Envision Solar International, Inc. and Subsidiary
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying
notes are an integral part of these Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
1.
|
CORPORATE ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
CORPORATE ORGANIZATION
Envision Solar was
incorporated in June 2006 as a limited liability company (“LLC”). Through a series of transactions and mergers, including
a series of 2010 transactions where the then existing entity was acquired by an inactive publicly-held company in a transaction
treated as a recapitalization of the company, the resulting entity became Envision Solar International, Inc., a Nevada Corporation
(along with its subsidiary, hereinafter the “Company”, "us", "we", "our" or "Envision").
The effects of the recapitalization have been retroactively applied to all periods presented in the accompanying consolidated financial
statements and footnotes. Additionally, the Company had formed various wholly owned subsidiaries to account for its planned future
operations, but these entities were dissolved over the subsequent years. The only remaining subsidiary included in these consolidated
financial statements is Envision Solar Construction Company, Inc. which was a non-operational entity officially dissolved in 2017.
NATURE OF OPERATIONS
Envision invents, designs,
and manufactures solar powered 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 platforms for EV charging, media and branding, and energy security which are attractively designed, rapidly
deployable, and of the highest quality. Management believes that the Company’s chief differentiator is its ability to invent,
design, engineer, and manufacture solar 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 the sales of digital out of home (“DOOH”) media.
PRINCIPALS OF CONSOLIDATION
The 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
consolidated 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 consolidated 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 consolidated
financial statements include the allowance for doubtful accounts receivable, valuation of inventory, depreciable lives of property
and equipment, estimates of loss contingencies, valuation of derivatives, valuation of beneficial conversion features in convertible
debt, valuation of share-based payments, and the valuation allowance on deferred tax assets.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
CONCENTRATIONS
Concentration of
Credit Risk
The Company
maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts through December 31, 2017. The Company had approximately $150,000 of bank
balances in excess of FDIC insured levels as of December 31, 2017 and no such amounts as of December 31, 2016.
Concentration of
Accounts Receivable
At December
31, 2017 and 2016, customers that each accounted for more than 10% of our accounts receivable were as follows:
|
|
2017
|
|
|
2016
|
|
Customer 1
|
|
|
94%
|
|
|
|
–
|
|
Customer 2
|
|
|
–
|
|
|
|
71%
|
|
Customer 3
|
|
|
–
|
|
|
|
25%
|
|
Concentration of
Revenues
For the
years ended December 31, 2017 and 2016, customers that each represented more than 10% of our revenues were as follows:
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
28%
|
|
|
|
–
|
|
Customer B
|
|
|
12%
|
|
|
|
14%
|
|
Customer C
|
|
|
–
|
|
|
|
26%
|
|
Customer D
|
|
|
–
|
|
|
|
30%
|
|
CASH AND CASH EQUIVALENTS
For the purposes of
the 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 December 31, 2017 and December 31, 2016,
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 December 31, 2017 and 2016, the carrying amounts of these instruments approximated their fair values
because of the short-term nature of these instruments. See Note 10 for further discussion of fair value measurements.
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.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
INVENTORY
Inventory is stated
at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method of accounting. Inventory
costs primarily relate to purchased raw materials and components used in the manufacturing of our products, work in process for
products being manufactured, and finished goods. Included in these costs are direct labor and certain manufacturing overhead costs
associated with the manufacturing process. The Company regularly reviews inventory components and quantities on hand, and performs
annual physical inventory counts. A reserve is established if this review process determines the market value of such inventory
may be below the carrying value.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment
is recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related
assets of 3 to 7 years. Expenditures for maintenance and repairs, along with fixed assets below our capitalization threshold, are
expensed as incurred.
PATENTS
The Company believes
it will achieve future economic value for its various patents and patent ideas. All administrative costs for obtaining patents
are accumulated on the balance sheet as a Patent asset until such time as a patent is issued. The costs of these intangible assets
are classified as a long term asset and amortized on a straight line basis over the legal life of such asset, which is typically
20 years. In the event a patent is denied, all accumulated administrative costs will be expensed in that period. For the years
ended December 31, 2017 and 2016 respectively, patent amortization expense was $561 and $561.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts
for long-lived assets in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.”
This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
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 of a note where the
embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at
fair value, relieves all related notes, derivatives and debt discounts and recognizes a net gain or loss on extinguishment.
Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are
reclassified to liabilities at the fair value of the instrument on the reclassification date.
REVENUE AND COST RECOGNITION
Revenues are primarily
derived from the direct sales of products. Revenues may also consist of maintenance fees for previously sold products, design fees
for the design of solar systems and arrays, and revenues from sales of professional services.
Revenues from leases,
maintenance fees, 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 or when legal transfer of ownership takes
place. Any deposits received from a customer prior to such delivery are accounted for as deferred revenue on the balance sheet.
At December 31, 2017 and December 31, 2016, deferred revenue amounted to $77,514 and $75,323 respectively. At December 31, 2017,
the Company has received partial deposits for two undelivered Solar Tree® units, an undelivered EVARC® unit and a multi-year
maintenance contract.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
The Company includes
shipping and handling fees billed to customers as revenues, and shipping and handling costs as cost of revenues. Sales tax is recorded
on a net basis and excluded from revenue. 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. In accordance
with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated.
At December 31, 2017, the Company has no product warranty accrual given the Company’s de minimis historical financial warranty
experience.
RESEARCH AND DEVELOPMENT
In accordance with
ASC 730-10, “Research and Development,” expenditures for research and development of the Company’s products are
expensed when incurred, and are included in operating expenses. The Company recognized research and development costs, not including
the minimal amounts of labor associated with research and development projects, of $1,772 for the year ending December 31,
2017 and $3,459 for the year ending December 31, 2016.
ADVERTISING
The Company conducts
advertising for the promotion of its products and services. In accordance with ASC 720-35, “Advertising Costs,” advertising
costs are charged to operations when incurred. Such amounts aggregated $81,278 in 2017 and $58,149 in 2016.
STOCK-BASED COMPENSATION
The Company follows
ASC 718, “Compensation – Stock Compensation.” ASC 718 requires companies to estimate and recognize the fair value
of stock-based awards to employees and directors. The fair value of the portion of an award that is ultimately expected to vest
is recognized as an expense over the requisite service periods using the straight-line attribution method.
The Company accounts
for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “Equity-Based
Payments to Non-Employees”.
The Company estimates
the fair value of each stock option at the grant date by using the Black-Scholes option pricing model.
INCOME TAXES
The Company accounts
for income taxes pursuant to the provisions of ASC Topic 740, “Income Taxes,” which requires, among other things, an
asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which
management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows
the provisions of ASC 740-10-25-5,
“
Basic Recognition Threshold
.”
When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the
guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period
during which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount
of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.
The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected
as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain
of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of December
31, 2017, tax years 2014 through 2017 remain open for IRS audit. The Company has received no notice of audit from the IRS for any
of the open tax years.
The Company recognizes
the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides
guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an
examination by a taxing authority. For tax positions considered effectively settled, the Company recognizes the full amount of
the tax benefit.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
BASIC AND DILUTED NET LOSS PER COMMON
SHARE
Basic net loss per
share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted
net loss per common share is computed by dividing the net loss by 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.
Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
Convertible debt convertible
into 19,846,181 common shares, options to purchase 15,216,664 common shares and warrants to purchase 5,781,900 common shares were
outstanding at December 31, 2017. Convertible debt convertible into 6,123,370 common shares, options to purchase 19,917,007 common
shares and warrants to purchase 28,196,822 common shares were outstanding at December 31, 2016. Dilutive common stock equivalents
were not included in the computation of diluted net loss per share in 2017 and 2016 because the effects would have been anti-dilutive
due to the net losses. Due to the net losses in 2017 and 2016, basic and diluted net loss per share amounts are the same. These
potential common shares may dilute future earnings per share.
