ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Envision Solar International, Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
254,940
|
|
|
$
|
403,475
|
|
Accounts Receivable, net
|
|
|
793,692
|
|
|
|
5,946
|
|
Prepaid and Other Current Assets
|
|
|
340,688
|
|
|
|
55,674
|
|
Inventory, net
|
|
|
756,467
|
|
|
|
2,319,500
|
|
Total Current Assets
|
|
|
2,145,787
|
|
|
|
2,784,595
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
124,622
|
|
|
|
226,112
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Patents, net
|
|
|
130,488
|
|
|
|
75,279
|
|
Deposits
|
|
|
105,541
|
|
|
|
156,588
|
|
Deferred Equity Offering Costs
|
|
|
113,197
|
|
|
|
–
|
|
Total Other Assets
|
|
|
349,226
|
|
|
|
231,867
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,619,635
|
|
|
$
|
3,242,574
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
746,628
|
|
|
$
|
486,690
|
|
Accrued Expenses
|
|
|
483,804
|
|
|
|
451,924
|
|
Sales Tax Payable
|
|
|
46,625
|
|
|
|
46
|
|
Deferred Revenue
|
|
|
220,602
|
|
|
|
77,514
|
|
Convertible Line of Credit - net of discount amounting to $0 and $226,768 at September 30, 2018 and December 31, 2017, respectively
|
|
|
523,780
|
|
|
|
923,232
|
|
Convertible Note Payable - Related Party
|
|
|
172,500
|
|
|
|
135,000
|
|
Convertible Notes Payable - Current Portion - net of discount amounting to
$23,220 and $175,668 at September 30, 2018 and December 31, 2017, respectively
|
|
|
1,530,396
|
|
|
|
1,486,948
|
|
Note Payable - net of discount amounting to $128,979 as of September 30, 2018
|
|
|
658,521
|
|
|
|
–
|
|
Auto Loan - Current Portion
|
|
|
10,366
|
|
|
|
9,862
|
|
Total Current Liabilities
|
|
|
4,393,222
|
|
|
|
3,571,216
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable - Long Term Portion
|
|
|
100,000
|
|
|
|
–
|
|
Auto Loan - Long Term Portion
|
|
|
11,931
|
|
|
|
20,620
|
|
Total Long Term Liabilities
|
|
|
111,931
|
|
|
|
20,620
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,505,153
|
|
|
|
3,591,836
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 0 shares outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
–
|
|
|
|
–
|
|
Common Stock, $0.001 par value, 490,000,000 shares authorized, 145,143,995 and 141,835,662 shares issued or issuable and outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
145,144
|
|
|
|
141,836
|
|
Additional Paid-in-Capital
|
|
|
38,638,651
|
|
|
|
37,785,781
|
|
Accumulated Deficit
|
|
|
(40,669,313
|
)
|
|
|
(38,276,879
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Deficit
|
|
|
(1,885,518
|
)
|
|
|
(349,262
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
2,619,635
|
|
|
$
|
3,242,574
|
|
The accompanying unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
Envision Solar International, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
938,218
|
|
|
$
|
225,524
|
|
|
$
|
4,658,685
|
|
|
$
|
1,103,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
894,068
|
|
|
|
234,832
|
|
|
|
4,561,501
|
|
|
|
1,130,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
|
44,150
|
|
|
|
(9,308
|
)
|
|
|
97,184
|
|
|
|
(26,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses (including stock based expense of $219,277 and $289,801 for the nine
months ended September 30, 2018 and 2017, respectively)
|
|
|
519,468
|
|
|
|
489,540
|
|
|
|
1,701,788
|
|
|
|
1,703,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(475,318
|
)
|
|
|
(498,848
|
)
|
|
|
(1,604,604
|
)
|
|
|
(1,730,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
818
|
|
|
|
245
|
|
|
|
2,240
|
|
|
|
551
|
|
Gain on sale of Fixed Assets
|
|
|
16,260
|
|
|
|
–
|
|
|
|
16,260
|
|
|
|
–
|
|
Gain on Debt Settlement, net
|
|
|
–
|
|
|
|
(2,183
|
)
|
|
|
–
|
|
|
|
172
|
|
Interest Expense
|
|
|
(148,316
|
)
|
|
|
(65,413
|
)
|
|
|
(806,330
|
)
|
|
|
(167,019
|
)
|
Gain on Debt Extinguishment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
107,081
|
|
Total Other (Expense) Income
|
|
|
(131,238
|
)
|
|
|
(67,351
|
)
|
|
|
(787,830
|
)
|
|
|
(59,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax
|
|
|
(606,556
|
)
|
|
|
(566,199
|
)
|
|
|
(2,392,434
|
)
|
|
|
(1,789,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(606,556
|
)
|
|
$
|
(566,199
|
)
|
|
$
|
(2,392,434
|
)
|
|
$
|
(1,790,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share - Basic and
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Basic and
Diluted
|
|
|
144,893,995
|
|
|
|
127,284,567
|
|
|
|
144,368,552
|
|
|
|
125,133,060
|
|
The accompanying unaudited notes are
an integral part of these unaudited Condensed Consolidated Financial Statements
Envision Solar International, Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows
Unaudited
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,392,434
|
)
|
|
$
|
(1,790,104
|
)
|
Adjustments to Reconcile Net loss to Net Cash Used in Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
51,816
|
|
|
|
51,909
|
|
Common stock issued for services
|
|
|
206,250
|
|
|
|
113,625
|
|
Common stock issued for loan guaranty
|
|
|
–
|
|
|
|
57,505
|
|
Gain on debt settlement
|
|
|
–
|
|
|
|
(172
|
)
|
Gain on sale of fixed assets
|
|
|
(16,260
|
)
|
|
|
–
|
|
Compensation expense related to grant of stock options
|
|
|
13,026
|
|
|
|
118,671
|
|
Gain on debt extinguishment
|
|
|
–
|
|
|
|
(107,081
|
)
|
Amortization of debt issue costs
|
|
|
–
|
|
|
|
800
|
|
Amortization of debt discount
|
|
|
651,638
|
|
|
|
17,540
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(787,746
|
)
|
|
|
1,023,213
|
|
Prepaid expenses and other current assets
|
|
|
(315,285
|
)
|
|
|
(102,945
|
)
|
Inventory, net
|
|
|
1,609,828
|
|
|
|
(909,165
|
)
|
Deposits
|
|
|
51,047
|
|
|
|
(1,810
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
259,938
|
|
|
|
(211,229
|
)
|
Accrued expenses
|
|
|
31,880
|
|
|
|
255,381
|
|
Convertible note payable issued in lieu of salary - related party
|
|
|
37,500
|
|
|
|
72,500
|
|
Sales tax payable
|
|
|
46,579
|
|
|
|
(50,181
|
)
|
Deferred revenue
|
|
|
143,088
|
|
|
|
14,844
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(409,135
|
)
|
|
|
(1,446,699
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
–
|
|
|
|
(5,919
|
)
|
Sale of equipment
|
|
|
50,267
|
|
|
|
–
|
|
Funding of patent costs
|
|
|
(56,065
|
)
|
|
|
(1,927
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(5,798
|
)
|
|
|
(7,846
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
290,000
|
|
|
|
260,000
|
|
Payments of offering costs related to sale of common stock
|
|
|
(12,000
|
)
|
|
|
(3,600
|
)
|
Borrowings (Repayments) on convertible line of credit, net
|
|
|
(626,220
|
)
|
|
|
850,000
|
|
Borrowings (Repayments) on line of credit, net
|
|
|
–
|
|
|
|
(1,000,000
|
)
|
Payments of loan offering costs
|
|
|
(5,000
|
)
|
|
|
(16,727
|
)
|
Payments of deferred equity offering costs
|
|
|
(113,197
|
)
|
|
|
–
|
|
Borrowings on notes payable
|
|
|
750,000
|
|
|
|
–
|
|
Borrowings (Repayments) on convertible notes payable,net
|
|
|
(9,000
|
)
|
|
|
1,494,000
|
|
Repayments of auto loan
|
|
|
(8,185
|
)
|
|
|
(6,188
|
)
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
266,398
|
|
|
|
1,577,485
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(148,535
|
)
|
|
|
122,940
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
403,475
|
|
|
|
8,568
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
254,940
|
|
|
$
|
131,508
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
141,588
|
|
|
$
|
49,000
|
|
Cash paid for income tax
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Transfer of prepaid asset to inventory
|
|
$
|
30,272
|
|
|
$
|
21,168
|
|
Depreciation capitalized into inventory
|
|
$
|
16,523
|
|
|
$
|
16,496
|
|
Prepaid insurance financed by third party
|
|
$
|
–
|
|
|
$
|
9,334
|
|
Shares issued for debt conversion
|
|
$
|
–
|
|
|
$
|
704,709
|
|
Recording of debt discount
|
|
$
|
385,982
|
|
|
$
|
475,990
|
|
Recording of payment premium on note payable
|
|
$
|
37,500
|
|
|
$
|
–
|
|
The accompanying unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
1.
|
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
Envision
Solar International Inc. (along with its subsidiary, hereinafter the “Company”, “us”,
“we”, “our” or “Envision”), a Nevada corporation, invents, designs, and manufactures
solar 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 electric vehicle (“EV”) charging, media and branding, and energy
security which management believes are attractive, rapidly deployed, and of the highest quality. Management believes that the
Company’s chief differentiator is its ability to invent, design, engineer, and manufacture solar 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: environmental 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.
