligation. Keshif also has the right under the Side Letter to invite one representative to attend all meetings
of Envision’s Board of Directors and, in the event Envision is unable to meet its obligations under the LSA, Keshif will
immediately become entitled to elect one member to Envision’s Board of Directors.
The outstanding
balance on the line of credit at March 31, 2016 is $1,000,000 and there is no additional credit line available to the Company.
|
6.
|
CONVERTIBLE NOTES PAYABLE
- RELATED PARTIES AND FAIR VALUE MEASUREMENTS
|
As of March
31, 2016, the following summarizes amounts owed under short-term convertible notes –related parties:
|
|
Amount
|
|
Evey Note
|
|
$
|
83,616
|
|
Noble Note
|
|
|
600,000
|
|
|
|
$
|
683,616
|
|
Evey Note
Prior to
fiscal 2011, the Company was advanced monies by John Evey, our director, and executed a 10% convertible promissory note which was
convertible into shares of common stock at $0.33 per share. There was no beneficial conversion feature at the note date and this
note is subordinate to the Gemini Master Funds notes. Through a series of amendments, the conversion price of the convertible note
was reduced to $0.20 and the maturity date was extended to December 31, 2015.
Effective
December 31, 2015, the Company entered into a further extension agreement to extend the maturity date of this note to December
31, 2016. There were no additional fees or discounts associated with this extension. This modification was treated as an extinguishment,
but as the market price of the Company’s stock was below the conversion price at the time of the modification, there was
no beneficial conversion feature that needed to be recorded.
After
principal payments totaling $3,000 during the three month period ended March 31, 2016, the balance of the note as of March
31, 2016 is $83,616 with accrued interest amounting to $39,795 which is included in accrued expenses (See Note 4). The
note continues to bear interest at a rate of 10%
(See note 12).
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Noble Note
At the end
of 2010, the Company had a series of outstanding convertible notes to Gemini Master Fund, Ltd which were due December 31, 2011.
These notes bore interest at a rate of 12% per annum and, with the exception of one note, had a conversion feature whereby, the
lender, at its option, may at any time convert this loan into common stock at $0.25 per share. Interest under these notes is due
on the first business day of each calendar quarter, however, upon three days advance notice, the Company may elect to add such
interest to the note principal balance effectively making the interest due at note maturity. With regard to the conversion feature
of these notes, the conversion rights contain price protection whereby if the Company sold equity or converted existing instruments
to common stock at a price less than the effective conversion price, the conversion price will be adjusted downward to the sale
price. Furthermore, if the Company issues new rights, warrants, options or other common stock equivalents at an exercise price
that is less than the stated conversion price, then the conversion price shall be adjusted downward to a new price based on a stipulated
formula. The holder may not convert the debt if it results in the holder beneficially holding more than 4.9% of the Company’s
common stock. The note is secured by substantially all assets of the Company and its subsidiary, and is unconditionally guaranteed
by the subsidiary.
Prior to
June 30, 2010 all shares underlying the Gemini Master Fund convertible debt were subject to a lock-up agreement, and the shares
were not easily convertible to cash thus, the embedded conversion option did not need to be bifurcated and recorded as a fair value
derivative due to the price protection provision in the notes. Subsequent to June 30, 2010, such lock-up provisions expired and
as such, the Company determined that the embedded conversion option met the definition of a derivative liability and needed to
be bifurcated and recorded as a derivative at fair value.
Through
a series of amendments, the Company modified terms of all notes so that the terms of these notes became equivalent. Further, the
interest rates were reduced to 10%; the conversion prices were reduced to $0.15; and the terms were extended to December 31, 2013.