CONTINGENCIES
Certain conditions
may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company, but which
will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such
contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related
to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's
legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that
a liability has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability would be
accrued in the Company's consolidated financial statements. If the assessment indicates that a potentially material loss contingency
is not probable but is reasonably possible, or is probable but cannot be reasonably estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable would be disclosed. The Company does not include
legal costs in its estimates of amounts to accrue.
SEGMENTS
The Company follows
the guidance of ASC 280-10 for “Disclosures about Segments of an Enterprise and Related Information." During 2017 and
2016, the Company only operated in one segment; therefore, segment information has not been presented.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no new accounting
pronouncements that became effective during the year ended December 31, 2017 that materially affect the consolidated financial
position of the Company or the results of its’ operations. Accounting Standard Updates which are not effective until after
December 31, 2017, including the pronouncements discussed below, disclose the potential effects on the Company’s consolidated
financial position and/or results of its’ operations and financial statement disclosures.
ASU 2017-05
In February
2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-05:
"Other Income - Gains and
Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)” -
to clarify the scope of Subtopic 610-20,
“Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets”, and to add guidance for partial
sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial
assets in contracts with noncustomers. This guidance is effective for interim and annual reporting periods beginning after December
15, 2017. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
ASU 2017-08
In March
2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-08: “Receivables – Non-Refundable
fees and Other Costs (Subtopic 310-20)” to amend the amortization period for certain purchased callable debt securities held
at a premium. The Board is shortening the amortization period for the premium to the earliest call date. 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 2016-15
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 does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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 expects this
ASU will increase its current assets and current liabilities, but have no net 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 adoption of this ASU did not have a material impact on its consolidated financial statements.
ASU 2014-09
In May 2014,
the Financial Accounting Standards Board issued Update No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”
which requires that an entity recognize revenue to depict the transfer of promised goods and services to customers in an amount
that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Since the
issuance of the original standard, the FASB has issued several updates to the standard which i) clarify the application of the
principal versus agent guidance; ii) clarify the guidance relating to performance obligations and licensing; iii) clarify assessment
of the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts
at transaction; and iv) clarify narrow aspects of ASC 606 or corrects unintended application of the guidance. The new revenue recognition
standard, amended by the updates, becomes effective in the first quarter of 2018 and is to be applied retrospectively using one
of two prescribed methods. Early adoption is permitted. The Company currently plans to adopt the new standard effective January
1, 2018 and does not believe the adoption of this standard will have any impact on the amount or timing of its revenues.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
ASU 2015-17
In November
2015, the FASB issued ASU No. 2015-17, “
Balance Sheet Classification of Deferred Taxes
,” which requires that
an entity classify deferred tax assets and liabilities as noncurrent on the balance sheet. Prior to the issuance of the standard,
deferred tax assets and liabilities were required to be separated into current and noncurrent amounts on the basis of the classification
of the related asset or liability. This ASU was effective for the Company on April 1, 2017. The adoption of ASU No. 2015-17 did
not have a material impact on the Company's consolidated financial statements or related disclosures.
ASU 2014-15
In August
2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Topic 205-40)”, which
requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern
for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard
was effective for the Company for its annual period beginning December 31, 2016. The Company has reflected the related disclosure
requirements associated with the standard in Note 2.
As reflected in the
accompanying consolidated financial statements for the years ended December 31, 2017 and 2016, the Company had net losses of $3,041,430
(which includes $430,084 of stock based compensation expense) and $2,633,516 (which includes $842,089 of stock based compensation
expense), respectively, and net cash used in operating activities of $3,437,312 and $1,798,726, respectively. Additionally, at
December 31, 2017, the Company had a working capital deficit of $786,621, stockholders’ deficit of $349,262, and accumulated
deficit of $38,276,879. It is managements opinion that these factors raise substantial doubt about the Company’s ability
to continue as a going concern for a period of twelve months from the date of this filing.
In addition to the
funds raised in a private securities offering during the year ended December 31, 2017 and reflected in the accompanying financial
statements, Envision raised an additional $290,000 from the same offering subsequent to December 31, 2017. Envision will look to
raise additional funds for further operating capital and working capital. Further, the Company will seek additional sales that
would provide additional revenues and possible gross profits. All such actions and funds, if successful, may or 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 or provide additional working capital. From January 1, 2017 through December 31, 2017, the Company raised $2,345,000 from
a private securities offering, borrowed a net $500,000 from certain loan facilities and additionally drew down $1,150,000 on a
potential $3,000,000 line of credit that was established during 2017.
The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
3.
|
ACCOUNTS RECEIVABLE, AND DEFERRED REVENUE
|
Accounts Receivable
The Company records
accounts receivable as it bills its customers for products and services. The allowance for doubtful accounts is based upon the
Company’s policy (See Note 1). Accounts receivable throughout the year may decrease based on payments received, credits for
change orders, or back charges incurred.
At December 31, 2017
and 2016, accounts receivables were as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Accounts receivable
|
|
$
|
5,946
|
|
|
$
|
1,161,064
|
|
Less: Allowance for doubtful accounts
|
|
|
–
|
|
|
|
–
|
|
Accounts receivable, Net
|
|
$
|
5,946
|
|
|
$
|
1,161,064
|
|
Bad debt expense for
2017 and 2016 was $0 and $510, respectively.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Deferred Revenue
Deferred revenues are
deposits from customers for product sales which have not yet been delivered and multi period maintenance contracts (See Note 1).
Deferred revenue was $77,514 and $75,323 for the years ended December 31, 2017 and December 31, 2016, respectively.
4.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and
other current assets are summarized as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Prepaid insurance
|
|
$
|
25,402
|
|
|
$
|
26,124
|
|
Deposit on future raw materials
|
|
|
30,272
|
|
|
|
21,168
|
|
Prepaid services
|
|
|
–
|
|
|
|
46,875
|
|
Total prepaid expenses and other current assets
|
|
$
|
55,674
|
|
|
$
|
94,167
|
|
Inventories are stated
at the lower of cost or net realizable value. Costs are determined using the first in- first out (FIFO) method. As of December
31, 2017 and 2016, inventory consists of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Finished goods
|
|
$
|
1,716,141
|
|
|
$
|
22,375
|
|
Work in process
|
|
|
311,481
|
|
|
|
164,915
|
|
Raw materials
|
|
|
300,479
|
|
|
|
93,113
|
|
Inventory reserve
|
|
|
(8,601
|
)
|
|
|
(8,601
|
)
|
Inventory, net
|
|
$
|
2,319,500
|
|
|
$
|
271,802
|
|
6.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment
consists of the following:
|
|
Est. Useful
Lives
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Computer equipment and software
|
|
5 years
|
|
$
|
32,666
|
|
|
$
|
28,344
|
|
Furniture and fixtures
|
|
7 years
|
|
|
82,529
|
|
|
|
82,529
|
|
Office equipment
|
|
5 years
|
|
|
20,533
|
|
|
|
20,533
|
|
Machinery and equipment
|
|
1-5 years
|
|
|
341,583
|
|
|
|
322,010
|
|
Autos
|
|
3 years
|
|
|
49,238
|
|
|
|
49,238
|
|
Leasehold improvements
|
|
47 months
|
|
|
6,790
|
|
|
|
6,790
|
|
Total property and equipment
|
|
|
|
|
533,339
|
|
|
|
509,444
|
|
Less accumulated depreciation
|
|
|
|
|
(307,227
|
)
|
|
|
(216,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
|
$
|
226,112
|
|
|
$
|
293,041
|
|
Depreciation expense
for 2017 and 2016 was $68,820 and $101,877, respectively. In 2017 and 2016, respectively, approximately $22,000 and $21,600 of
depreciation was capitalized into inventory as manufacturing overhead costs.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
The major
components of accrued expenses are summarized as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Accrued vacation
|
|
$
|
152,051
|
|
|
$
|
136,410
|
|
Accrued interest
|
|
|
175,953
|
|
|
|
235,776
|
|
Accrued loan guaranty
|
|
|
–
|
|
|
|
8,333
|
|
Accrued rent
|
|
|
77,164
|
|
|
|
26,091
|
|
Accrued commissions
|
|
|
–
|
|
|
|
18,828
|
|
Accrued loss contingency
|
|
|
44,423
|
|
|
|
–
|
|
Other accrued expense
|
|
|
2,333
|
|
|
|
4,995
|
|
Total accrued expenses
|
|
$
|
451,924
|
|
|
$
|
430,433
|
|
8.
|
LINE
OF CREDIT/TERM DEBT – SILICON VALLEY BANK
|
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 was secured by a second priority perfected
security interest in all of the assets of the Company in favor of the Bank.