Basis of Presentation
The interim
unaudited condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the Company’s management, all adjustments (consisting
of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly our results of
operations and cash flows for the three and nine months ended September 30, 2018 and 2017, and our financial position as of September
30, 2018, have been made. The results of operations for such interim periods are not necessarily indicative of the operating results
to be expected for the full year.
Certain information
and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from
these interim financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017. The December
31, 2017 consolidated balance sheet is derived from those statements.
Principals of Consolidation
The unaudited
condensed consolidated financial statements include the accounts of Envision Solar International, Inc. and its wholly-owned subsidiary,
Envision Solar Construction Company, Inc. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in
the accompanying unaudited condensed consolidated financial statements include the allowance for doubtful accounts
receivable, valuation of inventory and standard cost allocations, depreciable lives of property and equipment, valuation of
intangible assets, estimates of loss contingencies, valuation of beneficial conversion features in
convertible debt, valuation of share-based payments, and the valuation allowance on deferred tax assets.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Concentrations
Concentration of Credit Risk
Financial instruments that potentially
subject us to concentrations of credit risk consist of cash and revenues.
The Company
maintains its cash in banks and financial institution deposits that at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts from inception through September 30, 2018. As of September 30, 2018, there were no
amounts greater than the federally insured limits.
Concentration of Accounts
Receivable
As of September
30, 2018, customers that each represented more than 10% of the Company’s net accounts receivable balance were as follows:
Customer A
|
42%
|
Customer B
|
25%
|
Customer C
|
13%
|
As of December 31, 2017, there was
a single customer that represented 94% of the Company’s net accounts receivable balance.
Concentration of Revenues
For the nine months ended September
30, 2018, customers that each represented more than 10% of our net revenues were as follows:
For the nine months ended September
30, 2017, customers that each represented more than 10% of our net revenues were as follows:
Customer E
|
36%
|
Customer F
|
16%
|
Customer G
|
12%
|
Cash and Cash Equivalents
For the
purposes of the unaudited condensed consolidated statements of cash flows, the Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at September
30, 2018 and December 31, 2017 respectively.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Fair Value of Financial Instruments
The Company’s
financial instruments, including cash, accounts receivable, accounts payable, accrued expenses, and short term loans, are carried
at historical cost basis. At September 30, 2018, the carrying amounts of these instruments approximated their fair values because
of the short-term nature of these instruments.
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 Recognition
As of January
1, 2018, Envision adopted the revenue standards of Financial Accounting Standards Board Update No. 2014-09: “Revenue from
Contracts with Customers (Topic 606).” The core principle of this Topic is that an entity recognizes revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. Revenue is recognized in accordance with that core principle by applying the
following five steps: 1) identify the contracts with a customer; 2) identify the performance obligations in the contract; 3) determine
the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as)
we satisfy a performance obligation.
Revenues
are primarily derived from the direct sales of manufactured products. Revenues may also consist of maintenance fees for the maintenance
of previously sold products, and revenues from sales of professional services.
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. Revenue values are fixed price arrangements determined at the time an order is placed or a contract is entered
into. The customer is typically obligated to make payment for such products within a 30-45 day period after delivery.
Revenues
from maintenance fees are recognized equally over the period of the maintenance term. Revenue values are fixed price arrangements
determined at the time an order is placed or a contract is entered into. The customer is typically obligated to make payment for
the service in advance of the maintenance period.
Revenues
from professional services are recognized as services are performed. Revenue values are based upon fixed fee arrangements or hourly
fee-based arrangements with agreed to hourly rates of service categories in line with expertise requirements. These services are
billed to a customer as such services are provided and the customer will be obligated to make payments for such services typically
within a 30-45 day period.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Any deposits
received from a customer prior to delivery of the purchased product or monies paid prior to the period for which a service is provided
are accounted for as deferred revenue on the balance sheet.
Sales tax
is recorded on a net basis and excluded from revenue.
The Company
generally provides a standard one year warranty on its products for materials and workmanship but will pass on the warranties from
its vendors, if any, which generally cover at least such period. In accordance with ASC 450-20-25, the Company accrues for product
warranties when the loss is probable and can be reasonably estimated. At September 30, 2018, the Company has no product warranty
accrual given the Company’s de minimis historical financial warranty experience.
Cost of Revenues
The Company
records direct material and component costs, direct labor and associated benefits, and manufacturing overhead costs such as supervision,
manufacturing equipment depreciation, rent, and utility costs as costs of revenues. The Company further includes shipping and handling
fees billed to customers as revenues, and shipping and handling costs as cost of revenues.
Patents
The company
believes it is in a position to achieve future economic value benefits for its various patents and patent ideas. All administrative
costs for obtaining patents are accumulated on the balance sheet as a Patent asset until such time as a patent is issued at which
point amortization begins. 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 or abandoned, all accumulated
administrative costs will be expensed in the period in which the patent was denied or abandoned. Patent amortization expense was
$856 and $420 in the nine-month periods ended September 30, 2018 and 2017, respectively.
Stock-Based Compensation
The Company
follows ASC 718, “Compensation – Stock Compensation.” ASC 718 requires companies to estimate and recognize the
fair value of stock-based awards to employees and directors. The fair value of the portion of an award that is ultimately expected
to vest is recognized as an expense over the requisite service periods using the straight-line attribution method.
The Company
accounts for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “Equity-Based
Payments to Non Employees.”
The Company
estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model.
Net Loss Per Share
Basic net
loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during
the periods presented. Diluted net loss per common share is computed using the weighted average number of common shares outstanding
for the period, and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments or other common
stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Convertible
notes payable that are convertible into 16,640,182 common shares, options to purchase 15,174,175 common shares and warrants to
purchase 6,717,950 common shares were outstanding at September 30, 2018. These shares were not included in the computation of diluted
loss per share for the three or nine months ended September 30, 2018 because the effects would have been anti-dilutive. These options
and warrants may dilute future earnings per share.
Segments
The Company
follows ASC 280-10 for, "Disclosures about Segments of an Enterprise and Related Information." During 2018 and 2017,
the Company only operated in one segment; therefore, segment information has not been presented.
Reclassifications
Certain reclassifications have
been made on prior period balances to conform to the current year presentation. At September 30, 2018, $30,396, net of $23,220
of discount, and $62,616 at December 31, 2017, was reclassified from Convertible Notes Payable – Related Parties to Convertible
Notes Payable as the lender is no longer a related party. This reclassification had no impact on net loss, shareholders’
equity or cash flows as previously reported.
New Accounting Pronouncements
ASU 2018-05
In March
2018, the Financial Accounting Standards Board issued Accounting Standards Update No. 2018-05:
"Income Taxes (Topic 805)”
to provide accounting and disclosure guidance on accounting for income taxes under generally accepted accounting principles (“U.S.
GAAP”). This guidance addresses the recognition of taxes payable or refundable for the current year and the recognition of
deferred tax liabilities and deferred tax assets for the future tax consequences of events that have been recognized in an entity’s
financial statements or tax returns. ASC Topic 740 also addresses the accounting for income taxes upon a change in tax laws or
tax rates. The income tax accounting effect of a change in tax laws or tax rates includes, for example, adjusting (or re-measuring)
deferred tax liabilities and deferred tax assets, as well as evaluating whether a valuation allowance is needed for deferred tax
assets. The Company has accounted for the changes related to the Tax Cuts and Jobs act passed by Congress in 2017.
