ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Envision Solar International, Inc. and Subsidiary
Condensed Consolidated
Balance Sheets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
80,695
|
|
|
$
|
32,451
|
|
Accounts Receivable, net
|
|
|
271,636
|
|
|
|
831,617
|
|
Prepaid and Other Current Assets
|
|
|
87,187
|
|
|
|
51,787
|
|
Inventory, net
|
|
|
789,385
|
|
|
|
422,175
|
|
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
|
|
|
79,172
|
|
|
|
22,058
|
|
Total Current Assets
|
|
|
1,308,075
|
|
|
|
1,360,088
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
297,844
|
|
|
|
243,961
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Debt issue costs, net
|
|
|
18,581
|
|
|
|
102,194
|
|
Patents, net
|
|
|
60,902
|
|
|
|
36,620
|
|
Deposits
|
|
|
184,452
|
|
|
|
163,284
|
|
Total Other Assets
|
|
|
263,935
|
|
|
|
302,098
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,869,854
|
|
|
$
|
1,906,147
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
668,499
|
|
|
$
|
834,962
|
|
Accrued Expenses
|
|
|
520,225
|
|
|
|
348,467
|
|
Sales Tax Payable
|
|
|
56,013
|
|
|
|
152,438
|
|
Deferred Revenue
|
|
|
226,737
|
|
|
|
213,467
|
|
Line of Credit
|
|
|
1,000,000
|
|
|
|
800,000
|
|
Convertible Notes Payable -Related Parties
|
|
|
677,616
|
|
|
|
686,616
|
|
Notes Payable
|
|
|
43,033
|
|
|
|
43,033
|
|
Auto Loan - Current Portion
|
|
|
9,198
|
|
|
|
8,797
|
|
Convertible Note Payable
|
|
|
100,000
|
|
|
|
100,000
|
|
Embedded Conversion Option Liability
|
|
|
134,857
|
|
|
|
87,992
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,436,178
|
|
|
|
3,275,772
|
|
|
|
|
|
|
|
|
|
|
Auto Loan - Long-term Portion
|
|
|
32,070
|
|
|
|
38,978
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,468,248
|
|
|
|
3,314,750
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value, 162,500,000 shares authorized, 116,895,424 and 105,207,701 shares issued or issuable and outstanding at September 30, 2016 and December 31, 2015, respectively
|
|
|
116,895
|
|
|
|
105,208
|
|
Additional Paid-in-Capital
|
|
|
32,847,960
|
|
|
|
31,088,122
|
|
Accumulated Deficit
|
|
|
(34,563,249
|
)
|
|
|
(32,601,933
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Deficit
|
|
|
(1,598,394
|
)
|
|
|
(1,408,603
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
1,869,854
|
|
|
$
|
1,906,147
|
|
The accompanying
unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
Envision Solar International, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
522,412
|
|
|
$
|
665,254
|
|
|
$
|
1,207,226
|
|
|
$
|
1,365,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
525,944
|
|
|
|
712,202
|
|
|
|
1,285,858
|
|
|
|
1,485,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loss
|
|
|
(3,532
|
)
|
|
|
(46,948
|
)
|
|
|
(78,632
|
)
|
|
|
(120,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses (including stock based compensation expense of $348,721 and $108,575 for the
nine months ended September 30, 2016 and 2015, respectively)
|
|
|
614,586
|
|
|
|
412,675
|
|
|
|
1,634,861
|
|
|
|
1,247,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(618,118
|
)
|
|
|
(459,623
|
)
|
|
|
(1,713,493
|
)
|
|
|
(1,367,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
88
|
|
|
|
11
|
|
|
|
272
|
|
|
|
246
|
|
Gain on Debt Settlement, net
|
|
|
4,175
|
|
|
|
4,434
|
|
|
|
4,255
|
|
|
|
4,434
|
|
Interest Expense
|
|
|
(82,522
|
)
|
|
|
(30,408
|
)
|
|
|
(205,485
|
)
|
|
|
(345,906
|
)
|
Change in fair value of embedded conversion option liability
|
|
|
86,813
|
|
|
|
(42,967
|
)
|
|
|
(46,865
|
)
|
|
|
117,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
8,554
|
|
|
|
(68,930
|
)
|
|
|
(247,823
|
)
|
|
|
(223,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax
|
|
|
(609,564
|
)
|
|
|
(528,553
|
)
|
|
|
(1,961,316
|
)
|
|
|
(1,591,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
|
–
|
|
|
|
1,600
|
|
|
|
–
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(609,564
|
)
|
|
$
|
(530,153
|
)
|
|
$
|
(1,961,316
|
)
|
|
$
|
(1,592,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share- Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding- Basic and Diluted
|
|
|
115,059,578
|
|
|
|
100,901,848
|
|
|
|
110,304,103
|
|
|
|
99,411,704
|
|
The accompanying unaudited notes are
an integral part of these unaudited Condensed Consolidated Financial Statements
Envision Solar International, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,961,316
|
)
|
|
$
|
(1,592,799
|
)
|
Adjustments to Reconcile Net loss to Net Cash Used in Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
84,472
|
|
|
|
89,445
|
|
Common Stock issued for services
|
|
|
285,539
|
|
|
|
95,666
|
|
Gain on debt settlement, net
|
|
|
(4,255
|
)
|
|
|
(7,358
|
)
|
Compensation expense related to grant of stock options
|
|
|
63,182
|
|
|
|
12,909
|
|
Change in fair value of embedded conversion option liability
|
|
|
46,865
|
|
|
|
(117,770
|
)
|
Amortization of debt issue costs
|
|
|
83,613
|
|
|
|
2,438
|
|
Amortization of debt discount
|
|
|
–
|
|
|
|
252,070
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
559,981
|
|
|
|
(290,409
|
)
|
Prepaid expenses and other current assets
|
|
|
(57,506
|
)
|
|
|
(22,646
|
)
|
Inventory, net
|
|
|
(375,915
|
)
|
|
|
(370,322
|
)
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(57,114
|
)
|
|
|
75,517
|
|
Deposits
|
|
|
(21,168
|
)
|
|
|
1,063
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(166,463
|
)
|
|
|
332,432
|
|
Accrued expenses
|
|
|
162,112
|
|
|
|
53,552
|
|
Sales tax payable
|
|
|
(94,566
|
)
|
|
|
31,159
|
|
Deferred Revenue
|
|
|
13,270
|
|
|
|
(41,964
|
)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
–
|
|
|
|
(5,614
|
)
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(1,439,269
|
)
|
|
|
(1,502,631
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(97,477
|
)
|
|
|
(175,363
|
)
|
Funding of patent costs
|
|
|
(24,703
|
)
|
|
|
(25,895
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(122,180
|
)
|
|
|
(201,258
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
1,470,000
|
|
|
|
680,000
|
|
Proceeds from subscription receivable
|
|
|
–
|
|
|
|
25,000
|
|
Payments of offering costs related to sale of common stock
|
|
|
(44,800
|
)
|
|
|
–
|
|
Borrowings on line of credit
|
|
|
200,000
|
|
|
|
–
|
|
Repayments on convertible notes payable
|
|
|
(9,000
|
)
|
|
|
(265,325
|
)
|
Repayments on auto loan
|
|
|
(6,507
|
)
|
|
|
–
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
1,609,693
|
|
|
|
439,675
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
48,244
|
|
|
|
(1,264,214
|
)
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
32,451
|
|
|
|
1,380,554
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
80,695
|
|
|
$
|
116,340
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
33,551
|
|
|
$
|
47,374
|
|
Cash paid for income tax
|
|
$
|
–
|
|
|
$
|
1,600
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Transfer of prepaid asset to inventory
|
|
$
|
31,752
|
|
|
$
|
–
|
|
Transfer of inventory to property and equipment
|
|
$
|
56,677
|
|
|
$
|
52,989
|
|
Prepaid insurance financed by third party
|
|
$
|
9,646
|
|
|
$
|
6,660
|
|
The accompanying unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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, engineers and manufactures solar products
and proprietary technology solutions targeting three verticals: electric vehicle charging infrastructure; out of home advertising
infrastructure; and energy security and disaster preparedness. The Company focuses on creating renewably energized products 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 invent, design, engineer, and manufacture solar powered products which are
a complex integration of our own proprietary technology and other commonly available engineered components
.