The LSA contained 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. Envision drew down $800,000 of this
line in 2015 with another $200,000 drawdown in February 2016. As of December 31, 2016, the balance of this revolving line of credit
was $1,000,000.
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 were recorded as Debt Issue Costs on the accompanying balance sheet and were amortized
over the one year term of the line of credit.
As of December 31,
2016, the term of the LSA was extended to January 28, 2017. Fees amounting to $2,400 relating to this extension were recorded as
Debt Issue Costs on the accompanying balance sheet and were amortized over the term of this extension.
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, were recorded as Debt
Issue Costs and were amortized over the initial 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. Related to this guaranty, as of October 29, 2016, the Company issued 147,493 shares
of its common stock valued at $0.15 per share, or $22,123, and expensed this over the six month Measurement Period of the Guaranty.
The Company recorded a gain on debt settlement of $2,877 on this transaction. Additionally, as of April 29, 2017, the Company issued
234,302 shares of its common stock valued at $0.15 per share, or $35,145, and expensed this over the six month Measurement Period
of the Guaranty. The Company recorded a gain on debt settlement of $2,355 on this transaction. Additionally, in September 2017,
the Company issued 219,555 shares of its common stock valued at $0.15 per share, or $32,933 and expensed this over the final Measurement
Period of the Guaranty. The Company recorded a loss of $2,183 on this transaction (See Notes 14 and 17).
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Additionally, the Company
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 had 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 was
unable to meet its obligations under the LSA, Keshif was to immediately become entitled to elect one member to Envision’s
Board of Directors.
Effective March 30,
2017, the Company entered into an additional amendment to the LSA with Silicon Valley Bank as it relates to this debt. The amendment
(i) extended the maturity date to March 1, 2020, (ii) increased the loan to an aggregate principal amount of $1,500,000, and (iii)
changed the payment terms requiring monthly interest only payments through December 2017, and starting January 1, 2018, the Company
was required to repay the balance outstanding in twenty-seven equal monthly principal payments in addition to the monthly accrued
interest. The additional $500,000 of debt was funded to the Company in April 2017. Related to this amendment, the Company paid
$9,655 of fees to the Bank. These fees were recorded as debt discount and netted against the loan balance and amortized to interest
expense over the term of the debt facility.
As of September 25,
2017, the Company paid off the LSA in full with the proceeds of the “Lender” note as discussed in Note 11, and the
Guaranty and all other contractual rights related to this debt facility were cancelled.
9.
|
CONVERTIBLE
LINE OF CREDIT
|
On September 18, 2017,
in addition to a convertible “Lender” note (See Note 11), the Company entered into a revolving secured convertible
promissory note (the “Revolver”) with an unaffiliated lender (the “Lender”). Pursuant to the Revolver,
the Company has the right to make borrowings from the Lender in amounts of up to 70% of the value of any specific purchase order
(each a “PO”) received by the Company from a credit worthy customer (each a “Draw Down”), up to a maximum
of $3,000,000, commencing on the date of the Revolver and terminating 300 days after the date of the Revolver. The Revolver bears
simple interest at the floating rate per annum equal to the 12 month USD LIBOR index rate quoted from time to time in New York,
New York by the Bloomberg Service plus 600 basis points (the “Interest Rate”). The Interest Rate will be adjusted on
the first day of each calendar month during the term of this Note to reflect any changes in the 12 month LIBOR rate as quoted on
that day, or if that day is not a business day, on the next business day thereafter. The principal and accrued unpaid interest
with respect to each Draw Down is due and payable within five (5) business days of receipt from the Customer by the Company of
a payment due under the applicable PO (with respect to each Draw Down, the “Maturity Date”). Each Draw Down is secured
by a perfected recorded second priority security interest in all of the Company’s assets, as set forth in that certain Security
Agreement by and between the Company and the Lender. The Lender will have the right at any time until the Maturity Date of a Draw
Down, provided the Lender gives the Company written notice of the Lender’s election to convert prior to any prepayment of
such Draw Down by the Company with respect to converting that portion of such Draw Down covered by the prepayment, to convert all
or any portion of the outstanding principal and accrued unpaid interest (the “Conversion Amount”), into such number
of fully paid and nonassessable shares of the Company’s common stock as is determined by dividing the Conversion Amount by
the greater of (i) fifteen cents ($0.15) or (ii) 75% of the Volume Weighted Average Price of the Company’s common stock that
is quoted on a public securities trading market (if more than one, the one with the then highest trading volume), during the five
(5) consecutive trading days immediately prior to the date of the Lender’s written notice of the Lender’s election
to convert.
As additional consideration
for any Draw Downs made by the Lender to the Company as evidenced by the Revolver, the Company agreed to issue to the Lender common
stock purchase warrants exercisable for a period of three years from the date of issuance with an exercise price equal to the greater
of (i) $0.15 per share or (ii) 75% of the Volume Weighted Average Price of the Company’s common stock that is quoted on a
public securities trading market (if more than one, the one with the then highest trading volume), during the five (5) consecutive
trading days immediately prior to the date of the applicable Draw Down. The number of warrants issuable to the Lender will equal
25% of the increase over the highest amount previously drawn down by the Company on the Revolver divided by the greater of (i)
fifteen cents ($0.15) or (ii) 75% of the Volume Weighted Average Price of the Company’s common stock that is quoted on a
public securities trading market (if more than one, the one with the then highest trading volume), during the five (5) consecutive
trading days immediately prior to the date of the applicable Draw Down which causes the increase over the previous highest amount
borrowed.
The Company received
funds for an initial Draw Down on September 26, 2017 in the amount of $850,000. As a result of this Draw Down, the Company issued
1,416,667 common stock purchase warrants having a value of $122,992 using the Black-Scholes valuation methodology, and each with
a $0.15 exercise price (See Note 15). As a result of this transaction, and including the value of the issued warrants, the Company
recorded $243,223 of value of beneficial conversion features, which is recorded as debt discount on the accompanying balance sheet,
and is being amortized to interest expense over the term of the loan.
The Company received
funds for a second Draw Down on October 24, 2017 in the amount of $300,000. As a result of this Draw Down, the Company issued 500,000
common stock purchase warrants having a value of $56,620 using the Black-Scholes valuation methodology, and each with a $0.15 exercise
price (See Note 15). As a result of this transaction, and including the value of the issued warrants, the Company recorded $175,261
of value of beneficial conversion features, which is recorded as debt discount on the accompanying balance sheet, and is being
amortized to interest expense over the term of the loan.
As of December 31,
2017, the convertible line of credit had a balance, net of a $226,768 debt discount, amounting to $923,232. Accrued and unpaid
interest related to this note amounting to $22,236 is included in accrued expenses (See Note 7).