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 2018-07
In June
2018, the Financial Accounting Standards Board issued Accounting Standards Update No. 2018-07: “Compensation -Stock
Compensation (Topic 718)” which is meant to simplify and align the accounting for non-employee share-based payment
transactions to the accounting for share-based payments for acquiring goods and services from nonemployees. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2018. The Company expects adoption of this
ASU will not have a material impact on its consolidated financial statements.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
As
reflected in the accompanying unaudited condensed consolidated financial statements for the nine months ended September 30,
2018, the Company had a net loss and net cash used in operating activities of $2,392,434 and $409,135, respectively. Additionally, at
September 30, 2018, the Company had a working capital deficit of $2,247,435, an accumulated deficit of $40,669,313 and a
stockholders’ deficit of $1,885,518. It is Management’s 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 issuance date of this
report.
The Company
has incurred significant losses from operations, and such losses are expected to continue. In addition, the Company has limited
working capital. In the upcoming months, Management's plans include seeking additional operating and working capital through a
combination of public, private and debt financings. There is no guarantee that additional capital or debt financing will be available
when and to the extent required, or that if available, it will be on terms acceptable to the Company. Further, the Company
continues to seek out sales contracts for new product sales that should provide additional revenues and, in the long term, gross
profits. Additionally, Envision intends to renegotiate the debt instruments that become due later in 2018. All such actions
and funds, if successful, may not be sufficient to cover monthly operating expenses or meet minimum payments with respect to the
Company’s liabilities over the next twelve months.
The unaudited
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
Inventories
are stated at the lower of cost or net realizable value. Costs are determined using the first in- first out (FIFO) method. Inventory
consists approximately of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Finished Goods
|
|
$
|
–
|
|
|
$
|
1,716,141
|
|
Work in Process
|
|
|
401,379
|
|
|
|
311,481
|
|
Raw Materials
|
|
|
363,689
|
|
|
|
300,479
|
|
Inventory Reserve
|
|
|
(8,601
|
)
|
|
|
(8,601
|
)
|
Total Inventory
|
|
$
|
756,467
|
|
|
$
|
2,319,500
|
|
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
The major components of accrued
expenses are summarized as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accrued vacation
|
|
$
|
161,249
|
|
|
$
|
152,051
|
|
Accrued interest
|
|
|
189,058
|
|
|
|
175,953
|
|
Accrued rent
|
|
|
72,797
|
|
|
|
77,164
|
|
Accrued loss contingency
|
|
|
–
|
|
|
|
44,423
|
|
Other accrued expense
|
|
|
60,700
|
|
|
|
2,333
|
|
Total accrued expenses
|
|
$
|
483,804
|
|
|
$
|
451,924
|
|
5.
|
CONVERTIBLE LINE OF CREDIT
|
On September
18, 2017, in addition to a convertible “Lender” note (See Note 7), 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 originally terminating 300 days after the date of the Revolver, but subsequently
extended through December 31, 2019. 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.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
As additional
consideration for any Draw Downs made by 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 dollar 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 and three year term. As a result of this transaction and including the relative fair value of the issued
warrants, the Company recorded $243,223 of value of beneficial conversion features and warrants, which was recorded as debt discount
on the accompanying balance sheet and was amortized to interest expense over the term of the Draw Down. This Draw Down was paid
back to the Lender during the three month period ended March 31, 2018.
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 and three year term. As a result of this transaction and including the relative fair value of the issued
warrants, the Company recorded $175,261 of value of beneficial conversion features and warrants, which was recorded as debt discount
on the accompanying balance sheet and was amortized to interest expense over the term of the Draw Down. This Draw Down was paid
back to the Lender during the three month period ended March 31, 2018.
The Company
received funds for a third Draw Down on February 20, 2018 in the amount of $290,000. As a result of this Draw Down, the Company
issued 407,784 common stock purchase warrants having a fair value of $61,282 using the Black-Scholes valuation methodology, and
each with a $0.1778 exercise price and three year term (See Note 12). As a result of this transaction, the Company recorded $212,420
of debt discount consisting of the relative fair value of warrants of $50,591 and a beneficial conversion feature value of $161,829
which was amortized to interest expense over the term of the Draw Down. This drawn down was paid back to the Lender during the
three month period ended June 30, 2018.
During the
nine months ended September 30, 2018, the Company received other funds on drawdowns totaling $863,013 and paid back drawdowns amounting
to $339,233. No warrants were owed on these drawdowns.
As of September
30, 2018, the convertible line of credit had a balance amounting to $523,780 with accrued interest amounting to $197 which is included
in accrued expenses (See Notes 4 and 15).
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
6.
|
CONVERTIBLE NOTE PAYABLE -
RELATED PARTY
|
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 would have deferred until such time as Mr. Wheatley
and the Board of Directors agreed that payment of the deferred salary and/or cessation of the deferral was appropriate. In certain
circumstances upon the Company achieving specified milestones, which are described in the Agreement, Mr. Wheatley could have demanded
payment of all or any portion of the deferred amount, and the Company must comply with such demand. In August 2018 this agreement
was amended to where his salary shall defer until the earliest to occur of the following: (i) a permissable event specified in
Section 409A of the Code, or (ii) December 31, 2020, or (iii) an event specified below in Section 8.1(a) or 8.1(b) of this Agreement.
In the case of a cessation of the deferral, the Company’s Board of Directors may unilaterally affect such a result by a resolution
duly adopted by it without the agreement or participation of the Employee and with Employee recusing himself from the vote. Employee
will be paid all of the deferred amount upon the occurrence of (a) if and when the Company experiences a “change of control”
whereby more than 50% of the outstanding equity of the Company changes ownership in a single transaction or series of related transactions,
or otherwise as defined in Section 15.6 of the Original Agreement, (b) a sale of all or substantially all of the assets of the
Company, (c) a permissible event specified in Section 409A of the Code, or (d) on December 31, 2020.
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. As the conversion price
was equivalent to the fair value of the common stock at various salary deferral dates, there was 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 September 30,
2018, is $172,500 with accrued and unpaid interest amounting to $23,740 which is included in accrued expenses (See Notes 4
and 14).
7.
|
CONVERTIBLE NOTES PAYABLE
|
As of September
30, 2018, the following summarizes amounts owed under convertible notes payable:
|
|
Amount
|
|
|
Unamortized
Discount
|
|
|
Convertible Notes Payable, net of discount
|
|
Evey Note
|
|
$
|
53,616
|
|
|
$
|
23,220
|
|
|
$
|
30,396
|
|
“Lender” Note
|
|
|
1,500,000
|
|
|
$
|
–
|
|
|
|
1,500,000
|
|
Convertible Notes Payable – Current Portion
|
|
$
|
1,553,616
|
|
|
$
|
23,220
|
|
|
$
|
1,530,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pegasus Note
|
|
$
|
100,000
|
|
|
$
|
–
|
|
|
$
|
100,000
|
|
Convertible Notes Payable – Long Term Portion
|
|
$
|
100,000
|
|
|
$
|
–
|
|
|
$
|
100,000
|
|
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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.
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.
Effective
June 13, 2018, the Company entered into a further amendment to extend the maturity date of this note to December 31, 2019 and waive
the past requirements to pay the note with financing proceeds received by the Company. Additionally, the note holders agreed not
to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible
into common stock, before December 31, 2019. There were no additional fees or discounts associated with this amendment. 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.
As of September
30, 2018, the note had a balance of $100,000 with accrued and unpaid interest amounting to $87,644 which is included in accrued
expenses (See Note 4).
Evey Note
Prior to
fiscal 2011, the Company was advanced monies by John Evey, our former 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 is subordinate to the then existing notes. Through a series of amendments from the original
due date, the conversion price of the convertible note was reduced to $0.20 and the maturity date was extended to December 31,
2017.
Effective
June 27, 2018, the Company entered into a further extension agreement to extend the maturity date of this note to July 1, 2019.