Effective
February 28, 2014 the Company entered into an additional extension and amendment agreement with a simultaneous principal conversion
agreement related to these convertible notes payable. With this agreement, all outstanding notes were merged into one note, the
term of the note was extended to June 30, 2015 and the beneficial holder ceiling was increased to 9.9%. No other terms of the notes
were modified. These changes were accounted for as a debt modification but not as a debt extinguishment because the embedded conversion
feature is bifurcated and treated as a derivative and no other debt extinguishment criteria were met. As a result of this transaction,
the Company recorded $478,561 of embedded conversion option based effective interest based on the increase in the fair value of
the embedded conversion option due to the modification which was recorded as debt discount and was amortized over the then remaining
term of the loan. The Company further issued 1,500,000 common stock purchase warrants valued at $193,625 using the Black-Scholes
valuation methodology, each with a three year term and $0.20 strike price, to the holder which was recorded as debt discount and
was amortized over the then remaining term of the note. The Company agreed to pay a $6,500 fee to cover legal and document fees
which was capitalized as an asset on the balance sheet as “Debt issue costs” and was amortized over the then remaining
term of the note. Simultaneously, Gemini converted $550,000 of principal convertible debt, and all accrued interest through 2013,
and further, the accrued interest through the conversion date for the converted debt, totaling $155,161 into 4,701,076 shares of
common stock of the Company (3,666,666 shares for principal and 1,034,410 for interest) at the contracted conversion price of $0.15
per share. The conversion was recorded to equity with no gain or loss on such conversion related to the principal portion, while
the Company recorded a loss of $20,689 related to the conversion of accrued interest. As an inducement to Gemini to convert the
principal debt amount, the Company issued 3,727,778 common stock purchase warrants, each with a strike price of $0.20 and a three
year term. These warrants are valued at $482,300 using the Black-Scholes option pricing model and were expensed at the date of
the transaction.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
In June 2015,
Gemini sold a 70.0066819% stake in its’ note to Robert Noble, our former Chairman, in a private transaction. The Company
issued two replacement notes for their respective ownership values based on this transaction. Each note has the same terms and
conditions as existed prior to this transaction and as discussed above. There were no accounting effects for this transaction.
In September
2015, the Company made a payment of $306,624 to pay off the balance of the Gemini note and its accrued interest, and recorded a
loss on debt settlement of $2,925.
In regards
to the remaining note, Robert Noble agreed to an extension to April 18, 2016. Additionally, during 2015, the Company made a $100,000
payment to Mr. Noble to pay down the accrued interest on this note. As Mr. Noble is a greater than 10% shareholder in the Company,
the note is classified as Convertible Notes Payable- Related Parties in the accompanying balance sheets.
At
March 31, 2016, the remaining note had a balance of $600,000, and accrued interest of $47,224 which is included in accrued
expenses (See Note 4).
Effective
January 20, 2016, Mr. Noble entered into a Purchase Option Agreement with a firm affiliated with Jay S. Potter, a director of the
Company (the “Optionee”), pursuant to which the Optionee has the right to purchase or arrange for the purchase of the
Note from Mr. Noble and all of Mr. Noble’s shares in the Company (the “Option”), at any time until March 31,
2016. This date was subsequently amended to May 31, 2016. The Company has consented to the Purchase Option Agreement. Under a Note
Settlement and General Release Agreement, provided that the Option is fully exercised and honored, the Company agreed to grant
Mr. Noble the right to acquire, for one dollar, at any time until June 30, 2017, a worldwide, perpetual, irrevocable, nonexclusive,
royalty-free license to utilize all of the Company’s intellectual property developed prior to January 1, 2011, except for the following:
(i) EV ARC™ and (ii) EnvisionTrak™. Further, provided the Option is exercised in full and Mr. Noble complies with it,
the Company will extend the expiration date of the 1,138,120 warrants to purchase 1,138,120 shares of the Company’s common
stock owned by Mr. Noble (the “Warrants”) from December 31, 2016 to December 31, 2017, and will reduce the exercise
price of such Warrants from $0.24 to $0.20 per share. As of March 31, 2016, the Option has not yet been excercised.
Fair Value Measurements
– Derivative liability:
The
accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded
disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset
or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly
transaction between market participants on the measurement date. The accounting standard established a fair value
hierarchy which requires an entity to maximize the use of observable inputs, where available. This hierarchy
prioritizes the inputs into three broad levels as follows. Level 1 input are quoted prices (unadjusted) in
active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable
inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. An asset or
liability’s classification within the hierarchy is determined based on the lowest level input that is significant to
the fair value measurement.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Assets and liabilities measured
at fair value on a recurring and non-recurring basis consisted of the following at March 31, 2016:
|
|
|
|
|
Fair value Measurements at March 31, 2016
|
|
|
|
Carrying Value at March 31, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Embedded Conversion Option Liability
|
|
$
|
233,845
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
233,845
|
|
The following is a summary of
activity of Level 3 liabilities for the period ended March 31, 2016:
|
|
|
|
Balance December
31, 2015
|
|
$
|
87,992
|
|
Change in Fair Value
|
|
|
145,853
|
|
Balance March 31, 2016
|
|
$
|
233,845
|
|
Changes in
fair value of the embedded conversion option liability are included in other income (expense) in the accompanying unaudited condensed
consolidated statements of operations.