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
10.
|
CONVERTIBLE NOTES PAYABLE – RELATED PARTIES AND FAIR VALUE MEASUREMENTS
|
As of December 31,
2017 and 2016, the following summarizes amounts owed under short-term convertible notes –related parties:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Evey Note
|
|
$
|
62,616
|
|
|
$
|
74,616
|
|
Wheatley Note
|
|
|
135,000
|
|
|
|
50,000
|
|
Gemini Master Fund – Third Amended and
|
|
|
|
|
|
|
|
|
Restated Secured Bridge Note – Current Group
|
|
|
–
|
|
|
|
600,000
|
|
|
|
$
|
197,616
|
|
|
$
|
724,616
|
|
Evey Note
Prior to 2011, the
Company was advanced monies by John Evey, our former chairman and director, and executed a 10% convertible promissory note with
compounding interest 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 was 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, 2016. The Company made principal
payments amounting to $12,000 in fiscal 2016.
Effective December
31, 2016, the Company entered into a further extension agreement to extend the maturity date of this note to December 31, 2017.
There were no additional fees or discounts associated with this extension. This modification was treated as an extinguishment as
the change in fair value of the embedded conversion option just before and just after the modification was more than 10% of the
carrying amount of the note. The market price of the Company’s stock was below the conversion price at the time of the modification,
therefore no beneficial conversion feature needed to be recorded. The Company made principal payments amounting to $12,000 in fiscal
2017.
Although Mr. Evey is
no longer a director as of December 31, 2016, because he was our Chairman and a related party throughout most of 2016, we have
continued to classify this note as a Convertible note payable - related parties in the accompanying balance sheet. The note continues
to bear interest at a rate of 10%. The balance of the note as of December 31, 2017, is $62,616 with accrued and unpaid interest
amounting to $61,242 which is included in accrued expenses (See Note 7 and Note 17).
Wheatley Note
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, President, and Chairman of the Company (the “Agreement”). Pursuant to the Agreement, Mr. Wheatley
will receive an annual deferred salary of $50,000 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 are 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 at any time in whole or in part at Mr.
Wheatley’s discretion, with a maturity date of December 31, 2020. As the conversion price was equivalent to the market price
at the time of issuance, there is no beneficial conversion feature to this note. Additionally, on March 29, 2017 the board of directors
granted Mr. Wheatley a $35,000 bonus for which Mr. Wheatley agreed to defer such bonus under the same terms of his salary deferral.
The balance of the note as of December 31, 2017, is $135,000 with accrued and unpaid interest amounting to $12,312 which is included
in accrued expenses (See Note 7).
Gemini Third Amended and Restated Secured
Bridge Note – Current Group
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. The note was secured by substantially all assets of
the Company and its subsidiary, and was unconditionally guaranteed by the subsidiary.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
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 $0.15; the beneficial holder ceiling was increased to 9.9% and the terms
were extended to June 30, 2015.
In June 2015, Gemini
sold a 70.0066819% stake in its’ note to Robert Noble, our past Chairman, in a private transaction. The Company issued two
replacement notes for their respective ownership values based on this transaction with the Noble note having a balance of $600,000
and the Gemini note having a balance of $256,325. 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 to pay off the balance of the Gemini note and its accrued interest.
In regards to the then
remaining note, Robert Noble agreed to an extension to March 31, 2016. Additionally, 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 extend the expiration date of 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 agreed to reduce the exercise
price of such Warrants from $0.24 to $0.20 per share. (see Note 15)
During the fourth quarter
of 2016, the Company was notified that a transaction, or series of transactions, arranged by GreenCore, had officially closed whereas
the convertible note and the “Noble” shares were ultimately obtained by a group of various shareholders, some of which
are related parties to the Company. As the note was partially held by a related party shareholder and was held by other related
party shareholders during the year, the note was classified as Convertible Notes Payable- Related Parties in the accompanying balance
sheets.
Effective as of February
15, 2017, the Company received conversion notices from all the then current note holders effecting the conversion of the entire
principal balance of the note amounting to $600,000 and accrued and unpaid interest, as of February 15, 2017, amounting to $104,709.
The Company issued 4,698,060 shares of common stock at the contracted conversion price of $0.15 per share, to retire the entirety
of this convertible note (See Notes 14 and 17).
At December 31, 2017,
there is no outstanding balance owed for this convertible note.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Fair Value Measurements – Derivative
liability:
The accounting
guidance 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 guidance 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 inputs 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 December 31, 2016:
|
|
Carrying Value at
|
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
December 31, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Embedded Conversion Option Liability
|
|
$
|
107,081
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
107,081
|
|
As a result of the February
2017 conversion discussed above, there was no embedded conversion option liability as of December 31, 2017.
The following is a summary
of activity of Level 3 liabilities for the periods ended December 31, 2016 and 2017:
Balance at December 31, 2015
|
|
$
|
87,992
|
|
Change in fair value
|
|
|
19,089
|
|
Balance at December 31, 2016
|
|
$
|
107,081
|
|
Gain on debt extinguishment
|
|
|
(107,081
|
)
|
Balance at December 31, 2017
|
|
$
|
–
|
|
Changes
in fair value of the embedded conversion option liability are included in other income (expense) in the accompanying consolidated
statements of operations.
The Company
estimates the fair value of the embedded conversion liability utilizing the Black-Scholes pricing model, which is dependent upon
several variables such as the expected term (based on contractual term), expected volatility of our stock price over the expected
term (based on historical volatility), expected risk-free interest rate over the expected term, and the expected dividend yield
rate over the expected 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 December 31, 2016:
Assumptions
|
|
December 31, 2016
|
|
Expected remaining term
|
|
|
0.25
|
|
Expected Volatility
|
|
|
103%
|
|
Risk free rate
|
|
|
0.50%
|
|
Dividend Yield
|
|
|
0.00%
|
|
There were
no changes in the valuation techniques during 2017. In 2016, the Company did compute the valuation of this derivative liability
using a binomial lattice model noting no material differences in valuation results. The weighted average interest rate for short
term notes as of December 31, 2017 was 10%.
11.
|
CONVERTIBLE
NOTES PAYABLE
|
As of December
31, 2016, the $100,000 owed under convertible notes payable consisted only of the Pegasus note.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
As of December
31, 2017, the following summarizes amounts owed under convertible notes payable:
|
|
Amount
|
|
|
Discount
|
|
|
Convertible Notes Payable, net of discount
|
|
Pegasus Note
|
|
$
|
100,000
|
|
|
$
|
–
|
|
|
$
|
100,000
|
|
“Lender” Note
|
|
|
1,500,000
|
|
|
|
175,668
|
|
|
|
1,324,332
|
|
|
|
$
|
1,600,000
|
|
|
$
|
175,668
|
|
|
$
|
1,424,332
|
|
Pegasus Note
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, 2016, and waived, through December 31, 2015, the requirement
to pay down the note with financing proceeds received by the Company.
As of December
31, 2017, the note is past due and had a balance of $100,000 with accrued and unpaid interest amounting to $80,164 which is included
in accrued expenses (See Note 7).