Additionally, Mr. Evey agreed not to offer for sale, issue, sell, contract to sell, or otherwise dispose of any of our common stock
or securities convertible into common stock on or before December 31, 2018 and not to offer for sale, issue, sell, contract to
sell, pledge, or otherwise dispose of any of our common stock issuable upon the conversion of the note, on or before July 1, 2019.
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 Company recorded debt discount amounting to $30,960 for the value of the beneficial conversion
feature and is amortizing this to interest expense over the remaining term of the loan.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
For the nine
month period ended September 30, 2018, in lieu of interest payments, the Company made principal payments totaling $9,000. As of
September 30, 2018, this note has a balance, net of $30,396 of discount, amounting to $23,220 with accrued interest amounting to
$70,285 which is included in accrued expenses (See Note 4). The note continues to bear interest at a rate of 10%
.
“Lender”
Note
On September
18, 2017, in addition to entering into a revolving convertible line of credit (See Note 5), the Company also entered into a $1,500,000
secured convertible promissory note with the same 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 originally payable in full on or before September 17, 2018 to the extent
not converted into shares of the Company’s common stock. This note was amended to be payable in full by December 31, 2018.
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 fair value of $187,142 using the Black-Scholes valuation
methodology, and each with a $0.15 exercise price. As a result of this transaction, the Company recorded $232,767 of debt discount
consisting of the relative fair value of the warrants of $166,384 and a beneficial conversion feature of $66,384, which was amortized
to interest expense over the original 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.
As of September
30, 2018, the convertible note had a balance amounting to $1,500,000.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
On
August 27, 2018, the Company entered into an unsecured promissory note (the “Note”) in the amount of
$750,000 (the “Principal Amount”) with Gemini Special Opportunities Fund, LP (the “Lender”). The Note
bears simple interest at an annual rate of 10% and is subject to a Securities Purchase Agreement, dated August 27, 2018. This
Note is due and payable on February 28, 2019 (the “Maturity Date”). The Company may prepay the Note, provided if
the Company repays the Note on or prior to November 28, 2018, the Company shall pay 105% of the Principal Amount plus
accrued interest, and if the Company repays the Note after November 28, 2018, including repayment on the Maturity Date, the
Company shall pay 115% of the Principal Amount plus accrued interest. At the time of issuance, the Company recorded an
increase in the Note Payable balance of $37,500 with offsetting debt discount related to this repayment premium which is
being amortized to interest expense over the term of the note. Additionally, the Company paid $5,000 of lender fees which
were also recorded as debt discount and are also being amortized to interest expense over the term of the note.
As additional
consideration for the loan evidenced by the Note, the Company issued to the Lender 900,000 common stock purchase warrants exercisable
for a period of five years from the date of issuance with an exercise price equal to $0.25 per share. These warrants had a fair
value of $115,521 using the Black-Sholes valuation methodology. As a result of this transaction, the Company recorded $100,102
of debt discount consisting of the relative fair value of the warrants which is being amortized to interest expense over the term
of the note (See Note 12).
As of September
30, 2018, this note has a balance, net of $128,979 of discount, amounting to $658,521 with accrued interest amounting to $7,192
which is included in accrued expenses (See Note 4).
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 September 30, 2018,
the loan has a short-term portion of $10,366 and a long-term portion of $11,931.
10.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Matters:
From time
to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As
of September 30, 2018, 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
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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. Monthly lease payments range
from $46,800 per month currently increasing to $50,619 per month for the final year of the lease.
Other Commitments:
The Company
enters into various contracts or agreements in the normal course of business whereby such contracts or agreements may contain commitments.
Since inception, the Company entered into agreements to act as a reseller for certain vendors; joint development contracts with
third parties; referral agreements where the Company would pay a referral fee to the referrer for business generated; sales agent
agreements whereby sales agents would receive a fee equal to a percentage of revenues generated by the agent; business development
agreements and strategic alliance agreements where both parties agree to cooperate and provide business opportunities to each other
and in some instances, provide for a right of first refusal with respect to certain projects of the other parties; agreements with
vendors where the vendor may provide marketing, investor relations, public relations, technical consulting or subcontractor services,
vendor arrangements with non binding minimum purchasing provisions, and financial advisory agreements where the financial advisor
would receive a fee and/or commission for raising capital for the Company. All expenses and liabilities relating to such contracts
were recorded in accordance with generally accepted accounting principles during the periods. Although such agreements increase
the risk of legal actions against the Company for potential non-compliance, there are no firm commitments in such agreements.
Stock Issued in Cash Sales
During the
nine months ended September 30, 2018 pursuant to a private placement, 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. Additionally, the Company issued 273,333 warrants as an offering cost to a third
party, each with a 5 year term and a strike price of $0.15 per share, at the close of the private placement offering. There
was no accounting effect for the issuance of these warrants as their fair value was charged to additional paid-in-capital as an
offering cost and offset by a credit to additional paid-in-capital for their fair value when issuing these warrants. (See Note
12)
Director Compensation
During
the nine month period ended September 30, 2018, the Company released and issued a total of 500,000 vested shares of common
stock (related to previous grants to each of these directors of 750,000 shares which vest on a pro rata basis over a three
year period), with a per share fair value of $0.15, or $75,000 (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 $75,000 was expensed
during the nine months ended September 30, 2018. As of September 30, 2018, there were unreleased shares of common stock
representing $543,750 of unrecognized restricted stock grant expense related to these Restricted Stock Grant Agreements.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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 a total of 750,000 shares of common stock with a per share value of
$0.15 per share (based on the market price at the time of the agreement), or $112,500, to three directors for 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). These shares are immediately expensed.
On July
19, 2018, Mr. Jay S. Potter resigned as a director of Envision Solar International, and the Company accepted Mr.
Potter’s resignation effective on the same date. In recognition of Mr. Potter’s long and valuable service
to the Company, the Board of Directors authorized the immediate vesting and issuance to Mr. Potter of the balance of the
nonperformance restricted stock award scheduled to be issued to him through December 31, 2018. As such, the Company
released and issued a total of 125,000 vested shares of common stock with a per share fair value of $0.15, or $18,750 (based
on the market price at the time of the agreement), which was expensed on July 19, 2018.
On
August 22, 2018, Mr. Robert C. Schweitzer accepted an appointment as a new director of the Company effective August 22, 2018.
Mr. Schweitzer is an independent director who has also accepted an appointment to serve as the chairman of the
Company’s audit committee. In consideration for Mr. Schweitzer’s acceptance to serve as a director of the
Company, the Company agreed to grant 1,500,000 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, prorata, per quarter over a 36 month period commencing on September 30, 2018, issuable quarterly on the last
day of each calendar quarter; provided, that the first release will be of 62,500 shares on December 31, 2018 and the last
release will be of 62,500 shares on September 30, 2021; and 750,000 shares based on the achievement by the Company of certain
performance goals in accordance with the Agreement
.
12.
|
STOCK OPTIONS AND WARRANTS
|
Stock Options
There were
no stock options issued during the nine months ended September 30, 2018.
During the
nine months ended September 30, 2018, the Company recorded stock option-based compensation of $13,026 related to prior grants.
As of September 30, 2018, there is $20,504 of unrecognized stock option based compensation expense that will be recognized over
the next two years.
Warrants
As a part
of the Company’s private placement, the Company effectively issued 273,333 warrants during the three months ended March 31,
2018 to the placement agents. These warrants, valued at $26,206, 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 79.39%, expected dividends of 0.0%, a discount rate of 1.50%, 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 (See Note 11).
In connection
with a Draw Down of a convertible line of credit, as of February 20, 2018, the Company issued 407,784 common stock purchase warrants
with a total value of $61,282 and each with a $0.1778 exercise price and 3 year term. 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 82.55%, expected dividends of 0.0%, a discount rate of 1.50%, and expected term of 3 years. (See Note 5).
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
In
connection to the issuance of a Note Payable on August 27, 2018, the Company issued 900,000 common stock purchase warrants with
a total value of $115,521 and each with a $0.25 exercise price and a 5 year term. 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 82.68%, expected dividends of 0.0%, a discount rate of 2.35%, and expected term of 5 years. (See Note 8). As a
result of this transaction, the Company recorded $100,102 of debt discount consisting of the relative fair value of the
warrants which is being amortized to interest expense over the term of the note (See Note 8).