The
Company estimates the fair value of the embedded conversion option liability utilizing the Black-Scholes option pricing
model, which is dependent upon several variables such as the expected remaining term (based on contractual term), expected
volatility of our stock price over the expected remaining term (based on historical volatility), expected risk-free interest
rate over the expected remaining term, and the expected dividend yield rate over the expected remaining term. The Company
believes this valuation methodology is appropriate for estimating the fair value of the derivative liability. The
following table summarizes the assumptions the Company utilized to estimate the fair value of the embedded conversion option
at March 31, 2016:
Assumptions
|
|
|
|
Expected remaining term
|
|
|
0.25
|
|
Expected volatility
|
|
|
117.06%
|
|
Risk free rate
|
|
|
0.16%
|
|
Dividend yield
|
|
|
0.00%
|
|
There were
no changes in the valuation techniques during the three month period ended March 31, 2016. The Company did however compute the
valuation of this derivative liability using a binomial lattice model noting no material differences in valuation results.
|
7.
|
CONVERTIBLE NOTE PAYABLE
|
On December
19, 2009, the Company entered into a convertible promissory note for $100,000 to a new landlord in lieu of paying rent for one
year for new office space. The interest is 10% per annum with the note principal and interest originally due December 18, 2010
and subsequently extended until December 31, 2012. However, if the Company receives greater than $1,000,000 of proceeds from debt
or equity financing, 25% of the amount in excess of $1,000,000 shall be used to pay down the note. This note is subordinate to
all existing senior indebtedness of the Company. This note is convertible at $0.33 per share and had no beneficial conversion feature
at the note date.
Through a
series of amendments, the term of the note was extended until December 31, 2015, and waived, through December 31, 2014, the requirement
to pay down the note with financing proceeds received by the Company.
Effective
December 31, 2015, the Company entered into an additional modification extending the term of the note to December 31, 2016, and
waiving, through December 31, 2015, the requirement to pay down the note with financing proceeds received by the Company in the
period. There was no accounting effect for this transaction.
The
balance of the note as of March 31, 2016 is $100,000 with accrued and unpaid interest amounting to $62,712 which is included
in accrued expenses (See Note 4).
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
|
8.
|
NOTES PAYABLE AND AUTO LOAN
|
Note Payable
The Company
has an outstanding Promissory Note with one of its vendors that was entered into in exchange for the vendor cancelling its open
invoices to the Company. The original loan amount was for $160,633 and bears interest at 10%. The note can be converted only at
the option of the Company, at any time, into common stock with an original conversion price of $0.33 per share. Partial conversions
of the note occurred in 2011, 2012 and 2013, and further, through a series of amendments, the note, plus the accrued interest became
due and payable on December 31, 2015. No other terms of the note were changed.
Effective
December 31, 2015, the Company entered into a further amendment to this note extending the maturity date of the note to June 30,
2016. There was no accounting effect for this extension.
As of
March 31, 2016, the note had a remaining balance due of $43,033 with accrued and unpaid interest amounting to $14,928 which
is included in accrued expenses (See Note 4).
Auto Loan
In October
2015, the Company purchased a new vehicle and financed the purchase through a dealer auto loan. The loan has a term of 60 months,
requires minimum monthly payments of approximately $950, and bears interest at a rate of 5.99 percent. As of March 31, 2016, the
loan has a short-term portion of $8,930 and a long term portion of $36,715.
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Matters:
From time
to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As
of March 31, 2016, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on
the results of our operations.
Other Commitments:
The Company
enters into various contracts or agreements in the normal course of business whereby such contracts or agreements may contain commitments.