The
resulting products are built to have the longest life expectancy in the industry while also delivering valuable amenities and potentially
highly attractive revenue opportunities for our customers. Management believes that Envision's products deliver multiple layers
of value such as: impact free renewably energized EV charging; media, branding, and advertising platforms; sustainable and secure
energy production; architectural enhancement; reduced carbon footprint; high visibility “green-halo” branding; reduction
of net operating costs through reduced utility bills; and revenue creation opportunities through 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 and nine months ended September 30, 2016 and 2015, and our financial position as of September 30,
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.
Principles 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.
Concentrations
Concentration of Credit Risk
Financial instruments that potentially subject
us to concentrations of credit risk consist of cash and revenues.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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 September 30, 2016. As of September 30, 2016, there were no amounts greater
than the federally insured limits.
Concentration of Accounts Receivable
As of September 30, 2016,
customers that each represented more than 10% of the Company’s net accounts receivable balance were as follows:
Customer A
|
49%
|
Customer B
|
23%
|
Customer C
|
20%
|
Concentration of Revenues
For the nine months ended
September 30, 2016, customers that each represented more than 10% of our net revenues were as follows:
Customer A
|
31%
|
Customer B
|
23%
|
Customer C
|
10%
|
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 September 30, 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 September 30, 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.)
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 historical 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 revenues from professional services performed which typically stem from the modification, repair, or maintenance
of our installed product base.
Revenues from leases 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 September 30, 2016 and December 31, 2015, deferred revenue amounted
to $226,737 and $213,467 respectively. At September 30, 2016, the Company has received partial deposits for twelve undelivered
Solar Tree® units.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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.”
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 September 30, 2016, the Company has no product warranty accrual
given the Company’s de minimis historical financial 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 long-term assets 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.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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.
Convertible notes payable
that are convertible into 5,652,821 common shares, options to purchase 15,137,007 common shares and warrants to purchase 27,905,155
common shares were outstanding at September 30, 2016. These shares were not included in the computation of diluted loss per share
for the three and nine months ended September 30, 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
The Financial Accounting
Standards Board Accounting Standard Updates (“ASU”) which are not effective until after September 30, 2016, and not
disclosed below, are not expected to have a significant effect on the Company’s consolidated financial position or results
of operations. The Company is evaluating or has implemented the following at September 30, 2016:
ASU 2016-15
In August 2016, the Financial
Accounting Standards Board issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments.
This guidance addresses eight specific cash flow issues with the objective of reducing
diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The standard
provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2) settlement
of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the
settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions
received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable
cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period. The Company
is currently evaluating the impact of the adoption of ASU 2016-15.
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.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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.
ASU 2015 - 11
In July 2015, the FASB
issued Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory.” This standard changes the inventory
valuation method from the lower of cost or market to the lower of cost or net realizable value for inventory valued under the first-in,
first-out or average cost methods. The standard is effective for fiscal years beginning after December 15, 2016, including interim
periods and requires prospective adoption with early adoption permitted. The Company is conforming to this standard.
As reflected in the accompanying
unaudited condensed consolidated financial statements for the nine months ended September 30, 2016, the Company had a net loss
and net cash used in operations of $1,961,316 and $1,439,269 respectively. Additionally, at September 30, 2016, the Company had
a working capital deficit of $2,128,103, an accumulated deficit of $34,563,249 and a stockholders’ deficit of $1,598,394
.
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 or have 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 recorded liabilities that might be necessary should the Company be unable to
continue as a going concern.
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 of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Finished Goods
|
|
$
|
51,686
|
|
|
$
|
85,487
|
|
Work in Process
|
|
|
659,842
|
|
|
|
234,226
|
|
Raw Materials
|
|
|
96,320
|
|
|
|
130,245
|
|
Inventory Allowance
|
|
|
(18,463
|
)
|
|
|
(27,783
|
)
|
Total Inventory
|
|
$
|
789,385
|
|
|
$
|
422,175
|
|
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The major components of accrued expenses are
summarized as follows:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Accrued vacation
|
|
$
|
156,151
|
|
|
$
|
135,940
|
|
Accrued officers’ salary
|
|
|
68,749
|
|
|
|
68,749
|
|
Accrued interest
|
|
|
209,748
|
|
|
|
142,261
|
|
Accrued rent
|
|
|
6,523
|
|
|
|
–
|
|
Accrued insurance financing
|
|
|
9,646
|
|
|
|
–
|
|
Other accrued expenses
|
|
|
69,408
|
|
|
|
1,517
|
|
Total accrued expenses
|
|
$
|
520,225
|
|
|
$
|
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.
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 (See Note 9).
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The outstanding balance
on the line of credit at September 30, 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 MEASURMENTS
|
As of September 30, 2016,
the following summarizes amounts owed under short-term convertible notes –related parties:
|
|
Amount
|
|
Evey Note
|
|
$
|
77,616
|
|
Greencore Note
|
|
|
600,000
|
|
|
|
$
|
677,616
|
|
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 $9,000 during the nine month period ended September 30, 2016, the balance of the note as of September 30, 2016 is $77,616
with accrued interest amounting to $45,967 which is included in accrued expenses (See Note 4). The note continues to bear interest
at a rate of 10% (See Note 12).
GreenCore 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.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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 shares 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.
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, during 2015, the Company made a $100,000 payment to Mr. Noble to pay down the accrued interest on this note.
Effective January 20, 2016,
Mr. Noble entered into a Purchase Option Agreement with Greencore Capital LLC (“GreenCore”), 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 prior to March 31, 2016, which date was subsequently extended. The Company had consented to the original 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 September 30, 2016, the Company
has been notified that the note was acquired by GreenCore. As Jay Potter, our director, is the managing member of GreenCore, and
GreenCore is the acting agent, the note is classified as Convertible Notes Payable- Related Parties in the accompanying balance
sheets (See Note 12). GreenCore has agreed to an extension of the note until December 31, 2016.
At September 30, 2016,
the remaining note had a balance of $600,000, and accrued interest of $79,009 which is included in accrued expenses (See Note 4).
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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.
Assets and liabilities measured at fair value
on a recurring and non-recurring basis consisted of the following at September 30, 2016:
|
|
|
|
|
Fair value Measurements at September 30,
2016
|
|
|
|
Carrying Value at September 30, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Embedded Conversion Option Liability
|
|
$
|
134,857
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
134,857
|
|
The following is a summary of activity of Level
3 liabilities for the nine month period ended September 30, 2016:
Balance December 31, 2015
|
|
$
|
87,992
|
|
Change in Fair Value
|
|
|
46,865
|
|
Balance September 30, 2016
|
|
$
|
134,857
|
|
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 September 30, 2016:
Assumptions
|
|
|
|
Expected remaining term
|
|
|
0.25
|
|
Expected volatility
|
|
|
103.47%
|
|
Risk free rate
|
|
|
0.16%
|
|
Dividend yield
|
|
|
0.00%
|
|
There were no changes in
the valuation techniques during the three and nine month periods ended September 30, 2016. The Company did however compute the
valuation of this derivative liability using a binomial lattice model noting no material differences in valuation results.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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 September 30, 2016 is $100,000 with accrued and unpaid interest amounting to $67,699 which is included in accrued expenses
(See Note 4).
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 September 30, 2016,
the note had a remaining balance due of $43,033 with accrued and unpaid interest amounting to $17,073 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 an original term of 60 months, requires
minimum monthly payments of approximately $950, and bears interest at a rate of 5.99 percent. As of September 30, 2016, the loan
has a short-term portion of $9,198 and a long-term portion of $32,070.