“Lender”
Note
On September
18, 2017, in addition to entering into a revolving convertible line of credit (See Note 9), the Company also entered into a secured
convertible promissory note with an unaffiliated lender (the “Lender”). The Note bears simple interest at the floating
rate per annum equal to the 12 month USD LIBOR index rate quoted from time to time in New York, New York by the Bloomberg Service
plus 400 basis points (the “Interest Rate”). The Interest Rate will be adjusted on the first day of each calendar month
during the term of the Note to reflect any changes in the 12 month LIBOR rate as quoted at on that day, or if that day is not a
business day, on the next business day thereafter. Interest will only accrue on outstanding principal. Accrued unpaid interest
is payable monthly on the first calendar day of each month for interest accrued during the previous month, with all outstanding
principal and accrued unpaid interest payable in full on or before September 17, 2018 to the extent not converted into shares of
the Company’s common stock. The Note is secured by a perfected recorded first priority security interest in all of the Company’s
assets, as set forth in a certain Security Agreement by and between the Company and the Lender, dated September 18, 2017. At any
time until the Maturity Date, and provided Lender gives the Company written notice of Lender’s election to convert prior
to any prepayment of this Note by the Company with respect to converting that portion of this Note covered by the prepayment, the
Lender has the right to convert all or any portion of the outstanding principal and accrued interest (the “Conversion Amount”),
into such number of fully paid and nonassessable shares of the Company’s common stock as is determined by dividing the Conversion
Amount by the greater of (i) fifteen cents ($0.15) or (ii) 75% of the Volume Weighted Average Price of the Company’s common
stock that is quoted on a public securities trading market (if more than one, the one with the then highest trading volume), during
the five (5) consecutive trading days immediately prior to the date of the Lender’s written notice of its election to convert.
As additional
consideration for the loan evidenced by the Note, the Company agreed to issue to the Lender common stock purchase warrants exercisable
for a period of three years from the date of issuance with an exercise price equal to $0.15 per share. The number of warrants issuable
to the Lender is equal to 25% of the loan Amount divided by fifteen cents ($0.15). As of September 18, 2017, the Company issued
2,500,000 common stock purchase warrants under this provision having a value of $187,142 using the Black-Scholes valuation methodology,
and each with a $0.15 exercise price (See Note 15). As a result of this transaction, and including the value of the issued warrants,
the Company recorded $232,767 of value of beneficial conversion features, which is recorded as debt discount on the accompanying
balance sheet, and is being amortized to interest expense over the term of the note.
During any
time when the Note is outstanding, or when the Lender holds any Company stock, or any warrants to acquire Company stock where the
combination of both could result in the Lender owning stock with a current value of one million dollars or greater, in the Company,
the Lender will have certain review and consulting rights as described in the Note.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
As of December
31 2017, the convertible note had a balance, net of $175,668 of debt discount, amounting to $1,324,332 with accrued and unpaid
interest amounting to $7,593 which is included in accounts payable.
12.
|
NOTE PAYABLE AND AUTO LOAN
|
Note Payable
On June 1, 2010, the
Company entered into a Promissory Note with one of its vendors in exchange for the vendor cancelling its open invoices to the Company.
Total outstanding payables recorded by the Company at the time of settlement were $179,702. The note 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. During 2011, 2012 and 2013, the company made partial conversions of this note. Further, through
a series of amendments, the note was extended to December 31, 2014 and the conversion price of the note was reduced to $0.20 per
share of common stock.
Through a series of
amendments, the maturity date of the note was extended through June 30, 2016. There were no accounting effects for these amendments.
In December 2017 the
Company made a $40,000 settlement payment to pay off this note, and all accrued interest, in full. The Company recorded a gain
on debt settlement of $25,352 related to this transaction.
Auto Loan
In October 2015, the Company
purchased a new vehicle and financed the purchase through a dealer auto loan. The loan has a term of 60 months, requires minimum
monthly payments of approximately $950, and bears interest at a rate of 5.99 percent. As of December 31, 2017, the loan had a short-term
portion of $9,862 and a long-term portion of $20,620.
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Leases:
In August
2016, the Company entered into a sublease for its current corporate headquarters and manufacturing facility. The sublease expires
in August 2020 which is the same term of the master lease for which the Company is the subtenant. As part of the sublease, the
Company provided a $146,091 deposit to the landlord which will be reduced in months nineteen and thirty-one of the sublease, as
defined, in lieu of rent payments. At the end of the lease period, $50,619 of the deposit will remain as security for the surrender
of the premises.
Future annual
minimum lease payments related to our facility lease are as follows:
2018
|
|
$
|
522,288
|
|
2019
|
|
|
543,180
|
|
2020
|
|
|
404,952
|
|
Total
|
|
$
|
1,470,420
|
|
Administrative
rent expense was $112,675 and $59,228 for the years ended December 31, 2017 and 2016, respectively. Further, for the years ended
December 31, 2017 and 2016, respectively, $446,618 and $337,287 of rent was capitalized into inventory as manufacturing overhead
costs.
As of December
31, 2017, there are no other lease agreements with non-cancelable terms in excess of one year.
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 December 31, 2017, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect
on the results of our operations.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Other Commitments:
The Company
enters into various contracts or agreements in the normal course of business whereby such contracts or agreements may contain commitments.
During 2017 and 2016, the Company has agreements to act as a reseller for certain vendors; 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 have agreed to cooperate and provide business opportunities to each other; agreements with
vendors where the vendor may provide marketing, public relations, technical consulting or subcontractor services and financial
advisory agreements where the financial advisor would receive a fee and/or commission for advising and 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,
other than sales agent agreements and revenue generating sales contracts, there are no firm commitments in such agreements as of
December 31, 2017.
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.
Shares
Issued
Issuances
of the Company’s common stock during the years ended December 31, 2017 and 2016, respectively, are as follows:
2017
Stock Issued in Cash Sales
During the
year ended December 31, 2017 pursuant to private placements, the Company issued 15,633,327 shares of common stock for cash with
a per share price of $0.15 per share or $2,345,000 and the Company incurred $53,600 of capital raising fees that were paid in cash
and charged to additional paid-in capital. Additionally, as of December 31, 2017, related to the Company’s private placement,
the company is obligated to issue 223,337 common stock purchase warrants to the placement agents. There will be no financial statement
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 recording the issuance of these warrants (see
Note 15).
Stock Issued for Loan
Conversion
During the
year ended December 31, 2017, and effective as of February 15, 2017, the Company issued 4,698,060 shares of common stock at the
contracted conversion price of $0.15 per share, or $704,709 effecting the conversion of the entire principal balance of the note
amounting to $600,000 and accrued and unpaid interest, as of February 15, 2017, amounting to $104,709 (See Note 10).
Stock Issued for Services
During the
year ended December 31, 2017, as payment for professional services provided, the Company issued 15,000 shares of the Company’s
common stock with a per share fair value of $0.15 (based on contemporaneous cash sales prices) or $2,250. These shares were fully
earned, and were expensed, upon issuance.
Stock Issued for Services
– Related Party
For
professional services provided per the terms of a consulting agreement with GreenCore Capital LLC (“GreenCore”), and
during the year ended December 31, 2017, the Company issued 180,000 shares of the Company’s common stock with a per share
fair value of $0.15 (based on contemporaneous cash sales prices)
or
$27,000.
Jay Potter, our director, is the managing member of GreenCore and the individual performing the services. (See Note 17)
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Stock Issued for Director
Services
As of
December 31, 2016, the board approved a modified compensation program, effective January 1, 2017, for all non-executive
directors where each director would receive 750,000 restricted shares of common stock, pursuant to a restricted stock grant
agreement (“New Program RSA”) with vesting 62,500 per quarter over a 36 month period commencing on March 31, 2017
or upon the date for which a new director is named, issuable on the last day of each calendar quarter so long as such
director serves as a director of the Company at that time. Each director that had a previous agreement agreed to terminate
their rights to any previously issued shares and cancel such previous agreements. As such, the Company granted 2,250,000
shares to directors on January 1, 2017 having a total value of $337,500. The Company intends to grant up to an
additional 750,000 shares of its common stock to each director based on their achieving certain performance criteria to be
agreed upon by the Board of Directors after discussion with senior management.
During the
year ended December 31, 2017, the Company released 750,000 shares of common stock with a per share fair value of $0.15, or $112,500
(based on the market price at the time of the agreements), to three directors for their service as defined in their respective
restricted stock grant agreements. The payments were expensed at issuance (See Note 17 and 18).
The total
unrecognized restricted stock grant expense related to the Restricted Stock Agreements of our directors amounted to $225,000 at
December 31, 2017.