Since inception, the Company entered into agreements to act as a reseller for certain vendors; joint development contracts with
third parties; referral agreements where the Company would pay a referral fee to the referrer for business generated; sales agent
agreements whereby sales agents would receive a fee equal to a percentage of revenues generated by the agent; business development
agreements and strategic alliance agreements where both parties agree to cooperate and provide business opportunities to each other
and in some instances, provide for a right of first refusal with respect to certain projects of the other parties; agreements with
vendors where the vendor may provide marketing, investor relations, public relations, technical consulting or subcontractor services,
vendor arrangements with non binding minimum purchasing provisions, and financial advisory agreements where the financial advisor
would receive a fee and/or commission for raising capital for the Company. All expenses and liabilities relating to such contracts
were recorded in accordance with generally accepted accounting principles during the periods. Although such agreements increase
the risk of legal actions against the Company for potential non-compliance, there are no firm commitments in such agreements, other
than monthly forgivable draw arrangements with certain sales representatives, as of
March 31, 2016.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Upon the
signing of customer contracts, the Company enters into various other agreements with third party vendors who will provide services
and/or products to the Company. Such vendor agreements may call for a deposit along with certain other payments based on the delivery
of goods or services. Payments made by the Company before the completion of projects are treated as ongoing project expenses and
due to the contractual nature of the agreements; the Company may be contingently liable for other payments required under the
agreements.
Stock Issued in Cash Sales
During the
three months ended March 31, 2016 pursuant to private placements, the Company issued 2,166,666 shares of common stock for cash
with a per share price of $0.15 per share or $325,000 and the Company incurred $23,600 of capital raising fees that were paid in
cash and charged to additional paid-in-capital. Additionally, the Company obligated to issue 98,333 warrants as an offering cost
to a third party, each with a 5 year term and a strike price of $0.15 per share, at the close of the private placement offering.
There will be no accounting effect for the issuance of these warrants as their fair value will be charged to additional paid-in-capital
as an offering cost and offset by a credit to additional paid-in-capital for their fair value
when
issuing these warrants (See Note 12).
Stock Issued for Services
During
the three months ended March 31, 2016, as partial payment for professional services provided by GreenCore Capital, LLC (“GreenCore’),
the Company issued 128,571 shares of the Company’s common stock with a per share fair value of $0.15 (based on contemporaneous
cash sales prices)
or
$19,286 and expensed the payment at issuance.
The Company recorded a loss on debt settlement of $1,286 on this transaction. Jay Potter, our director, is the managing member
of GreenCore and the primary individual performing the services (See Note 12).
New Director
On February
19, 2016, Mr. Anthony Posawatz accepted an appointed as a new director of the Company effective February 19, 2016. In consideration
for Mr. Posawatz’s acceptance to serve as a director of the Company, the Company agreed to grant him 1,000,000 restricted
shares of its common stock, with a per share value of $0.15 (based on contemporaneous cash sales prices), or $150,000, vesting
according to the following vesting schedule: 27,777 per month over a 36 month period commencing on March 31, 2016, issuable on
the last day of each calendar quarter so long as Mr. Posawatz serves as a director of the Company, subject to the grantee’s
right to waive vesting and issuance on a quarterly basis. The share issuances will be proportionally expensed during the period
in which they vest. During the three months ended March 31, 2016, the Company released 55,556 shares of common stock valued at
$8,333 under this agreement (See Note 12).
Director Compensation
On February
12, 2016, the Board approved a compensation program for all non executive directors that do not otherwise have a pre-existing compensation
plan. Starting for the 2016 year of service, each of the two directors will receive 1,000,000 shares of common stock, with
a per share value of $0.15 (based on contemporaneous cash sales prices), or $150,000, that will vest equally at the end of
each calendar quarter that such director remains in service as a director over a three year period. The shares issuances will be
proportionally expensed during the period in which they vest.
During the
three months ended March 31, 2016, the Company released 236,110 shares of common stock valued at $35,417 to three directors under
their respective agreements (See Note 12).
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
|
11.
|
STOCK OPTIONS AND WARRANTS
|
Stock Options
On February
12, 2016, the Company issued 200,000 stock options to each of the three non-executive directors that served as a director during
2015, other than Mr. Moody, for a total of 600,000 stock options. These options were granted as compensation for the services
provided in 2015, vested immediately, and were valued using the Black-Scholes option pricing methodology. Jay Potter and
John Evey each received 200,000 options exercisable at a price of $0.125 per share for a period of 10 years from the date of grant,
with a combined total valuation of $40,100. Robert Noble, our former chairman, received 200,000 options exercisable at a
price of $0.1375 per share for a period of 5 years from the date of grant for a total valuation of $15,493. The assumptions
used in the valuation of these options include volatility of 114.93%, expected dividends of 0.0%, a discount rate of 0.16%, and
expected terms, applying the simplified method, of 5 years for Mr. Potter and Mr. Evey and 2.5 years for Mr. Noble.
During the
three months ended March 31, 2016, the Company recorded stock option based compensation of $58,515.