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 September 30,
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.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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.
Related
to the Guaranty issued by Keshif whereas Keshif guaranteed the Company’s obligations under the LSA with Silicon Valley Bank,
the Company is obligated to issue additional shares of its common stock based on the formula as defined in the stock purchase
agreement signed with Keshif related to the Guaranty. The Company is obligated to issue 147,493 shares of its common stock in
October 2016 with a contractual value of $25,000. The value of this share issuance is being expensed over the remaining period
of the Guaranty currently maturing on October 29, 2016 (See Note 5).
Stock Issued in Cash Sales
During the nine months
ended September 30, 2016 pursuant to private placements, the Company issued 9,800,000 shares of common stock for cash with a per
share price of $0.15 per share or $1,470,000 and the Company incurred $44,800 of capital raising fees that were paid in cash and
charged to additional paid-in-capital. Additionally, the Company is obligated to issue 191,667 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 nine months ended September 30, 2016, as partial payment for professional services provided by GreenCore, the Company issued
464,115 shares of the Company’s common stock with a per share fair value of $0.15 (based on contemporaneous cash sales prices)
or
$69,604 and expensed the payment at issuance. The Company recorded
a gain on debt settlement of $2,396 on these transactions. Jay Potter, our director, is the managing member of GreenCore and the
primary individual performing the services (See Note 12).
Effective July 2016, the
Company entered into an investor relations consulting agreement with LP Funding, LLC whereby the consultant will provide various
investor recognition services to the Company. The agreement calls for two payments of 500,000 shares of the Company’s common
stock, with a per share value of $0.15 (based on contemporaneous cash sales prices) or a total of $150,000. The payments are contractually
defined to be earned on a specific day and will be expensed over the term of the agreement. During the nine months ended September
30, 2016, the Company released 500,000 shares of common stock and recorded $75,000 of expense under this agreement (See Note 13).
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 nine
months ended September 30, 2016, the Company released 222,222 shares of common stock valued at $33,333 under this agreement (See
Note 12).
On September 8, 2016, Mr.
Peter W. Davidson accepted an appointment as a new director of the Company, effective September 8, 2016. In consideration for Mr.
Davidson’s acceptance to serve as a director of the Company, the Company agreed to grant 750,000 restricted shares of its
common stock, with a per share value of $0.15 (based on contemporaneous cash sales prices), or $112,500, to Mr. Davidson, vesting
according to the following vesting schedule: 62,500 shares or pro rata portion thereof per calendar quarter over a 36 month period
commencing on September 30, 2016, issuable on the last day of each calendar quarter so long as Mr. Davidson serves as a director
of the Company, provided, that the first vesting is scheduled to occur on September 30, 2016 and be for 62,500 shares. The Company
intends to grant up to an additional 750,000 restricted shares of its common stock to Mr. Davidson based on Mr. Davidson achieving
certain performance criteria to be agreed upon by the Board of Directors after discussion with senior management at a future date.
During the nine months ended September 30, 2016, the Company released 62,500 shares of common stock valued at $9,375 under this
agreement (See Note 12).
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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 received 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 share issuances will be proportionally expensed
during the period in which they vest.
During the nine months
ended September 30, 2016, the Company released 638,886 shares of common stock valued at $95,833 to three directors under their
respective agreements (See Note 12).
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 nine months
ended September 30, 2016, the Company recorded stock option based compensation of $63,182.
Warrants
There was no warrant activity
during the nine months ended September 30, 2016. However, pursuant to a private placement, the Company is obligated to issue 191,667
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 nine months ended September 30, 2016, the Company made principal payments totaling $9,000 on this
note. The balance of the note as of September 30, 2016 is $77,616 with accrued interest amounting to $45,967 (See Note 6).
In June 2015, Gemini Master
Fund Ltd 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. In regards to the note for Mr. Noble,
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. 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 prior to March 31, 2016. This date was subsequently amended and remains in effect as of the filing of this report. 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
September 30, 2016, the Company has been notified that the note was acquired by GreenCore. As Jay Potter, our director, is the
managing member of GreenCore, and GreenCore is the acting agent, the note is classified as Convertible Notes Payable- Related Parties
in the accompanying balance sheets (See Note 6). GreenCore has agreed to an extension of the note until December 31, 2016. At September
30, 2016, the remaining note had a balance of $600,000, and accrued interest of $79,009 which is included in accrued expenses.
ENVISION SOLAR INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
As
partial payment for professional services provided by GreenCore during the nine months ended September 30, 2016, the Company made
cash payments amounting to $62,500, and has recorded additional payments owed amounting to $34,000 in accounts payable. Further,
the Company issued 464,115 shares of the Company’s common stock with a per share fair value of $0.15 (based on contemporaneous
cash sales prices)
or
$69,604 and expensed the payments at issuance.
The Company recorded a gain on debt settlement of $2,396 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 nine months
ended September 30, 2016, the Company released 923,608 shares of common stock with a per share fair value of $0.15, or $138,541
(based on the market price at the time of the agreements), to five directors for their service as defined in their respective Restricted
Stock Grant Agreements. The payments were expensed at issuance (See Note 10).
Subsequent to September
30, 2016, pursuant to a private placement, the Company issued to two shareholders a total of 2,333,333 shares of common stock for
cash with a per share price of $0.15 per share or $350,000. Further, related to this investment, the Company is obligated to issue
100,000 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.
Effective July 2016, the
Company entered into an investor relations consulting agreement with LP Funding, LLC whereby the consultant will provide various
investor recognition services to the Company. The agreement calls for two payments of 500,000 shares of the Company’s common
stock for each payment, with a per share value of $0.15 (based on contemporaneous cash sales prices) or a total of $150,000. The
payments are contractually defined to be earned on a specific day and will be expensed over the term of the term of the agreement.
Subsequent to September 30, 2016, the Company released the second tranche of 500,000 shares of common stock valued at $75,000 under
this agreement (See Note 10).
On October 18, 2016, the
Company entered into a five-year employment agreement, effective as of January 1, 2016, with Mr. Desmond Wheatley, the Chief Executive
Officer and President of the Company (the “Agreement”). Pursuant to the Agreement, Mr. Wheatley will receive an annual
salary of $250,000 per annum, which will be paid (i) in twenty-four installments of $8,333 each on the fifteenth and last day of
each month and (ii) twenty-four installments of $2,083, on the same dates, which Mr. Wheatley will defer until such time as Mr.
Wheatley and the Board of Directors agree that payment of the deferred salary and/or cessation of the deferral is appropriate.
In certain circumstances upon the Company achieving specified milestones, which are described in the Agreement, Mr. Wheatley can
demand payment of all or any portion of the deferred amount, and the Company must comply with such demand. All deferred amounts
will be evidenced by an unsecured convertible promissory note payable by the Company to Mr. Wheatley, bearing simple interest at
the rate of 10% per annum, accruing until paid, convertible into shares of the Company’s common stock at $0.15 per share
(subject to appropriate adjustment in the event of stock dividends, stock splits, recapitalizations, and similar extraordinary
transactions) at any time in whole or in part at Mr. Wheatley’s discretion, with a maturity date of December 31, 2020. Additionally,
pursuant to the Agreement, on October 18, 2016, Mr. Wheatley was granted 4,350,000 stock options to purchase 4,350,000 shares of
the Company’s common stock pursuant to the Company’s 2011 Stock Incentive Plan, exercisable at an exercise price of
$0.15 per share for a period of ten years from the date of grant, vesting as follows: 1,450,000 on October 18, 2016, 1,450,000
on January 1, 2017, and 1,450,000 on January 1 2018. These options are valued at $513,862 using the Black-Scholes option pricing
methodology. The assumptions used in the valuation of these options include volatility of 105.15%, expected dividends of
0.0%, a discount rate of 0.16%, and expected terms, applying the simplified method, of 5.6 years.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
This report contains forward-looking
statements that are based on current expectations, estimates, forecasts and projections about Envision Solar International, Inc.