Stock Issued for Loan
Guaranty
During the
year ended December 31, 2017, and in consideration for the continued Guaranty of the Company’s obligations extended under
a now terminated line of credit, the Company issued 453,857 shares of its common stock, with a per share value of $0.15 (based
on contemporaneous cash sales prices) or $68,078 to Keshif Ventures LLC, a related party, pursuant to a stock purchase agreement.
These shares were expensed to interest expense over the term of the Guaranty period. The Company recorded a gain on debt settlement
of $172 related to this transaction. (See Notes 8 and 17)
2016
Stock Issued in Cash Sales
During the year
ended December 31, 2016 pursuant to private placements, the Company issued 12,133,333 shares of common stock for cash with a per
share price of $0.15 per share or $1,820,000 and the Company incurred $68,800 of capital raising fees that were paid in cash and
charged to additional paid-in capital.
Stock Issued for Services
For professional
services provided per the terms of a consulting agreement with an investor relations consulting firm, the Company issued 1,000,000
shares of the Company’s common stock with a per share fair value of $0.15 per share (based on contemporaneous cash sales
prices) or $150,000. These payments were expensed over the term of the agreement. As of December 31, 2016, $46,875 was recorded
in prepaid expenses (See note 4) and expensed in 2017.
Stock Issued for Services
– Related Party
For
professional services provided per the terms of a consulting agreement with GreenCore Capital LLC (“GreenCore”), and
during the year ended December 31, 2016, the Company issued 464,115 shares of the Company’s common stock with a per share
fair value between $0.14 and $0.17 (based on an average market value of the stock when earned as defined in the agreement)
or
$69,603. The Company recorded a gain on debt settlement of $2,396 on
these transactions. These payments were expensed at time of issuance. Jay Potter, our director, is the managing member of GreenCore
and the individual performing the services. (See Note 17)
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Stock Issued for Director
Services
On February
12, 2016, the Board approved a compensation program for all non-executive directors that did not otherwise have a pre-existing
compensation plan. Starting for the 2016 year of service, each of two directors will receive 1,000,000 shares of common stock,
with a per share value of $0.15 (based on contemporaneous cash sales prices), or $150,000, that will vest equally at the end
of each calendar quarter that such director remains in service as a director over a three year period.
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.
On September
8, 2016, Mr. Peter 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 granted 750,000 restricted shares of its
common stock to him, subject to the terms and conditions set forth in the Restricted Stock Grant Agreement including but not limited
to the following vesting schedule: 62,500 shares or prorate portion thereof per calendar quarter over a 36 month period commencing
on September 30, 2016. The value of this stock grant is $0.15 per share (based on contemporaneous cash sales prices) or $112,500,
and is being expensed proportionately as the shares vest. The Company intends to grant up to an additional 750,000 shares of its
common stock to Mr. Davidson based on Mr. Davidson’s achieving certain performance criteria to be agreed upon by the Board
of Directors after discussion with senior management at a future date.
During the
year ended December 31, 2016, the Company released 1,152,776 shares of common stock with a per share fair value of $0.15, or $172,916
(based on the market price at the time of the agreement), to five directors for their service as defined in their respective Restricted
Stock Grant Agreements and as discussed above. The payments were expensed at issuance (See Note 17).
The total
unrecognized restricted stock grant expense related to the above discussed stock issuances amounted to $337,500 at December 31,
2016.
Stock Issued for Loan
Guaranty -Related Party
During the
year ended December 31, 2016, and in consideration for the continued Guaranty of the Company’s obligations extended under
a line of credit, the Company issued 147,493 shares of its common stock, with a per share value of $0.15 (based on contemporaneous
cash sales prices) or $22,123 to Keshif Ventures LLC, a related party, pursuant to a stock purchase agreement. These shares were
expensed to interest expense over the term of the Guaranty period. The Company recorded a gain on debt settlement of $2,877 related
to this transaction. (See Notes 8 and 17)
15.
|
STOCK OPTIONS AND WARRANTS
|
On August
10, 2011, the Company’s Board of Directors approved and caused the Company to adopt the Envision Solar International, Inc.
2011 Stock Incentive Plan (the “Plan”), which authorizes the issuance of up to 31,500,000 shares of the Company’s
common stock pursuant to the exercise of stock options or other awards granted under the Plan.
In 2008,
the Board approved the 2008 equity Incentive Plan, which authorizes 6,108,571 shares under the plan. Exercise rights may not expire
more than three months after the date of termination of the employee but may expire in less time as stipulated in the individual
grant notice. For disability or death, the optionee or estate will generally have up to twelve months to exercise their options.
For certain options the Company may have rights of first refusal for a stipulated period of time, under a separate stock restriction
agreement, whereby if the holder exercise the options and then desires to sell the underlying shares, the Company has the right
to repurchase such shares at a price to which the holder has agreed to sell them to a third party.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Stock Options
The Company
follows the provisions of ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 establishes standards
surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic
718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions,
such as options issued under the Company’s Stock Option Plans. The Company’s stock option compensation expense was
$220,084 and $442,871 for the years ended December 31, 2017 and 2016, respectively, and there was $33,529 of total unrecognized
compensation cost related to unvested options granted under the Company’s options plans as of December 31, 2017. This
stock option expense will be recognized through March 2020.
The fair
value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain
assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected
option life and expected volatility in the market value of the underlying common stock.
From January
1, 2016 through December 31, 2016, the Company issued 5,380,000 stock options under the plans with a total valuation of $622,109.
Of these stock options, 200,000 have a 5 year term while the remaining 5,180,000 have a 10 year term.
From January
1, 2017 through December 31, 2017, the Company issued 645,000 stock options under the plans with a total valuation of $61,632.
All of these options have a 10 year term.
We used the
following assumptions for options granted in fiscal 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
|
81.05%
|
|
|
|
103.59% -114.93%
|
|
Expected term
|
|
|
5 Years
|
|
|
|
2.5-6.5 Years
|
|
Risk-free interest rate
|
|
|
0.15%
|
|
|
|
0.16% -0.50%
|
|
Expected dividend yield
|
|
|
None
|
|
|
|
None
|
|
The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company’s stock options and warrants have characteristics different from those of its
traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The
risk free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the
expected term. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s
current expectation of future action surrounding dividends. Expected volatility was based on historical data for the trading of
our stock on the open market. The expected lives for such grants were based on the simplified method for employees and directors.
All options
qualify as equity pursuant to ASC 815-40-25, “Contracts in Entity’s Own Equity.”
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Option activity
for the years ended December 31, 2017 and 2016 under the 2008 and 2011 Plans are as follows:
|
|
Number of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2015
|
|
|
15,337,007
|
|
|
$
|
0.28
|
|
Granted
|
|
|
5,380,000
|
|
|
|
0.15
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(800,000
|
)
|
|
|
0.19
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2016
|
|
|
19,917,007
|
|
|
$
|
0.25
|
|
Granted
|
|
|
645,000
|
|
|
|
0.16
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(1,095,000
|
)
|
|
|
0.19
|
|
Expired
|
|
|
(4,250,343
|
)
|
|
|
0.33
|
|
Outstanding at December 31, 2017
|
|
|
15,216,664
|
|
|
$
|
0.23
|
|
Exercisable at December 31, 2017
|
|
|
13,479,165
|
|
|
$
|
0.24
|
|
Weighted average grant date fair value
|
|
|
|
|
|
$
|
0.10
|
|
The following
table summarizes information about employee stock options outstanding at December 31, 2017:
Options Outstanding
|
|
Options Exercisable
|
|
|
Range of Exercise Price
|
|
|
Number Outstanding at
December 31, 2017
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Number
Exercisable at
December 31, 2017
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
$
|
0.13-1.31
|
|
|
|
15,216,664
|
|
|
|
5.45 Years
|
|
|
$
|
0.23
|
|
|
$
|
–
|
|
|
|
13,479,165
|
|
|
$
|
0.24
|
|
|
$
|
–
|
|
|
|
|
|
|
|
15,216,664
|
|
|
|
5.45 Years
|
|
|
$
|
0.23
|
|
|
$
|
–
|
|
|
|
13,479,165
|
|
|
$
|
0.24
|
|
|
$
|
–
|
|
As the Company’s
stock price was lower than the weighted average exercise price at December 31, 2017, there is no aggregate intrinsic value of the
options.