For each
of the identified periods, revenues can be categorized into the following:
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Product Sales
|
|
$
|
4,642,428
|
|
|
$
|
1,094,898
|
|
Maintenance Fees
|
|
|
5,682
|
|
|
|
5,220
|
|
Professional Services
|
|
|
10,575
|
|
|
|
3,825
|
|
Total Revenues
|
|
$
|
4,658,685
|
|
|
$
|
1,103,943
|
|
At September
30, 2018 and December 31, 2017, deferred revenue amounted to $220,602 and $77,514 respectively. At September 30, 2018, the Company
has received an initial deposit to plan and manufacture two Solar Tree® units, a prepayment for two EVARC units, in addition
to deposits for multi-year maintenance plans for previously sold products. As of September 30, 2018, deferred revenue associated
with product deposits are $174,836 and the delivery of such products are expected within the following six months, while deferred
maintenance fees amounted to $45,766 and pertain to services to be provided through the second quarter of 2022.
14.
|
RELATED PARTY TRANSACTIONS
|
During
the nine months ended September 30, 2018, the Company released and issued a total of 1,375,000 shares of vested common stock
with a total value of $206,250, to three directors. These payments were expensed upon release of the shares (See Note
11).
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. 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. All deferred amounts are evidenced by an unsecured convertible promissory note payable
by the Company to Mr. Wheatley. The balance of the note as of September 30, 2018, is $172,500 with accrued and unpaid interest
amounting to $23,740 which is included in accrued expenses (See Notes 4 and 6).
Subsequent
to September 30, 2018, the Company has borrowed net funds under its Convertible Line of Credit with the Lender amounting to $36,220
(See Note 5).
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
This report contains
forward-looking statements that are based on current expectations, estimates, forecasts and projections about Envision Solar International,
Inc. (hereinafter, with its subsidiary, “Envision,” “Company,” “us,” “we” or “our”),
the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding
matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects.
For example, when we use words such as "projects," "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," "should," "would," "could,"
"will," "opportunity," "potential" or "may," and variations of such words or other words
that convey uncertainty of future events or outcomes, we are making forward-looking statements.
These forward-looking
statements are subject to numerous assumptions, risks and uncertainties that may cause the Company’s actual results to be
materially different from any future results expressed or implied by the Company in those statements. The most important factors
that could prevent the Company from achieving its stated goals include, but are not limited to, the following:
|
(a)
|
volatility or decline of the Company’s stock price;
|
|
(b)
|
potential fluctuation in quarterly results;
|
|
(c)
|
failure of the Company to earn revenues or profits;
|
|
(d)
|
inadequate capital to continue or expand its business, and inability to raise additional capital
or financing to implement its business plans;
|
|
(e)
|
unavailability of capital or financing to prospective customers of the Company to enable them to
purchase products and services from the Company;
|
|
(f)
|
failure to commercialize the Company’s technology or to make sales;
|
|
(g)
|
reductions in demand for the Company’s products and services, whether because of competition,
general industry conditions, loss of tax incentives for solar power, technological obsolescence or other reasons;
|
|
(h)
|
rapid and significant changes in markets;
|
|
(i)
|
inability of the Company to pay its liabilities;
|
|
(j)
|
litigation with or legal claims and allegations by outside parties;
|
|
(k)
|
low trading volume of our common stock and general lack of liquidity;
|
|
(l)
|
competition in the EV charging market including price competition from grid connected chargers;
|
|
(m)
|
insufficient revenues to cover operating costs, resulting in persistent losses; and
|
|
(n)
|
potential dilution of the ownership of existing shareholders in the Company due to the issuance
of new securities by the Company in the future.
|
There is no assurance
that the Company will be profitable. The Company may not be able to successfully develop, manage, or market its products and services.
The Company may not be able to attract or retain qualified executives and other personnel. Intense competition may suppress the
prices that the Company can charge for its products and services, hindering profitability or causing losses. The Company may not
be able to obtain customers for its products or services. Government regulation may hinder the Company’s business. Additional
dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the
exercise of outstanding warrants and stock options. The Company is exposed to other risks inherent in its businesses.
Because the statements
are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking
statements. The Company cautions you not to place undue reliance on the statements, which speak only as of the date of this unaudited
Quarterly Report on Form 10-Q. Forward looking statements and other disclosures in this report speak only as of the date they are
made. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent
written or oral forward-looking statements that the Company or persons acting on its behalf may issue. The Company does not undertake
any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events.
Overview
Envision is a sustainable
technology innovation company based in San Diego, California.
Focusing on what we refer to as “Solar
3.0,” we invent, design, engineer, manufacture, and sell solar powered products that enable vital and highly valuable services
in locations where it is either too expensive or too impactful to connect to the utility grid, or where the requirements for electrical
power are so important that grid failures, like blackouts, are intolerable. When competing with utilities or typical solar companies,
we rely on our products’ ease of deployment, reliability, accessibility, and total cost of ownership, rather than producing
the cheapest kilowatt hour with the help of subsidies.
Envision invents, designs,
engineers, manufactures and sells solar powered products and proprietary technology solutions serving three markets that are experiencing
annual global spending in the billions of dollars and that are experiencing significant growth:
|
·
|
electric vehicle charging infrastructure;
|
|
·
|
out of home advertising platforms; and
|
|
·
|
energy security and disaster preparedness.
|
The Company focuses
on creating renewably energized, high-quality products for electric vehicle (“EV”) charging, outdoor media and branding,
and energy security that are rapidly deployable and attractively designed.
We believe that there
is a clear need for a rapidly deployable and highly scalable EV charging infrastructure, and that our EV ARC™ and Solar Tree®
products fulfill that requirement. We are agnostic as to the EV charging service equipment (“EVSE”) and integrate best
of breed solutions based upon our customer’s requirements. For example, our EV ARC™ and Solar Tree® products have
been deployed with Chargepoint, Blink, Juice Box, Bosch, AeroVironment, and other high quality EV charging solutions. We can make
recommendations to customers or we can comply with their specifications and/or existing charger networks. EV ARC™ and Solar
Tree® products replace the infrastructure required to support EV chargers, not the chargers themselves. We do not sell EV charging,
rather we sell products which enable it.
We believe our chief
differentiators are:
|
·
|
our ability to invent, design, engineer, and manufacture solar powered products which dramatically reduce the cost, time and complexity of the installation and operation of EV charging infrastructure and outdoor media platforms when compared to traditional, utility grid tied alternatives;
|
|
·
|
our products’ capability to operate during grid outages and to provide a source of emergency power rather than becoming inoperable during times of grid interruptions; and
|
|
·
|
our ability to create new, marketable and patentable inventions which are a complex integration of our own proprietary technology and parts, and other commonly available engineered components, creating further barriers to entry for our competition.
|
The resulting products
are built to have what we believe is the longest life expectancy in the industry while also delivering valuable amenities and potentially
highly attractive revenue opportunities for our customers. Envision’s products are designed to deliver multiple layers of
value such as: environmental impact free renewably energized EV charging; media, branding, and advertising platforms; sustainable
and secure energy production; reduced carbon footprint; high visibility "green halo" branding; reduction of net operating
costs through reduced utility bills; revenue creation opportunities through sales of digital out of home (“DOOH”) media;
and sponsorship and naming rights. The Company sells its products to customers with requirements in one or more of the three verticals
the Company addresses. Qualified customers can also lease our EV ARC™ products through leasing relationships we have developed.
Envision’s products can qualify for various federal, state, and local financial incentives which can significantly reduce
final out-of-pocket costs from our selling price for eligible customers. Currently, the main source of our revenue is from the
sale of the patented EV ARC™ to government agencies and private enterprise.
Products and Technologies
We currently produce
two categories of product: the patented EV ARC™ (Electric Vehicle Autonomous Renewable Charger) and the patented Solar Tree®.
We have recently submitted third and fourth product categories, the EV-Standard™ product and the UAV ARC™ product,
for patent approval. They are patent pending and in late stage product development and engineering. All four product lines incorporate
the same underlying technology and value, having a built-in renewable energy source in the form of attached solar panels or light
wind generator, along with battery storage. The EV ARC™ product is a permanent solution in a transportable format and the
Solar Tree® product is a permanent solution in a fixed format. The EV-Standard™ is also fixed but uses an existing streetlamp’s
foundation and grid connection. The UAV ARC™ is a permanent solution in a transportable format and will be used to charge
drone (UAV) fleets. We believe that our series of products offer multiple layers of value to our customers while leveraging the
same underlying technology and fabrication techniques and infrastructure that we use for all of our products. This enables us to
reach a broad customer base with varied product offerings without maintaining the overhead normally associated with a diverse set
of products.