(hereinafter, with its subsidiary, “Envision,” “Company,” “us,” “we” or “our”),
the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding
matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects.
For example, when we use words such as "projects," "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," "should," "would," "could,"
"will," "opportunity," "potential" or "may," and variations of such words or other words
that convey uncertainty of future events or outcomes, we are making forward-looking statements.
These forward-looking statements
are subject to numerous assumptions, risks and uncertainties that may cause the Company’s actual results to be materially
different from any future results expressed or implied by the Company in those statements. The most important factors that could
prevent the Company from achieving its stated goals include, but are not limited to, the following:
|
(a)
|
volatility or decline of the Company’s stock price;
|
|
(b)
|
potential fluctuation in quarterly results;
|
|
(c)
|
failure of the Company to earn revenues or profits;
|
|
(d)
|
inadequate capital to continue or expand its business, and inability to raise additional capital
or financing to implement its business plans;
|
|
(e)
|
unavailability of capital or financing to prospective customers of the Company to enable them to
purchase products and services from the Company;
|
|
(f)
|
failure to commercialize the Company’s technology or to make sales;
|
|
(g)
|
reductions in demand for the Company’s products and services, whether because of competition,
general industry conditions, loss of tax incentives for solar power, technological obsolescence or other reasons;
|
|
(h)
|
rapid and significant changes in markets;
|
|
(i)
|
inability of the Company to pay its liabilities;
|
|
(j)
|
litigation with or legal claims and allegations by outside parties;
|
|
(k)
|
insufficient revenues to cover operating costs, resulting in persistent losses; and
|
|
(l)
|
potential dilution of the ownership of existing shareholders in the Company due to the issuance
of new securities by the Company in the future.
|
There is no assurance that
the Company will be profitable. The Company may not be able to successfully develop, manage, or market its products and services.
The Company may not be able to attract or retain qualified executives and other personnel. Intense competition may suppress the
prices that the Company can charge for its products and services, hindering profitability or causing losses. The Company may not
be able to obtain customers for its products or services. Government regulation may hinder the Company’s business. Additional
dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the
exercise of outstanding warrants and stock options. The Company is exposed to other risks inherent in its businesses.
Because the statements
are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking
statements. The Company cautions you not to place undue reliance on the statements, which speak only as of the date of this unaudited
Quarterly Report on Form 10-Q. Forward looking statements and other disclosures in this report speak only as of the date they are
made. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent
written or oral forward-looking statements that the Company or persons acting on its behalf may issue. The Company does not undertake
any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events.
Overview
Envision Solar differentiates
itself from many other companies involved in the solar industry through its use of solar energy production as an enabler of valuable
amenities and services through its products in locations where it is either too expensive, difficult, or environmentally impactful
to connect to the utility grid. Rather than competing with utilities and other solar companies to produce cheaper electricity,
the Company instead creates unique and proprietary products which use solar as a source of energy to enable valuable service and
amenity provision in rapidly growing markets. Envision invents, designs, engineers and manufactures solar products and proprietary
technology solutions targeting three verticals: electric vehicle charging infrastructure; out of home advertising infrastructure;
and energy security and disaster preparedness. We focus on creating renewably energized products for electric vehicle (“EV”)
charging, media and branding, and energy security which management believes are attractive, rapidly deployable, and of the highest
quality. Management believes that our chief differentiator is our ability to invent, design, engineer, and manufacture solar powered
products which are a complex integration of our own proprietary technology and other commonly available engineered components.
The resulting products are built to have the longest life expectancy in the industry while also delivering valuable amenities and
potentially highly attractive revenue opportunities for our customers. Management believes that Envision’s products deliver
multiple layers of value including: impact free renewably energized EV charging; media, branding, and advertising platforms; sustainable
and secure energy production; architectural enhancement; reduced carbon footprint; high visibility “green-halo” branding;
reduction of net operating costs through reduced utility bills; and revenue creation opportunities through sales of digital out
of home (“DOOH”) media. Our products can qualify for various federal, state and local incentives which could significantly
reduce final out-of-pocket costs from our selling price for eligible customers. The Company sells its products to customers with
requirements in one or more of the three verticals the Company addresses.
Products and Technologies
The Company produces two
categories of product: the EV ARC™ product (Electric Vehicle Autonomous Renewable Charger) and the Solar Tree® product.
Both product lines incorporate the same underlying technology and value, having a built in renewable energy source in the form
of attached solar panels, along with battery storage capability, but one is in a transportable format and one is in a fixed format.
According to Frost and
Sullivan, the EV charging infrastructure industry will grow at 128% CAGR over the next five years in the US. The Chinese Government
has committed to spending $200B during the next decade on EV charging, and the EU has made commitments to spend multiple billions
of dollars on EV infrastructure during the next five years. Further, as a result of the diesel emissions scandal, Volkswagen has
agreed to a settlement with the US government which requires Volkswagen to spend $2 billion on EV infrastructure over the next
decade. Leveraging the structural and technological attributes of its existing products, the Company has developed and patented
a product called EV ARC™. We have observed that the EV ARC™ can solve many problems associated with electric vehicle
charging infrastructure deployments. Until the introduction of the EV ARC™, the deployment of EV chargers could be hindered
by complications in the site acquisition processes caused by the complicated and invasive processes required to fulfill the installation.
Each typical competing EV charger requires a pedestal which is typically mounted to a poured concrete foundation which first requires
excavation. Chargers also typically require a trench run to deliver grid connected electricity, and often require transformers
and other local electrical equipment upgrades. Additional entitlements, easements, leases, and other site acquisition requirements
may slow, or prevent entirely, the deployment of large numbers of typical fixed format chargers. When an EV charger is deployed
successfully, the host may be liable for increased kilowatt hour charges and at times, more expensive demand charges. Landlords,
corporations, venues, and other hosts often do not perceive enough value creation in the deployment of an EV charger, and as such,
may not be inclined to grant permission to the service providers who approach them, or to install EV chargers for their own employees
and guests, because the costs and disruption associated with grid tied chargers can be prohibitive.
We believe EV ARC™
changes this paradigm completely because it is entirely self-contained and is delivered to the site ready to operate. It requires
no foundation, trenching, concrete, electrical or civil works and can be deployed in minutes. Its high traction ballasted base
pad creates a structurally sound platform that supports the rest of the structure. The solar array is connected via our EnvisionTrak™
tracking solution to a column which is mounted to the ballasted pad. An electrical cabinet integrated into the unit houses various
components enabling the conversion of sunlight to electricity which is stored in on-board batteries, and delivers that electricity
to the EV charging station. Incorporating battery storage means that an EV ARC™ can operate day and night. An EV ARC™
delivers a clean source of power to any model of EV charger that is integrated into the structure. Further, the EV ARC™ can
be remotely monitored through a cellular data connection for energy production and the state of health of its vital components.
The EV ARC™ has been successfully deployed in California, New York, Colorado, Brazil, the Virgin Islands, and Spain and for
customers such as Caltrans, Google, NY City, Genentech, Johnson and Johnson, the Department of Energy, and many others.
The Company has integrated
a digital advertising screen onto the EV ARC™ creating the EV ARC™ Digital. This advertising screen is weather, theft,
and vandalism resistant and will be powered entirely by the EV ARC™. The introduction of the advertising screen creates new
potential revenue streams for the owner of the EV ARC™ and we believe that this makes an EV ARC™ a more attractive
product for certain prospective customers. This advancement could lead to multiple other similar uses of our products. Because
the EV ARC™ product delivers valuable services such as solar powered EV charging and a secure energy source which can be
used by first responders during grid failures, management believes that it may be eligible for permitting where other advertising
platforms would be prohibited.