Options exercisable
have a weighted average remaining contractual life of 5.02 years as of December 31, 2017.
Warrants
2017
During the
year ended December 31, 2017, and as additional consideration for the funding of the Convertible Note payable by the Lender, the
Company issued 2,500,000 common stock purchase warrants having a value of $187,142 using the Black-Scholes valuation methodology,
and each with a $0.15 exercise price and a three year term (See Note 11). The assumptions used in the valuation of these warrants
include volatility of 85.78%, expected dividends of 0.0%, a discount rate of 1.50%, and expected term of 3 years.
During the
year ended December 31, 2017 as a result of Draw Downs on our Convertible Line of Credit with Lender, the Company issued 1,916,667
common stock purchase warrants having a value of $179,612 using the Black-Scholes valuation methodology, and each with a $0.15
exercise price and three year term (See Note 9). The assumptions used in the valuation of these warrants include volatility of
83.67-85.78, expected dividends of 0.0%, a discount rate of 1.50%, and expected term of 3 years.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
As of December
31, 2017, related to the Company’s private placement, the company is obligated to issue 223,337 common stock purchase warrants
to the placement agents. There will be no financial statement 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 recording the issuance of these warrants.
During the
twelve months ended December 31, 2017, 26,831,589 warrants had expired.
2016
As a part
of the Company’s private placement, the Company effectively issued 291,667 warrants in the twelve months ended December 31,
2016 to the placement agents. These warrants, valued at $30,419, are exercisable for 5 years at an exercise price of
$0.15 per share. The Company estimated the fair value of the warrants utilizing the Black-Scholes pricing model. The assumptions
used in the valuation of these warrants include volatility of 102.99%, expected dividends of 0.0%, a discount rate of 0.50%, and
expected term of 5 years. There was no financial statement accounting effect for the issuance of these warrants as their fair value
has been charged to Additional Paid-in-Capital as an offering cost and was offset by a credit to Additional Paid-in-Capital for
their fair value when recording the issuance of these warrants.
During the
twelve months ended December 31, 2016, 1,314,286 warrants had expired.
Warrant activity
for the years ended December 31, 2017 and 2016 are as follows:
|
|
Number of Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2015
|
|
|
29,219,441
|
|
|
$
|
0.18
|
|
Granted
|
|
|
291,667
|
|
|
|
0.15
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(1,314,286
|
)
|
|
|
0.33
|
|
Outstanding at December 31, 2016
|
|
|
28,196,822
|
|
|
$
|
0.17
|
|
Granted
|
|
|
4,416,667
|
|
|
$
|
0.15
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(26,831,589
|
)
|
|
|
0.16
|
|
Outstanding at December 31, 2017
|
|
|
5,781,900
|
|
|
$
|
0.17
|
|
Exercisable at December 31, 2017
|
|
|
5,781,900
|
|
|
$
|
0.17
|
|
Weighted average grant date fair value
|
|
|
|
|
|
$
|
0.08
|
|
Warrants
exercisable have a weighted average remaining contractual life of 2.46 years as of December 31, 2017.
There was
no Federal income tax expense for the years ended December 31, 2017 and 2016 due to the Company’s net losses. Income tax
expense represents minimum state taxes due.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
The blended
Federal and State tax rate of 39.83% applies to loss before taxes. The Company’s tax expense differs from the “expected”
tax expense for Federal income tax purposes, (computed by applying the United States Federal tax rate of 34% to loss before taxes),
as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Computed “expected” tax expense (benefit)
|
|
$
|
(1,034,086
|
)
|
|
$
|
(895,395
|
)
|
State taxes, net of federal benefit
|
|
|
(171,202
|
)
|
|
|
(154,764
|
)
|
Goodwill impairment and other non-deductible items
|
|
|
643,016
|
|
|
|
(31,134
|
)
|
Change in federal tax rates
|
|
|
4,145,380
|
|
|
|
–
|
|
Change in deferred tax asset valuation allowance
|
|
|
(3,583,108
|
)
|
|
|
1,081,293
|
|
Income tax expense
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred income
taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The effects of temporary differences that gave rise to significant
portions of deferred tax assets and liabilities at December 31 are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Charitable contributions
|
|
$
|
2,900
|
|
|
$
|
4,128
|
|
Reserve for bad debt
|
|
|
17,948
|
|
|
|
25,548
|
|
Stock options
|
|
|
3,416,792
|
|
|
|
4,776,104
|
|
Depreciation
|
|
|
6,920
|
|
|
|
33,638
|
|
Other
|
|
|
17,674
|
|
|
|
25,159
|
|
Net operating loss carryforward
|
|
|
6,957,507
|
|
|
|
9,167,042
|
|
Total gross deferred tax assets
|
|
|
10,419,741
|
|
|
|
14,031,619
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(10,351,807
|
)
|
|
|
(13,934,915
|
)
|
Total net deferred tax assets
|
|
|
67,934
|
|
|
|
96,704
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accrued salaries
|
|
|
(67,934
|
)
|
|
|
(96,704
|
)
|
Total deferred tax liabilities
|
|
|
(67,934
|
)
|
|
|
(96,704
|
)
|
Total net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
As a result
of the Company’s history of incurring operating losses, a full valuation allowance has been established. The valuation allowance
at December 31, 2017 was $10,351,807. The decrease in the valuation allowance during 2017 was $3,583,108.
At December 31,
2017, the Company has a net operating loss carry forward of $24,862,803 available to offset future net income through 2037. The
NOL expires during the years 2017 to 2037. The utilization of the net operating loss carryforwards is dependent upon the ability
of the Company to generate sufficient taxable income during the carryforward period. In the event that a significant change in
ownership of the Company occurs as a result of the Company’s issuance of common stock, the utilization of the NOL carry forward
will be subject to limitation under certain provisions of the Internal Revenue Code. Management does not presently believe that
such a change has occurred.
On December
22, 2017, the United States enacted the Tax Cuts and Jobs Act (Act). The Act makes significant modifications to the provisions
of the Internal Revenue Code, including but not limited to, a corporate tax rate decrease to 21% effective as of January 1, 2018.
The Company’s net deferred tax assets and liabilities have been revalued at the newly enacted U.S. Corporate rate in the
year of enactment. The adjustment related to the revaluation of the deferred tax asset and liability balances is a net charge of
approximately $4.1 million. This expense is fully offset by a change in valuation allowance. Accordingly, there is no impact on
income tax expense as of December 31, 2017.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
17.
|
RELATED
PARTY TRANSACTIONS
|
Accounts Payable
and Related Party Vendor Payments
During the
year ended December 31, 2016, the Company made cash payments totaling $69,500, and issued 464,115 shares of the Company’s
common stock with a total value of $69,603 to GreenCore for professional services provided to the Company as detailed in a March
28, 2014 consulting agreement. Additionally, as of December 31, 2016, the Company had an accounts payable balance of $27,000 owed
to Greencore. During the year ended December 31, 2017, the Company made cash payments totaling $54,000, and issued 180,000 shares
of the Company’s common stock with a total value of $27,000 to GreenCore under this same agreement. There were no balances
owed to GreenCore as of December 31, 2017. Jay Potter, our director, is the managing member of GreenCore (See Note 14).