Our current list of
products includes:
|
·
|
EV ARC™ Electric Vehicle Autonomous Renewable Charger (patented).
|
|
·
|
EV ARC™ HP DC Fast Charging Electric Vehicle Autonomous Renewable Charger.
|
|
·
|
EV ARC™ Media Electric Vehicle Autonomous Renewable Charger with advertising screen and/or branding/messaging.
|
|
·
|
EV ARC™ Autonomous Renewable Motorcycle Charger.
|
|
·
|
EV ARC™ Autonomous Renewable Bicycle Charger.
|
|
·
|
ARC Mobility™ Transportation System.
|
|
·
|
The Solar Tree® DCFC product, a single column-mounted smart generation and energy storage system with the capability to provide a 50kW DC fast charge to one or more electric vehicles (patented).
|
The EV Standard™ is currently patent
pending and in the development and engineering phase of its product evolution.
The UAV ARC™, a drone recharging
product, is patent pending and in the development and engineering phase of its product evolution.
All current Envision
products can be upgraded with the addition of the following:
|
·
|
EnvisionTrak™ sun tracking technology (patented),
|
|
·
|
Data capture and management (IoT),
|
|
·
|
SunCharge™ solar powered EV charging,
|
|
·
|
ARC™ technology energy storage,
|
|
·
|
E-Power emergency power panels,
|
|
·
|
Media and branding screens, and
|
|
·
|
Security cameras, WiFi, sound, and emergency call boxes.
|
EV ARC™ and Solar
Tree® products can also be equipped to provide emergency power to users such as first responders during times of emergency
or other grid failures. Because our products replenish their batteries every day, even during cloudy conditions, we believe that
they are some of the most robust and reliable back-up energy sources available today. Several of our current government customers
are ordering EV ARC™ units with our optional E Power panels integrated into the units. E Power is a series of secured power
outlets with directed and primary energy access available to emergency responders. This is a source of increased revenue for us
and, we believe, a compelling value proposition for our products.
EV ARC™ and Solar
Tree® products can be grid connected if the customer wishes. Our first utility customer connected its EV ARC™ units to
the grid in 2015. The EV ARC™ products provide solar powered EV charging, but they also serve as grid stability tools. During
times of low energy use the utility will charge the EV ARC™ on board batteries. During times of grid stress, the utility
takes energy from EV ARC™ batteries thus reducing stress on their generation assets and grid infrastructure. We believe that
“Grid Balancing” offers a potentially significant market opportunity for Envision’s products as electrical grids
become increasingly unstable due to increased demand, aging infrastructure, and extreme weather events. Experts from utilities
such as San Diego Gas & Electric have told us that this is the case and that distributed storage is an important part of their
future plans.
We believe these factors
make our products a compelling value proposition to anyone who intends to install such devices. A corporate customer can deploy
EV charging quickly, efficiently, and without digging up its parking lots. The positive carbon foot print impact is greater because
our products use sunlight to charge the employees’ EVs and, we believe, the marketing and branding impact is far greater
because the enterprise has a highly visible demonstration of its commitment to the environment.
EV ARC™:
The patented EV ARC™
is a transportable, but essentially permanent EV charging infrastructure product which supports Level I, Level II and DC Fast Charging
(which requires 4 to 7 interconnected units). EV ARC™ products can charge between one and six EVs simultaneously and a single
unit can provide EV charging in as many as 10 parking spaces. We have observed that the EV ARC™ can solve many problems associated
with electric vehicle charging infrastructure deployments. Until the introduction of the EV ARC™, the deployment of EV chargers
could be hindered by complications in site acquisition caused by the challenging and invasive requirements of the installation.
Typical competing EV charger installations require a pedestal which is usually mounted on a poured concrete foundation which requires
excavation. Fixed chargers also typically require a trench to deliver grid connected electricity, and often require transformers
and other local electrical equipment upgrades. Additional entitlements, easements, leases, and other site acquisition requirements
of fixed chargers can be environmentally impactful and expensive, and may slow, or prevent entirely, the deployment of large numbers
of typical fixed format chargers. California’s Department of General Services has informed us that it takes an average of
18 months to go through the process of installing a utility grid-tied EV charger. New York City, currently our largest customer,
experiences similar and sometimes longer delays because of the complexities of extending the electrical grid to locations where
EVs need to charge. Because the EV ARC™ has its own ballast and traction pad, it does not require a foundation. Because it
is entirely powered by locally generated and stored renewable energy, it does not require a grid connection. These innovations
allow us to completely avoid any on-site construction or electrical work which, in turn, allows us to avoid the design, engineering
and entitlement/planning processes typical of grid-tied installations. We have demonstrated that we are able to deploy our EV ARC™
product in as little as four minutes (rather than 18 months).
We believe EV ARC™
changes the paradigm of installing EV charging infrastructure completely because it is entirely self-contained and is delivered
to the site ready to operate. It requires no foundation, trenching, concrete, electrical or civil works, and can be deployed in
minutes. Its high-traction ballasted base pad creates a structurally sound platform that supports the rest of the structure. The
solar array is connected via our EnvisionTrak™ tracking solution to a column which is mounted to the ballasted pad. An electrical
cabinet integrated into the unit houses various components enabling the conversion of sunlight to electricity, which is stored
in on-board batteries, and delivers that electricity to the EV charging station. Incorporating battery storage means that an EV
ARC™ operates day and night, as well as during grid interruptions such as blackouts. An EV ARC™ can deliver a clean
source of power to any model of EV charger that is integrated into the structure. Further, the EV ARC™ can be remotely monitored
through a cellular data connection for energy production and the state of health of its vital components. EV ARC™ products
fit in a standard legal-sized parking space but they do not render that parking space unusable because vehicles, EV or otherwise,
can park on the high-traction ballasted pad. This is a significant differentiator for our product as most commercial and government
owned parking lots have a minimum number of parking spaces which they must provide, according to local codes, to support their
tenants, employees and visitors. Reducing, even by one, the number of available parking spaces might place the building out of
compliance with local and perhaps other codes. We believe that the fact that EV ARC™ does not reduce parking spaces creates
a significant barrier to entry for our competition as our high-traction ballasted pad forms part of our patent. EV ARC™ products
are delivered to our customers’ sites ready to operate.
In some instances,
we have integrated a digital, static, or scrolling advertising screen onto the EV ARC™ creating the EV ARC™ Media.
These advertising screens are resistant to weather, theft, and vandalism and are powered entirely by the EV ARC™. The introduction
of the advertising screen creates new potential revenue streams for the owner of the EV ARC™ and we believe this makes an
EV ARC™ a more attractive product for certain prospective customers. This advancement could lead to multiple other similar
uses of our products. Because the EV ARC™ product delivers valuable services such as solar powered EV charging and a secure
energy source which can be used by first responders during grid failures, management believes that the signage, promotion, and
advertising may be eligible for permitting where other advertising platforms would be prohibited.
“Digital Out
of Home Advertising” is the third fastest growing advertising medium. Double digit growth with billions of dollars per year
in national and global spending make outdoor advertising an attractive opportunity. There are, however, significant barriers to
making it work. In general, in the United States, it is becoming harder to deploy outdoor advertising in most places where it is
of value. Similar to the EV charging vertical, the outdoor advertising industry seeks new solutions to overcome the significant
barriers to entry such as planning, permission, entitlement, electrical circuitry, and civil engineering. Industry veterans spend
a good deal of time looking for the “new new” in advertising, a solution that is environmentally friendly, cost effective,
and most importantly, can make its way through the significant hurdles of permitting and zoning. We believe that our products are
ideally suited to reduce many of the barriers to entry for outdoor advertising, and as such, we believe that significant opportunities
may present themselves to us as we continue to address this market.
EV ARC™ products
also provide a highly reliable source of energy that is not susceptible to grid interruptions. Because an EV ARC™ generates
and stores all of its own energy, it will continue to charge EVs even during grid outages and failures such as those caused by
hurricanes, earthquakes, flooding or heavy snow, or by terrorists and in the future, outages that might be precipitated by nefarious
nation states. Government fleet operators, in particular, recognize the importance of having a hedge against such grid interruptions.