Digital Out of Home Advertising
is the third fastest growing advertising medium. Double digit growth and billions of dollars a year in US and global spending make
outdoor advertising an attractive opportunity for anyone who can make it work. There are, however, significant barriers to making
it work. In general, it is becoming harder to deploy outdoor advertising in most places where it is of value in the US. Similar
to the EV charging vertical, the outdoor advertising industry seeks new solutions to overcome the significant barriers to entry
such as planning, entitlement, electrical circuitry, and civil engineering. Industry veterans spend a good deal of time looking
for the “new new” in advertising, a solution that is environmentally friendly, cost effective, and most importantly,
can make its way through the significant hurdles of permitting and zoning. We believe that our products are ideally suited to reduce
many of the barriers to entry for outdoor advertising and as such we believe that significant opportunities may present themselves
to us as we continue to address this market.
EV ARC™ products
also provide a highly reliable source of energy that is not susceptible to grid interruptions. Because EV ARC™ has on-board
energy storage, it can be used as a disaster preparedness tool. It is a reliable back up source of energy in times of emergency
or grid failure caused by hurricanes, terrorism, cascading blackouts or other grid vulnerabilities. EV ARC™ can be configured
to allow only a select group, such as first responders, to access the solar generated and stored energy. A fireman or police officer
will be able to connect, safely, to the EV ARC™ and power any devices that would typically require a gasoline or diesel generator.
We believe that the EV ARC™ will be a much more reliable and cleaner source of energy than the electric grid or other traditional
back up energy sources. The EV ARC™ does not require the level of ongoing maintenance that a diesel or gasoline generator
does and there is less chance that it will not be operational in times of emergency, as the first responders are not required to
start it or fill it with fuel. We believe and, we have been told by our customers and prospects, that the triple use of EV charging,
digital outdoor advertising, and emergency energy production make the EV ARC™ an extremely compelling value proposition.
EV ARC™ is designed
to address the sizable market of EV charging infrastructure. We believe the current lack of such infrastructure is the single greatest
impediment to the adoption of EVs in the US and elsewhere. A standardized, easily deployable EV charger, which is renewably energized
rather than relying on carbon based electrical energy, would appear to have significant appeal to those that are interested in
the proliferation of EV’s and EV charging infrastructure. We believe no competing company has a similar product, so the Company’s
first-to-market position should create an opportunity for a sizable share in the market interest.
In June 2015, the Department
of General Services of the State of California awarded us a one year contract, with options for the State for two one-year extensions,
to produce and sell the EV ARC™ to any California state, local, or municipal agency that orders them from us. In April 2016,
this contract was extended for the first one year option period through June 2017.
In September of 2016, New
York City released an Invitation to Bid (ITB) for EV charging infrastructure. The ITB specified Envision Solar’s EV ARC™
product. We recently attended the bid opening where Envision Solar was the only bidder in attendance. New York City has informed
us that they intend to issue the award to us in the beginning of 2017.
In the early stages of
the production evolution for the EV ARC™ with low production volumes, the Company believed the appropriate selling price
point would be lower than the actual costs of production. The Company has been successful in reducing certain direct costs associated
with the production of EV ARC™ products where costs on most sales of the EVARC™ products now result in gross profits.
As long as unit sales are sufficient to overcome certain fixed overhead costs shared amongst the produced products, and we sustain
the trend of reducing our cost through continued production economies of scale, continued production process improvements, as well
as component cost reductions, Management believes that gross profits can be maintained for all sales.
The Company’s patented
Solar Tree® structure has been in deployment and continued improvement for several years. We believe the resulting product
has become the standard of quality in larger scale solar powered EV charging, energy security, and media and branding. We understand
the Solar Tree® product to be the only single column, tracking, and architectural solar support structure with integrated energy
storage potential and media platforms available today. We believe that Solar Tree® products with integrated battery storage
will become important contributors to the growing EV charging infrastructure requirements in California and the rest of the world.
Because our products do not require a connection to the electrical grid, they can enable EV charging in locations where it would
otherwise be impossible. For example, rest areas and park and ride locations which might have sufficient energy for lights and
vending machines, but do not have sufficient power for EV charging, can be served by our Solar Tree® products which can be
optimized for direct current (“DC”) fast charging. The costs and environmental impact associated with delivering a
50kW circuit to a remote rest area may be prohibitive whereas a Solar Tree® direct current fast charger (“DCFC”)
can be deployed with minimal site disturbance. Management believes that our relationship with Caltrans and other State of California
agencies, which are currently limited to the sale of EV ARC™ systems, can be leveraged to enable sales of our larger Solar
Tree® products. We further believe that success with Caltrans might be leveraged with other departments of transportation across
the United States and the rest of the world.
We believe Solar Tree®
products with on-board battery storage can provide a highly reliable source of energy to be used in the event of a failure of the
grid. We have seen data suggesting grid failures cost businesses in the United States approximately $200 billion per year and when
those failures impact vital services such as hospitals, they have been responsible for loss of life. We believe that a hospital
equipped with Solar Tree® energy security products could benefit both economically and from a life safety point of view. We
believe that there are many other such instances where the reliable combination of renewable energy and energy storage can deliver
value which exceeds simply competing with the utility.
The Company has invented
and incorporated EnvisionTrak™, its patented and proprietary tracking solution, to all of its products, furthering the unique
nature of the product and we believe increasing the Company’s technological leadership within the industry. We believe EnvisionTrak™
to be a complex integration of the highest quality gearing, electrical motors, and controls which are combined in a robust, highly
engineered, and supremely reliable manner. While there are many tracking solutions available to the solar industry, we believe
EnvsionTrak™ is the only tracking solution which causes the solar array to orient itself in alignment with the sun without
swinging, rotating, or leaving its lineal alignment with the parking spaces below. We believe this is a vital attribute in solar
shaded parking as any swinging or rotating of the arrays could result in impeding the flow of traffic, particularly first responders
such as fire trucks, in the drive aisles. It is a violation of many local codes to have restricted overhead clearance in the drive
aisles. EnvisionTrak™ has been demonstrated, through data obtained from our past customers, to significantly increase electrical
production. An additional value is derived from the high visual appeal created by EV ARC™ or Solar Tree® structures which
are tracking the sun in perfect synchronicity. Solar Tree® products incorporate our latest engineering and fabrication improvements.
This has allowed us to reduce costs and time to deploy Solar Tree® structures and we have seen improvements in the fabrication
processes. We anticipate further improvements in future deployments of the product. Currently the Company is under contract to
deliver 12 HVLC Solar Tree ® structures to a client in Chicago. Six of the structures have already been delivered early in
the fourth quarter of 2016 and we believe the remaining units will also be delivered later in the quarter.
We further believe that
Solar Tree® products optimized for branding can create visually stunning platforms for the delivery of a business’s brand
message with a less onerous planning and entitlement process than traditional signage might expect.
Envision continues to identify
other complimentary product offerings and enhancements to current offerings, and is in the design, engineering, and patenting phase
on certain such products.
We strive to produce products
integrating only the highest quality components available. The Company's production philosophy is to invest in quality design,
components, and integration so as to ensure the lowest costs of warranty and service in the industry, while maintaining and growing
a brand which we believe is already recognized as one of the leading producers of the highest quality solar products available.
The Company produces a
series of products which management believes offer multiple layers of value to its customers leveraging the same underlying technology
and fabrication techniques and infrastructure. This enables the Company to reach a broad customer base with varied product offerings
without maintaining the overhead normally associated with a diverse set of products.
The Company’s current list of products
includes:
|
1.
|
EV ARC™ Electric Vehicle Charger,
|
|
2.
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EV ARC™ Digital Electric Vehicle Charger with Digital advertising screen,
|
|
3.
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EV ARC™ Motorcycle Charger,
|
|
4.
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EV ARC™ Bicycle Charger,
|
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5.
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ARC Mobility™ Trailer,
|
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6.