Warrants
There was
no warrant activity during the three months ended March 31, 2016. However, pursuant to a private placement, the Company is obligated
to issue 98,333 warrants as an offering cost to a third party, each with a 5 year term and a strike price of $0.15 per share, at
the close of the private placement offering. There will be no accounting effect for the issuance of these warrants as their
fair value will be charged to additional paid-in-capital as an offering cost and offset by a credit to additional paid-in-capital
for their fair value
when issuing these warrants.
|
12.
|
RELATED PARTY TRANSACTIONS
|
In 2009,
the Company executed a 10% convertible note payable in the amount of $102,236 originally due December 31, 2010 to John Evey for
amounts loaned to the Company. Mr. Evey joined the Board of Directors on April 27, 2010. Through a series of extensions, the note
due date was extended to December 31, 2016. During the three month period ended March 31, 2016, the Company made principal payments
totaling $3,000 on this note. The balance of the note as of March 31, 2016 is $83,616 with accrued interest amounting to $39,795
(See Note 6).
In
June 2015, Gemini Master Fund Ltd sold a 70.0066819% stake in its’ note to Robert Noble, our former Chairman and current
owner of over 10% of our outstanding common stock, in a private transaction. The Company issued two replacement notes for their
respective ownership values based on this transaction. In regards to the note for Mr. Noble, he agreed to an extension of his note
to March 31, 2016. During the twelve months ended December 31, 2015, the Company made a $100,000 payment to Mr. Noble to pay down
the accrued interest on this note. The balance of the note as of March 31, 2016
is
$600,000 with accrued and unpaid interest amounting to $47,224. Effective January 20, 2016, Mr.
Noble entered into a Purchase Option Agreement with a firm affiliated with Jay S. Potter, a director of the Company (the “Optionee”),
pursuant to which the Optionee has the right to purchase or arrange for the purchase of the Note from Mr. Noble and all of Mr.
Noble’s shares in the Company (the “Option”), at any time until March 31, 2016
.
This
date was subsequently amended to May 31, 2016. The Company has consented to the Purchase Option Agreement. Under
a
Note Settlement and General Release Agreement, provided that the Option is fully exercised and honored, the Company agreed to grant
Mr. Noble the right to acquire, for one dollar, at any time until June 30, 2017, a worldwide, perpetual, irrevocable, nonexclusive,
royalty-free license to utilize all of the Company intellectual property developed prior to January 1, 2011, except for the following:
(i) EV ARC™ and (ii) EnvisionTrak™.
Further
,
p
rovided the Option is exercised in full and Mr. Noble
complies with it, the Company will extend the expiration date of the 1,138,120 warrants to purchase 1,138,120 shares of the Company’s
common stock owned by Mr. Noble (the “Warrants”) from December 31, 2016 to December 31, 2017, and will reduce the exercise
price of such Warrants from $0.24 to $0.20 per share (See Note 6).
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
As
partial payment for professional services provided by GreenCore Capital, LLC (“GreenCore’) during the three months
ended March 31, 2016, the Company made cash payments amounting to $15,000, recorded additional payments owed netting to $5,000
in accounts payable and issued 128,571 shares of the Company’s common stock with a per share fair value of $0.15 (based on
contemporaneous cash sales prices)
or
$19,286 and expensed the
payments at issuance. The Company recorded a loss on debt settlement of $1,286 on this transaction. Jay Potter, our director, is
the managing member of GreenCore and the primary individual performing the services (See Note 10).
During the
three month period ended March 31, 2016, the Company released 291,666 shares of common stock with a per share fair value of $0.15,
or $43,750 (based on the market price at the time of the agreements), to three directors for their service as defined in their
respective Restricted Stock Grant Agreements. The payments were expensed at issuance (See Note 10).
Subsequent to March 31, 2016,
pursuant to a private placement, the Company issued to three shareholders a total of 600,000 shares of common stock for cash with
a per share price of $0.15 per share or $90,000. The Company incurred $1,200 of capital raising fees that were paid in cash and
charged to additional paid-in capital. Related to these sales, the Company is further obligated to issue 5,000 warrants as an offering
cost to a third party, each with a 5 year term and a strike price of $0.15 per share, at the close of the private placement offering.
There will be no accounting effect for the issuance of these warrants as their fair value will be charged to additional paid-in-capital
as an offering cost and offset by a credit to additional paid-in-capital for their fair value
when
issuing these warrants.