Many of their fleet vehicles provide essential services and cannot be grounded for several days during a prolonged black-out such
as the one that occurred as a result of Hurricane Sandy. Grid tied EV chargers will not operate during black-outs. EV ARC™
supported EV chargers are immune to grid failure and as such provide a vital hedge against the loss of fleet electric vehicles.
We believe that as larger segments of the total vehicle fleet (government, private sector, and consumer) electrify, the necessity
of a large proportion of EV chargers which are powered by locally generated and stored electricity will create a significant opportunity
for our first mover status with our EV ARC™ and other products.
Because EV ARC™
can be deployed with an optional emergency power (E Power) panel, it can also be used as a reliable source of energy in times of
disaster, emergency, or grid failure caused by hurricanes, terrorism, cascading blackouts or other grid vulnerabilities. EV ARC™
can be configured to allow a select group, such as first responders, to access the solar generated and stored energy. A fireman
or police officer will be able to safely connect to the EV ARC™ and power any devices that would typically require a gasoline
or diesel generator. We believe that the EV ARC™ will be a much more reliable, and a cleaner source of, energy than the electric
grid or other traditional back up energy sources. The EV ARC™ does not require the level of ongoing maintenance that a diesel
or gasoline generator requires, and there is less chance that it will be inoperable in times of emergency since first responders
are not required to start it or fill it with fuel. We are currently selling EV ARC™ products equipped with E Power panels
to New York City, Caltrans, and many other entities. In the summer of 2017 the EV ARC™ product deployed for the government
of the US Virgin Islands was subjected to category five, 185 mph, winds which it survived. Our customer informed us, in writing,
that while most other infrastructure had been damaged or destroyed by the storm, our EV ARC™ product not only survived, but
was still in excellent condition. The EV ARC™ product is independently certified to withstand winds of 120mph by a licensed
structural engineering firm. We and our customers have observed that in practice, it can withstand hurricane force winds.
While the EV ARC™
and Solar Tree® products are designed to be grid independent, they can also be connected to the utility grid at the customer’s
request. In one instance we have a utility company customer which is using the EV ARC™ product to charge EVs, and also as
a grid balancing tool. The utility has connected the EV ARC™ to the grid and is able to use the internal batteries as a buffer
during times of grid instability. Industry experts predict that there will be a significant increase in the amount of deployed
energy storage connected to the grid to provide stability in the future. We believe that the EV ARC™ products’ ability
to act as a grid buffering solution, as well as a rapidly deployed EV charging solution, is another differentiator and a potentially
significant value proposition.
We believe, and we
have been told by our customers and prospects, that the triple use of EV charging, digital outdoor advertising, and emergency energy
production make the EV ARC™ an extremely valuable product for our customers.
EV ARC™ is designed
to address the sizable market of EV charging infrastructure. We believe the current lack of such infrastructure is the single greatest
impediment to the adoption of EVs in the US and elsewhere. A standardized, portable, easily deployable EV charger, which is renewably
energized rather than relying on carbon based electrical energy, would appear to have significant appeal to those who are interested
in the proliferation of EV’s and EV charging infrastructure. We believe no competing company has a similar product, so the
Company’s first-to-market position should create an opportunity for a sizable share in the market interest.
For our EV ARC product,
direct labor and material costs are lower than the selling price at the individual product level. However, prior to 2018, when
all of our overhead cost allocations such as rent, indirect labor, and other allocated costs had been spread across the low volume
of units we had annually produced, we had historically recognized gross losses on sales rather than gross profits. During 2018,
with our standard overhead allocations, our revenues have been greater than our costs and thus we have generated gross income.
We continually endeavor to make production improvements in both our products and our processes to reduce our manufacturing costs
while maintaining the high quality for which we strive. As unit sales and production continue to increase and we trend toward reducing
our cost base through improved economies of scale, production process improvements, and component cost reductions, management believes
that such gross profits will continue to be realized and consistently maintained in the future.
Solar Tree®
Products:
Our patented Solar
Tree® product has been in deployment and continued improvement for several years. We believe the resulting product has become
the standard of quality in larger scale solar powered EV charging, energy security, and media and branding. We understand the Solar
Tree® product to be the only single column, sun tracking, and architecturally enhanced solar support structure with integrated
energy storage, EV charging and media platforms available today. We believe that Solar Tree® products with integrated battery
storage will become important contributors to the growing EV charging infrastructure requirements in California and the rest of
the world. Because our products do not require a connection to the electrical grid, they can be rapidly deployed and enable EV
charging in locations where it would otherwise be impossible or economically infeasible. For example, rest areas and park and ride
locations which might have sufficient energy for lights and vending machines, but do not have sufficient power for EV charging,
can be served by our Solar Tree® products which can be optimized for direct current (“DC”) fast charging. The costs
and environmental impact associated with delivering a 50kW or greater circuit to a remote rest area may be prohibitive, whereas
a Solar Tree® DCFC can be deployed with minimal site disturbance. In November 2017, we received an order from the Fresno County
Rural Transit Authority to provide Solar Tree® DCFC products which will be used to charge electric buses from BYD Company Ltd.
(“BYD”). The growth in electric bus adoption is happening at a greater pace than EVs at time of writing. BYD is the
biggest electric bus company in the world. We believe that the successful deployment of these Solar Tree® DCFC products for
Fresno and with BYD may create significant opportunities for further deployments of electric bus charging infrastructure and DC
fast charging infrastructure for EVs both in the U.S. and internationally. We further believe that success of the sort that we
currently have with Caltrans may be leveraged with other departments of transportation across the United States and the rest of
the world
We believe Solar Tree®
products with on-board battery storage can provide a highly reliable source of energy to be used in the event of a failure of the
grid. We have seen data suggesting that grid failures cost businesses in the United States approximately $200 billion per year
and when those failures impact vital services such as hospitals, they have been responsible for loss of life. We believe that a
hospital equipped with Solar Tree® energy security products could benefit both economically and from a life safety point of
view. We believe that there are many other such instances where the reliable combination of renewable energy and energy storage
can deliver value which exceeds simply competing with the utility. This will become particularly true when larger segments of transportation
become electrified and grid interruptions mean the “grounding” of EVs which rely solely on the utility grid to re-fuel.
We also believe that
Solar Tree® products optimized for branding can create visually stunning platforms for the delivery of a business’ brand
message with a less onerous planning and entitlement process than that experienced with traditional signage.
We have invented and
incorporated EnvisionTrak™, our patented and proprietary tracking solution, into all of our products, furthering the unique
nature of our products and, we believe, increasing our technological leadership within the industry. EnvisionTrak™ is a complex
integration of high quality gearing, electrical motors, and controls which are combined in a robust, highly engineered, and reliable
manner. While there are many tracking solutions available to the solar industry, we believe EnvisionTrak™ is the only tracking
solution which causes the solar array to orient itself in alignment with the sun without swinging, rotating, or leaving its lineal
alignment with the parking spaces. We have received a patent on our claims of these attributes. We believe this is a vital attribute
in solar generators in parking environments, since any swinging or rotating arrays could result in impeding the flow of traffic,
particularly first responders such as fire trucks, in the drive aisles. It is a violation of many local codes to have restricted
overhead clearance in the drive aisles. EnvisionTrak™ has been demonstrated, through data obtained from our past customers,
to significantly increase electrical production. An additional value is derived from the high visual appeal created by EV ARC™
or Solar Tree® structures which are tracking the sun in perfect synchronicity. Solar Tree® products incorporate our latest
engineering and fabrication improvements. This has allowed us to reduce costs and time to deploy Solar Tree® structures, and
we have seen improvements in the fabrication processes. We anticipate further improvements in future deployments of the product
as we incorporate more smart technology and storage capabilities.
EV-Standard™
Product:
We have invented and
are in the late stages of product development on, our patent pending EV-Standard product which is, in our belief, the ideal curb
side charging solution. We believe this is another area in the developing charging ecosystem which provides major opportunities
and challenges within the “curbside” or “on street” sector. Because so many owners of vehicles and even
fleet operators (in cities like New York and San Francisco) park their vehicles on street, there is a significant need for curb
side charging. In fact, the CEC has publicly stated that only one in seven Californians are able to park their car close enough
to a circuit to charge at home. Their conclusion is that curb side, on street charging will be an important contributor to the
successful electrification of transportation in the State. Many other jurisdictions such as New York City have made the same statements.