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The Solar Tree® DCFC product, a thirty-five-foot square solar array mounted on a single column
with integrated energy storage and the capability to provide a 50kW fast charge to one or more electric vehicles,
|
|
7.
|
The Branded Solar Tree® (HVBA) product which includes customized branding, finishes and signage,
|
|
8.
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The Solar Tree® SMP (Sustainable Media Platform) product, which includes static and digital
advertising displays,
|
|
9.
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The Solar Tree® HVLC (High Value Low Cost) structure, and
|
|
10.
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The Solar Tree® Socket product, a single space version of the Solar Tree® structure.
|
All Envision products can be upgraded with the
addition of the following:
|
1.
|
EnvisionTrak™ sun tracking technology (patented),
|
|
2.
|
SunCharge™ solar powered EV charging,
|
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3.
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ARC™ technology energy storage,
|
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5.
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Media and branding screens,
|
|
6.
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Security cameras, WiFi, sound, and emergency call boxes.
|
Operations
The Company is headquartered
in San Diego, California in a newly leased 50,000 sq/ft building professionally equipped to handle the significant growth possibilities
we believe are in front of us. The building houses the Company’s corporate operations, sales, design, engineering and product
manufacturing.
The EV ARC® and Solar
Tree® structures are being fabricated in this facility. We have reduced certain direct costs associated with individual products
and we believe we have been better able to control quality as a result of our self-performing the manufacturing process as opposed
to outsourcing this activity as we did in the past. The Company has made improvements to existing products and is able to introduce
new products in a much more timely and efficient manner. Management believes that the product development process is significantly
faster and less expensive when carried out by an in-house fabrication facility. The Company intends to no longer install its Solar
Tree® products selling them instead as an engineered kit of parts to be installed by 3
rd
parties employed by the
buyer of the Solar Tree® kit. The company will continue to deliver the EV ARC™ product, using the specialized and proprietary
ARC Mobility™ trailer, within a 500 mile range of the fabrication facility and use 3
rd
party transportation solutions
for greater distances.
Management believes that
the continuation of the Company’s strategy to create highly engineered, highly scalable products which are delivered complete
or as a kit of parts to the customer site, and which require minimal planning, entitlement, or field labor activities, is further
positioning the Company as a leader in the provision of unique and highly scalable solutions to the three market verticals it targets.
The Company’s products are complex but standardized, readily deployable, and reduce the exposure of the Company and its customers
to the risks and inherent margin erosion that are incumbent in field deployments. The Company is no longer directly involved in
the field installation of its Solar Tree® products, instead selling them as a kit to be installed by others. Wherever possible,
the components of the Solar Tree® structures are factory integrated and assembled such that complete assemblies are delivered
to customer sites so that they may be erected and installed by readily available local labor resources contracted directly to the
site host without the Company’s involvement. As part of the delivery of the latest units of Solar Tree structures to our
customers, the Company’s design and engineering team has created a detailed, step by step, installation manual that we believe
can be easily used by any competent construction resource to seamlessly erect and install our structures. With this manual, we
believe the ease of installation can be directly communicated thus minimizing the trepidation and cost estimates associated with
installations and thereby continuing to reduce sales hurdles resulting in increased sales.
The EV ARC™ product
family requires no field installation work and is typically delivered to the customer site by the Company or by a third-party transportation
company for a fee.
The Company continues to
bring engineering improvements to its products that are designed to increase the level of standardization and reduce the field
labor and effort required for product deployment. The EV ARC™ is the embodiment of this strategy in that it requires almost
no field activity beyond “parking” it in a space. The Company has invented and produced the ARC Mobility™ trailer
which is a hydraulically enabled delivery trailer which can lower an EV ARC™ product to the ground in its final location
in less than two minutes.
Management believes that
the Company has significant operating leverage through the deliberate continued leveraging of certain outsourced resources. All
intellectual property is developed in-house. Product designs are then vetted by third-party structural and electrical engineering
firms to ensure that the designs meet the local jurisdictional requirements and codifications for the deployment locations. We
believe this further helps dissipate any potential liabilities for the structural and electrical elements by providing additionally
insured experts with partial responsibility for the designs.
Sales
Historically, the Company
concentrated a sizable portion of its resources on product development and engineering. Management believes that we now have a
reproducible suite of products which address the three market verticals for which we operate (EV charging infrastructure; out of
home advertising infrastructure; and renewable energy production), and as a result, we have increased our focus on sales and marketing
efforts in 2016.
Our current sales activities
are undertaken in the following manners:
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·
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Direct sales efforts undertaken by our “in-house” sales team,
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·
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Direct sales efforts undertaken by other independent contractors,
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|
·
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Direct sales efforts as a result of management relationships.
|
Our marketing efforts are
responsible for the generation of many of our sales leads and have consisted of the following:
|
·
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Attendance at trade shows and conferences, often with live demonstrations of EV ARC™,
|
|
·
|
Deliveries of a “loaner” EV ARC™ unit to potential customer sites so the customer
can directly experience the benefits of the product,
|
|
·
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Web Site and limited search engine optimization,
|
|
·
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Direct electronic mailings to prospects within our target markets,
|
|
·
|
Social Media outreach on Facebook, Twitter, and Linkedin,
|
|
·
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Video postings on YouTube and Vimeo,
|
|
·
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Distribution of printed materials promoting our products,
|
|
·
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Industry speaking engagements and SME panel participation across the United States,
|
|
·
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Media interviews in print, radio and TV,
|
Examples of the audiences
we target are:
|
·
|
Outdoor advertising companies,
|
|
·
|
Automotive related companies,
|
|
·
|
State and Federal government entities,
|
|
·
|
Commercial real estate.
|
Sales and business development
team members may receive a mixture of base and performance based pay. They are paid a percentage of revenue only when the company
actually receives payment from our customers.
We also have independently
contracted sales resources that are paid based upon performance. They are paid a percentage of revenue only when the Company actually
receives payment from our customers. Our team will assist such contractors in the creation of proposal documents when the prospective
sale appears to warrant the commitment of resources to such an activity. These contractors are responsible for their own costs
except in some instances where the Company’s management pre-approves an expenditure aimed at winning a sales contract.
We are increasingly exploring
the use of sales channels to communicate the value of and to sell our products. Examples of the types of channels we seek are:
|
·
|
Upstream vendors such as solar module manufacturers,
inverter manufacturers, EVSE manufactures,
|
|
·
|
EV charging service providers,
|
|
·
|
Outdoor advertising companies,
|
|
·
|
Engineers and consultants.
|
During 2016 we have
added multiple members to be a part of our national sales team as well as develop national sales strategies including a new
Director of Sales and Business Development who is a former Navy Seal Intelligence Officer. We continue to pursue and make
progress on promising sales opportunities. Using the contract with the state of California, we continue to garner sales and
add new state customers. We have received follow on orders from CalTrans, have added new California ordering departments, and
believe we are close to securing orders from other agencies. Further, we continue to have discussions with other governmental
organizations such as the City of New York which management believes will result in a sizable near term future order.
Additionally, we have been delivering our EV ARC™ on our ARC Mobility™ trailer to a variety of locations during a
“Gorilla” marketing road show. The EV ARC™ is being delivered to corporate campuses in major California
metropolitan areas such as San Diego, Los Angeles, San Francisco and Silicon Valley. We pre-announce the free availability of
solar powered EV charging – “Driving on Sunshine” – through the human resource and marketing
departments of the host companies. It is hoped that the host companies and their employees will see the ease of deployment
and the value of highly visible solar powered EV charging, and as a result, buy our products. We believe that this has been a
good way to raise awareness about the unique values our products deliver.
For the period ended September
30, 2016, contracted backlog is approximately $1,710,000 and management believes that a large majority of this backlog will be
executed on and delivered during the fourth quarter of 2016.