Director Compensation
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 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.
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 two directors will receive 1,000,000 shares of common stock, with a
per share value of $0.15 (based on contemporaneous cash sales prices), or $150,000, that will vest equally at the end of each calendar
quarter that such director remains in service as a director over a three year period.
During the
year ended December 31, 2016, the Company released 1,152,776 shares of common stock with a per share fair value of $0.15, or $172,916
(based on the market price at the time of the agreement), to five directors for their service as defined in their respective Restricted
Stock Grant Agreements. The payments were expensed at issuance (See Note 14).
On or about
December 31, 2016, Mr. Jay S. Potter, Mr. Tony Posawatz, and Mr. Peter Davidson, all directors of the Company, each entered into
an Amendment to their Restricted Stock Agreement with the Company (each an “Amendment”). Pursuant to their Amendments,
each director agreed to terminate his rights to unvested restricted shares of the Company’s common stock under their previous
respective Restricted Stock Agreements, in consideration for which the Company granted to each director 750,000 restricted shares
of the Company’s common stock, vesting 1/36 per month over a 36 month period commencing on the date of grant, issuable quarterly
on the last day of each calendar quarter (the first vesting is scheduled to occur on January 31, 2017 and be for 20,833 shares
and the first issuance is scheduled to occur on March 31, 2017 and be for 62,499 shares) so long as each director serves as a director,
employee, consultant or officer of the Company at the time of scheduled vesting. The Company will also grant an additional 750,000
restricted shares of the Company’s common stock to each director to vest in the future from time to time, based on their
achieving certain performance criteria to be agreed upon by the Board of Directors after discussion with senior management at a
future date.
During the
year ended December 31, 2017, the Company released 750,000 shares of common stock with a per share fair value of $0.15, or $112,500
(based on the market price at the time of the agreement), to three directors for their service as defined in their respective Restricted
Stock Grant Agreements. The payments were expensed at issuance (See Note 14 and 18).
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Stock Issued for Loan
Guaranty and Cash Sales
During the
year ended December 31, 2017, and in consideration for the continued Guaranty of the Company’s obligations extended under
a now terminated line of credit, the Company issued 453,857 shares of its common stock, with a per share value of $0.15 (based
on contemporaneous cash sales prices) or $68,078 to Keshif Ventures LLC, a related party, pursuant to a stock purchase agreement.
These shares were expensed to interest expense over the term of the Guaranty period (See Notes 8 and Note 14). Additionally, during
the year ended December 31, 2017, pursuant to a private placement, the Company issued 1,333,333 shares of common stock for cash,
with a per share price of $0.15 per share or $200,000 to Keshif.
During the
year ended December 31, 2016, and in consideration for the continuing Guaranty of the Company’s obligations extended under
a line of credit, the Company issued 147,493 shares of its common stock or $22,123 to Keshif Ventures LLC pursuant to a stock purchase
agreement. Additionally, during the year ended December 31, 2016, pursuant to a private placement, the Company issued 3,333,333
shares of common stock for cash, with a per share price of $0.15 per share or $500,000 to Keshif.
Convertible Notes Payable
to Related Parties
In 2009,
the Company executed a 10% convertible note payable in the amount of $102,236 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, 2017. During each of the fiscal years ended December 31, 2017 and 2016, respectively, in lieu of interest
payments, the Company made principal payments on this note amounting to $12,000. The balance of the note as of December 31, 2017
is $62,616 with accrued and unpaid interest amounting to $61,242 (See Note 10). Although Mr. Evey is no longer a director as of
December 31, 2016, because he was our Chairman and a related party throughout most of 2016, we have continued to classify this
note as a Convertible note payable - related parties in the accompanying balance sheet.
In June 2015,
Gemini Master Fund Ltd sold a 70.0066819% stake in its’ note to Robert Noble, our former Chairman and former owner of over
10% of our outstanding common stock, in a private transaction. The Company issued two replacement notes for their respective ownership
values based on this transaction. In regards to the note for Mr. Noble, he agreed to an extension of his note to March 31, 2016.
During the twelve months ended December 31, 2015, the Company made a $100,000 payment to Mr. Noble to pay down the accrued interest
on this note. Effective January 20, 2016, Mr. Noble entered into a Purchase Option Agreement with a firm affiliated with Jay S.
Potter, a director of the Company (the “Optionee”), pursuant to which the Optionee has the right to purchase or arrange
for the purchase of the Note from Mr. Noble and all of Mr. Noble’s shares in the Company (the “Option”), at any
time until March 31, 2016. This date was subsequently extended. The Company consented to the Purchase Option Agreement. Under a
Note Settlement and General Release Agreement, provided that the Option is fully exercised and honored, the Company agreed to grant
Mr. Noble the right to acquire, for one dollar, at any time until June 30, 2017, a worldwide, perpetual, irrevocable, nonexclusive,
royalty-free license to utilize all of the Company intellectual property developed prior to January 1, 2011, except for the following:
(i) EV ARC™ and (ii) EnvisionTrak™. Further, provided the Option was exercised in full and Mr. Noble complied with
it, the Company would 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. During the fourth quarter of 2016, the Company was notified that a transaction,
or series of transactions, arranged by GreenCore, had officially closed whereas the convertible note and the “Noble”
shares were ultimately obtained by a group of various shareholders, some of which are related parties to the Company. As the note
was partially held by a related party shareholder at the end of 2016 and was held by other related party shareholders during its
existence, the note was classified as Convertible Notes Payable- Related Parties in the accompanying balance sheets. Effective
as of February 15, 2017, the Company received conversion notices from all the current note holders effecting the conversion of
the entire principal balance of the note amounting to $600,000 and accrued and unpaid interest, as of February 15, 2017, amounting
to $104,709. The Company issued 4,698,060 shares of common stock at the contracted conversion price of $0.15 per share, to retire
the entirety of this convertible note. Of these shares, 2,315,940 shares were issued to Keshif Ventures, LLC. (See Notes 10 and
14)
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017 and 2016
Line of Credit Drawdown
On February
20, 2018, the Company received funds for a Draw Down on our Convertible Line of Credit in the amount of $290,000. As a result of
this Draw Down, the Company issued 407,784 common stock purchase warrants having a value of $61,282 using the Black-Scholes valuation
methodology, and each with a $0.1778 exercise price (See Note 9). As a result of this transaction, and including the value of the
issued warrants, the Company recorded $212,420 of value of beneficial conversion features, which is recorded as debt discount,
and is being amortized to interest expense over the term of the loan.
Stock and Warrants
Issued in Cash Sales
Subsequent
to December 31, 2017 pursuant to private placements, the Company issued 1,933,333 shares of common stock for cash with a per share
price of $0.15 per share or $290,000 and the Company incurred $12,000 of capital raising fees that were paid in cash and charged
to additional paid-in capital. Related to these sales, the Company is further obligated to issue 50,000 warrants as an offering
cost to a third party, each with a 5 year term and a strike price of $0.15 per share, at the close of the private placement offering.
There will be no accounting effect for the issuance of these warrants as their fair value will be charged to Additional
Paid-in-Capital as an offering cost and offset by a credit to Additional Paid-in-Capital for their fair value when issuing these
warrants.
Director Compensation
Effective March 27, 2018, based
on authorization initially approved by the Board of Directors on December 19, 2017, and confirmed by resolutions adopted by the
Board on March 27, 2018, the Company granted 250,000 shares of common stock with a per share value of $0.15 per share (based on
contemporaneous cash sales prices), or $37,500, to each of three directors for excellent performance of their duties. These
shares are being issued from a pool of 750,000 shares of common stock for each director of previously authorized restricted stock
grant awards for performance that are awarded if specific performance criteria are achieved or the Board authorizes their award
and vesting by specific resolutions (see Note 14 and 17).