We continue to experience long sales cycles
for our products. The sales cycle can be prolonged in part because we are educating a set of prospects in new industries in which
customers do not have significant experience but also because of our strategic decision to target larger organizations with possible
multiple campuses, such as Google or governmental organizations. It is our belief that while the sales cycle is longer for governmental
or larger organizations, once won, the potential for sales and profits is far more significant.
Critical Accounting Policies
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
.
Revenue and Cost Recognition.
Revenues are primarily derived from the direct sales of products.
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.
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 one year warranty on its products for materials and workmanship and will pass on the warranties from its vendors, if any, which
generally covers this one year 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. We
estimate the fair value of each stock option at the grant date by using the Black-Scholes option pricing model. Equity instruments
granted to non-employees are accounted for under ASC 505-50 “Equity Based Payments to Non-Employees.”
Accounts Receivable.
Accounts receivable are customer obligations due under normal trade terms. Management reviews accounts receivable on a periodic
basis to determine if any receivables may become uncollectible. Management’s evaluation includes several factors including
the aging of the accounts receivable balances, a review of significant past due accounts, dialogue with the customer, the financial
profile of a customer, our historical write-off experience, net of recoveries, and economic conditions. The Company includes any
accounts receivable balances that are determined to be uncollectible in its overall allowance for doubtful accounts. Further, the
Company may record a general reserve in its allowance for doubtful accounts to account for future changes that may negatively impact
our overall collections. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
Fair Value of Financial
Instruments.
We measure our financial assets and liabilities in accordance with generally accepted accounting principles. For
certain of our financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and short term loans,
the carrying amounts approximate fair value due to their short maturities. Further, amounts recorded as long term notes payable,
net of discount, also approximate fair value because current interest rates for debt that are available to us with similar terms
and maturities are substantially the same.
Inventory.
Inventories
are valued at the lower of cost or fair market value and consist of certain purchased or manufactured components of our overall
product offering. Cost is determined using the first-in, first-out (FIFO) method, and includes material and labor costs. If the
Company determines that the carrying value of an item may not be realizable, an impairment reserve is recorded to adjust such items
to their fair value.
Accounting for Derivatives.
The Company evaluates its 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.
Changes in Accounting
Principles
. No significant changes in accounting principles were adopted during the three months ended September 30, 2016.
Results of Operations
Results of Operations for the Three Months
Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Revenue.
For
the three months ended September 30, 2016, our revenues were $522,412 compared to $665,254 for the same period in 2015. In the
three-month period ended September 30, 2016, revenues were derived primarily from the delivery of eight EV ARC™ units to
end customers with additional revenues derived from a project to deliver a Solar Tree® unit and smaller ancillary sales of
certain spare parts and annual maintenance contracts. Revenues for the period ended September 30, 2015 related primarily to the
delivery of ten EV ARC™ units in addition to the performance on some smaller sales and lease contracts. As of September 30,
2016, our contracted backlog was approximately $1,710,000 and includes both EVARC™ and Solar Tree ® units currently in
production. Management believes that most of our contracted backlog will be fulfilled and delivered during the 4
th
quarter
of 2016.
Gross Loss.
For the three months ended September 30, 2016, we had a gross loss of $3,532 compared to a gross loss of $46,948 for the same period
in 2015. During the quarter ended September 30, 2016, we continue to experience the maturity of our production processes and were
able to realize a direct gross profit on most of the sales of our EV ARC ™ units. Further, with these sales, we were able
to profitably absorb the depreciation and other standard overhead rates associated with manufacturing the EV ARC™ units in
our facility. With the continuing increases in production volumes expected, we believe that we will see more decreases in per unit
labor costs and per unit manufacturing overhead costs which will drive even lower per unit total costs. The gross losses in the
2016 period were primarily due to losses incurred with the production of our first Solar Tree ™ unit being delivered as a
kit of parts to a customer who has requested delivery delays. Warranty or service costs remained low totaling less than $2,000.
Gross losses for the three months ended September 30, 2015 related to the costs to manufacture previous EV ARC ™ units.
Operating Expenses.
Total operating expenses were $614,586 for the three months ended September 30, 2016 compared to $412,675 for the same period
in 2015. During the three months ended September 30, 2016, we recorded approximately $54,000 in commissions related
to sales that are associated with our contracted backlog at the end of the period compared to no commissions in the three months
ended September 30, 2015. Further, director fees, paid with the Company’s common stock, increased approximately $36,000 in
the three months ended September 30, 2016 compared to the three month period ended September 30, 2015 while consulting fees earned
by our investor relations firm, for which there was no expense in 2015 and also paid with common stock, increased approximately
$75,000 in the period. We incurred moving costs of $11,500 during the three months ended September 30, 2016 and increased administrative
rent expense of approximately $9,000 related to our move to our new manufacturing and corporate office facility in August 2016.
Further, sales staff labor expense increased by approximately $15,000 and costs for promotional events increased by approximately
$12,000 in the 2016 period due to increases in both personnel and sales activities. All other expenses remained consistent between
the periods.
Interest Expense.
Interest
expense was $82,522 for the three months ended September 30, 2016 compared to $30,408 for the same period in 2015. The increase
in interest in 2016 resulted primarily from the interest on our line of credit which was not outstanding in 2015 as well as the
amortization of the loan guaranty expenses related to this line of credit. Coupon interest for outstanding debt other than the
line of credit decreased consistent with decreased debt amounts.
Change in Fair Value
of Embedded Conversion Option Liability.
We recorded a gain of $86,813 during the three months ended September 30, 2016 compared
to a loss of $42,967 during the same period in 2015. These amounts were the result of adjusting the fair value of our derivative
liabilities to market.
Net Loss.
We
had a net loss of $609,564 for the three months ended September 30, 2016 compared to net loss of $530,153 for the same period in
2015. Significant elements deriving these losses have been discussed above.
Results of Operations for the Nine Months
Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Revenue.
For
the nine months ended September 30, 2016, our revenues were $1,207,226 compared to $1,365,127 for the same period in 2015. Revenue
mix and delivery of EV ARC ™ units were consistent amongst the periods with three more EV ARC™ units being delivered
in 2015. As discussed above, as of September 30, 2016, our backlog was approximately $1,710,000 and management believes the Company
will execute on most of this backlog in the 4
th
quarter of 2016.
Gross Loss.
For the nine months ended September 30, 2016, we had a gross loss of $78,632 compared to a gross loss of $120,315 for the same
period in 2015. In 2016, approximately $20,000 of the gross loss was attributable to the delivery of an EV ARC ™ unit to
the Virgin Islands that had higher transportation and location specific logistical cost elements because the Company delivered,
for the first time, a transformer ARC ™ unit using a standard cargo container. Further, we experienced nonrecurring costs
of $26,000 related to the repair of certain production equipment and the procurement of other small equipment to assist in production
coupled with the normal depreciation of production and delivery equipment. Warranty or service costs remained low totaling approximately
$11,000 and included mostly travel related expenses to travel to deployed units. In 2015, just under half of the gross loss related
to cost overruns experienced in closing out certain projects involving the installation of our Solar Tree® structures while
the bulk of the remaining half related to the warranty, production, and fulfillment of EV ARC™ orders. We continue to develop
and improve upon our manufacturing processes. We have been successful in reducing certain costs and reducing the labor associated
with building an EV ARC™ unit and management believes that we will continue to reduce these costs through design, efficiency,
and purchasing improvements. Further, with the continuing increases in production volumes expected, we believe that we will see
continued decreases in per unit labor costs and per unit manufacturing overhead costs which will drive even lower per unit total
costs.
Operating Expenses.
Total operating expenses were $1,634,861 for the nine months ended September 30, 2016 compared to $1,247,428 for the same period
in 2015. Approximately $50,000 of this increase is associated with stock option expense that increased to $63,182 in the nine months
ended September 30, 2016 from $12,909 in the nine months ended September 30, 2015 and is a result of stock options issued to directors
in 2016 for the 2015 year of service. Current year director fees, paid in the company’s common stock, increased approximately
$97,000 year over year between the nine month periods ended September 30, 2016 and September 30, 2015, while general consulting
expenses increased $109,000 in the same period, primarily associated with an additional $41,000 paid to GreenCore Capital LLC,
and an increase of approximately $70,000, paid in common stock, primarily to an investor relations consulting firm. Additionally,
general labor expenses, including vacation, increased approximately $47,000 during the year as the Company added additional resources,
while sales expenses increased approximately $75,000 due primarily to $58,000 in commissions owed on contracted backlog work as
well as increases in the salesforce. Further, in the nine months ended September 31, 2016 as compared to the nine months ended
September 30, 2015 we incurred an additional $8,000 of computer hardware expense for networking and security equipment at our new
facility along with along with $11,500 in moving expenses and $11,000 in administrative rent expense, also both related to our
August move to our new headquarters facility. These expenses were offset by decreases in expenses related to fees paid in 2015
for the annual shareholder meeting that will be incurred in the fourth quarter of 2016 for our current year shareholder meeting
in addition to reductions of expensed small equipment purchased in 2016 as the Company expanded its operations in 2015 and thus
had to incur less of such equipment expense.
Interest Expense.
Interest
expense was $205,485 for the nine months ended September 30, 2016 compared to $345,906 for the same period in 2015. In the nine
months ended September 30, 2016, the Company recorded approximately $34,000 of interest expense related to the line of credit established
in late 2015 as well as the amortization to interest expense of approximately $105,000 of debt issue and debt guaranty costs related
to the same line of credit. In 2015, the company recorded debt discount amortization of $252,000 related to earlier debt transactions
that did not occur in 2016. Coupon interest for outstanding debt other than the line of credit decreased consistent with the decreased
debt load between the periods.
Change in Fair Value
of Embedded Conversion Option Liability.
We recorded a loss of $46,865 during the nine months ended September 30, 2016 compared
to a gain of $117,770 during the same period in 2015. These amounts were the result of adjusting the fair value of our derivative
liabilities to market.
Net Loss.
We
had a net loss of $1,961,316 for the nine months ended September 30, 2016 compared to net loss of $1,592,799 for the same period
in 2015. Significant elements deriving these losses have been discussed above.
Liquidity and Capital Resource
At September 30, 2016,
we had cash of $80,695. We have historically met our cash needs through a combination of proceeds from private placements of our
securities, and from loans. Our cash requirements are generally for operating activities.
Our operating activities
resulted in cash used in operations of $1,439,269 for the nine months ended September 30, 2016, compared to cash used in operations
of $1,502,631 for the same period in 2015. The principal elements of cash flow for the nine months ended September 30, 2016 include
the net loss of the Company offset by depreciation and amortization of $84,472 and other non-cash items amounting to approximately
$475,000 including: approximately $139,000 of common stock share value issued in lieu of cash for services to directors of the
company for their Board service; $70,000 of common stock share value paid to a company managed by our director for advisory services
provided to the Company; $75,000 of common stock share value paid to an investor relations consulting firm; $63,182 of stock option
expense primarily related to the issuance of 2016 options for the 2015 year of Board service for certain directors; $83,613 of
amortization of debt issue costs associated with our line of credit entered into during 2015; and a $46,865 gain related to the
change in fair value of the embedded conversion option liability. Further, cash from operations for the period included of a net
reduction in accounts receivable of $559,981 as the Company collected monies owed to it from 2015 sales; a use of cash of $21,168
primarily as a result of the deposit on our new facility offset by the use for rent of the deposit on our old facility; a use of
cash of $57,506 primarily for the prepayment of annual insurance policies and additionally some raw materials; a use of cash of
$375,915 used to build inventory; a use of cash of $166,463 for the payment of accounts payables, a use of cash amounting to $94,566
related to the payment of sales taxes owed; a generation of cash of $13,270 related to the reduction of deferred revenue deposits
for units that were delivered to end customers; and a $162,112 generation of cash for the increase of accrued liabilities including
interest.
Cash used in investing
activities amounted to $122,180 and $201,258 for the nine months ended September 30, 2016 and September 30, 2015, respectively.
In 2016, the Company built an EV ARC™ for Company demonstration purposes, added some production equipment and tools, and
purchased networking equipment for our new facility. In 2015, the Company added certain production equipment as well as built three
EVARC® units that were subsequently leased through a capital lease to an independent customer and subsequently transferred
to such customer with no gain or loss recorded. The Company’s funding of current and future patents of the Company amounted
to $24,703 for the nine months ended September 30, 2016 compared to $25,895 for the nine months ended September 30, 2015.
Cash received from our
financing activities was $1,609,693 for the nine months ended September 30, 2016 compared to cash received of $439,675 in the same
period in 2015. This cash received from financing activities is primarily net monies invested into the Company through
private placements that were open in the periods. Additionally, during 2016, the Company borrowed $200,000 on its line of credit
and repaid $15,507 of prior debt facilities.
As of September 30, 2016,
current liabilities exceeded current assets by $2,128,103. In 2016, current assets decreased by approximately $52,000 resulting
primarily from the collection of accounts receivable offset by increases in inventory, cash and the other current assets while
the total current liability balance, after considering the $200,000 increase in our line of credit, remained relatively flat at
September 30, 2016 as compared to December 31, 2015.
While the Company has primarily
been in a period of market awareness and product development with new product releases, until recently, the Company has not
generally earned a gross profit on its sales of products and services. It has been pricing its products and services in an
attempt to forge durable long term customer relationships, to gain market share, and to establish its brand. Management believes
that with increased production volumes, efficiencies will continue to improve, and production costs will continue to decrease,
thus allowing for consistent gross profits on the EV ARC ™ product. The Company will continue to rely on capital infusions
from the private placement of its securities as well as initiating future debt instruments until it achieves positive cash flow
from its business, which is predicated on increasing sales volumes and the continuation of production cost reduction measures.
Management cannot currently predict when or if it will achieve positive cash flow.
Management believes that
evolution in the operations of the Company may allow it to execute on its strategic plan and enable it to experience profitable
growth in the future. This evolution is anticipated to include the following continual steps: addition of sales personnel and independent
sales channels, continued management of overhead costs, process improvements leading to cost reductions, systemization of its products,
increased public awareness of the Company and its products, and the maturation of certain long sales cycle opportunities. Management
believes that these steps, if successful, may enable the Company to generate sufficient revenue and raise additional growth capital
to allow the Company to manage its debt burden appropriately and to continue operations. There is no assurance, however, as to
if or when the Company will be able to achieve those investment objectives. The Company does not have sufficient capital to meet
its current cash needs, which include the costs of compliance with the continuing reporting requirements of the Securities Exchange
Act of 1934, as amended. The Company is also in the process of seeking additional capital and long and short term debt financing
to attempt to overcome its working capital deficiencies. The Company is currently seeking private financing, but there is no assurance
that the Company can raise sufficient capital or obtain sufficient financing to enable it to sustain monthly operations. The Company
will attempt to renegotiate the maturity dates of its current debt financings as needed and as it has done successfully in the
past, but there is no assurance that these efforts will be successful. In order to address its working capital deficit, the Company
is also seeking to increase sales of its existing products and services. There may not be sufficient funds available to the Company
to enable it to remain in business and the Company’s needs for additional financing are likely to persist.
Going Concern Qualification
The Company has incurred
significant losses from operations, and such losses are expected to continue. The Company’s auditors have included a "Going
Concern Qualification" in their report for the year ended December 31, 2015. In addition, the Company has a working capital
deficit at September 30, 2016. The foregoing raises substantial doubt about the Company's ability to continue as a going concern.
Management's plans include seeking additional capital and debt financing. 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 contracts for new product sales that should provide additional revenues and future gross
profits. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty. The "Going Concern Qualification" might make it substantially more difficult to raise capital.
Off-Balance Sheet Arrangements
We do not have any off-balance
sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that
are material to investors.