We believe our EV-Standard™
product is a solution to solve this problem. EV-Standard™ is a streetlamp replacement which incorporates renewable energy
and on-board energy storage, and which provides a meaningful EV charging experience without significant infrastructure or construction
requirements. The EV-Standard™ design includes a light-wind generator fixed atop a new streetlamp standard. Also integrated
is a tracking solar panel and on-board battery storage. The EV-Standard™ product design takes power from the existing streetlamp
grid connection and uses it to charge the on-board batteries. The streetlamp’s circuit is available 24 hours per day but
is only in use during the hours of darkness. As a result, EV-Standard™ is able to use the full capacity of the grid connection
to charge its batteries during the day time. A further advantage of the EV-Standard is that it is delivered with a low energy,
high lumens, LED light fixture which reduces the energy required for street lighting during the hours of darkness. This makes the
street light more efficient and, crucially, the EV-Standard™ can use the unused capacity of night-time operations to further
charge its on-board batteries. The additional renewable energy generated by both the tracking solar array and the light-wind generator
supplies more energy to EV-Standards’ batteries. The energy from the batteries is then delivered to a Level II EV charger
which is mounted to the EV-Standard™ products’ column. The combination of the three sources of capacity, when delivered
at once through our on-board batteries, allows us to deliver a much more powerful and therefore more meaningful EV charging experience
than would be available simply through connecting to the existing street lamps’ utility grid connection as some of our competitors
currently offer.
We believe that the
improved EV charging experience offered by the EV-Standard™ design will be a differentiator for our company in a potentially
large market. We currently provide work-place charging to the State of California, New York City, and many others through our EV
ARC™ product. We believe that EV-Standard will become an excellent choice for California, New York and many other jurisdictions
across the U.S., and the world, as a viable and reliable on-street EV charging solution. Accordingly, we believe that EV-Standard™
represents an important opportunity for future growth. Like the EV ARC™ and Solar Tree® products, the EV-Standard™
will not rely upon a grid connection and as such will be able to continue to charge EVs during black-outs or other grid interruptions.
The UAV ARC™ Product:
We filed a patent application
for our new UAV ARC™ product which is currently in the advanced stage of product development. The UAV ARC™ is a rapidly
deployable, highly scalable, range extending drone recharging product which forms a network. It does not require any fueling or
grid connection because it generates and stores all of its own energy from renewable sources. UAV ARC™ is self-ballasted
and leveling and does not require any planning or construction for its installation. UAV ARC™ has a hardened exterior and
countermeasures designed to protect it from vandalism, theft or other nefarious activities. Each UAV ARC™ forms part of a
broader network which fuels drones and gathers and shares information about their health and flight plans as part of the Internet
of Things (“IoT”). UAV ARC™ units can be deployed on flat roofs in cities or on any terrain in remote locations.
The maritime version can be deployed at sea to extend UAV missions in a maritime environment. The planned networks of UAV ARC™
units will be designed to be open to any operator of unmanned aerial vehicles as part of a subscription or individual usage plan.
Operations
We are headquartered
in San Diego, California in a leased 50,000 square foot building professionally equipped to handle the significant growth possibilities
we believe are in front of us. The building houses our corporate operations, sales, design, engineering and product manufacturing.
The EV ARC™ and
Solar Tree® structures are currently fabricated in this facility. We intend to fabricate EV-Standard™ and UAV ARC™
in the same facility. We have reduced certain direct costs associated with our products as a result of insourcing fabrication.
We believe we have been better able to control quality as a result of our own in-house manufacturing processes as opposed to outsourcing
this activity as we did in the past. We have made improvements to existing products and are able to introduce new products in a
much more timely and efficient manner. Management believes that the product development process is significantly faster and less
expensive when carried out by an in-house fabrication facility. We sell our Solar Tree® products as an engineered kit of parts
to be installed by third parties employed by the buyer of the Solar Tree® kit. We will continue to deliver our EV ARC™
product, using the specialized and proprietary ARC Mobility™ trailer, within an approximate 1,500-mile range of our fabrication
facility, and use third party transportation solutions and Transformer ARC™ for greater distances. Our EV Standard™
and UAV ARC™ will be delivered by third party providers.
Management believes
that the continuation of our strategy to create highly engineered, highly scalable products which are delivered complete or as
a kit of parts to the customer site, and which require minimal or no planning, entitlement, or field labor activities, is further
positioning us as a leader in the provision of unique and highly scalable solutions to the market verticals we target. Our products
are complex but standardized, readily deployable, and reduce the exposure of the Company and our customers to the risks and inherent
margin erosion that are incumbent in field deployments. We are no longer directly involved in the field installation of our Solar
Tree® products, instead selling them as a kit to be installed by others. Wherever possible, the components of the Solar Tree®
structures are factory integrated and assembled such that complete assemblies are delivered to customer sites so that they may
be erected and installed by readily available local labor contracted directly by the site host without our involvement. As part
of the delivery of of Solar Tree structures to our customers, our design and engineering team has created a detailed, step by step,
installation manual that can be used by any competent construction firm to seamlessly erect and install our structures. With this
manual, we believe the ease of installation can be directly communicated to minimize installation costs and thereby reduce sales
hurdles, resulting in increased sales.
The EV ARC™ product
family requires no field installation work and is typically delivered to the customer site by us or by a third-party transportation
company for a fee.
We continue to bring
engineering improvements to our products that are designed to increase the level of standardization and reduce the field labor
and effort required for product deployment. The EV ARC™ is the embodiment of this strategy in that it requires almost no
field activity beyond “parking” it in a space. We have invented and produced the ARC Mobility™ trailer which
is a hydraulically operated delivery trailer that can lower an EV ARC™ product to the ground in its final location in as
little as four minutes.
We strive to benefit
by the deliberate continued utilization of certain outsourced resources. While we develop all intellectual property in-house, product
designs are vetted by third-party structural and electrical engineering firms to ensure that the designs meet the local jurisdictional
requirements and codifications for the deployment locations. We believe this further helps dissipate potential liabilities for
the structural and electrical elements by providing additionally insured experts with partial responsibility for the designs.
Sales and Marketing
Envision Solar uses
research to identify potential customers utilizing the following list of titles: Fleet Managers, Facilities Mangers, Parking Managers,
Public Works, Equipment Managers, City Planners, Acquisitions, Transportation Managers, Sustainability Managers, Environmental
Services, Energy Managers, Engineering and Energy Consultants. This is straight forward in the government space, however, reaching
persons responsible for adopting and implementing EV charging infrastructure in the enterprise space can be challenging and resource
intensive. The challenge for marketing and sales is reaching customers early when they have the initial need and before they choose
a more difficult and costly method of installing EV charging infrastructure.
Management of Envision’s
product portfolio will, for the time being, remain in a direct sales and marketing channel, pairing customers with sales specialists
to ensure their needs are met with the right equipment. Envision Solar has employed a General Services Administration (“GSA”)
consultant (FedShed) to assist Envision in the procurement of a GSA title 52 schedule. In this case federal and some state agencies
will be able to select products from the GSA catalog. Federal sales and marketing campaigns will continue through direct distribution
or organizations will have the option to order indirectly through the GSA catalog. This Federal selling process will be similar
to those we already have in place with the State of California and the City of New York.
Envision Solar uses
a layered approach to marketing in support of direct sales, involving a combination of regional and industry focused campaigns,
nurturing campaigns, tradeshows, speaking opportunities, product demonstrations, press releases and social media (Facebook, Instagram,
Twitter and LinkedIn). We are rebranding and updating our website which will serve as a foundation to connect with our customers,
influencers, investors and enthusiasts. Envision Solar is, we believe, an industry leader in the EV charging infrastructure space
and the website will be used to highlight that with webinars and industry news to automate the education of our target markets
helping them confidently make an informed decision about the purchase of our products. Presentation and execution will continue
to remain a priority and we will keep sales and marketing materials updated to ensure messaging is on point and consistent with
our product offering, customer’s needs and industry standards.
We have recently engaged
an artificial intelligence (AI) company, Kriya Ai, to assist us in the identification of prospective customers. We have previously
relied upon manual searches to identify potential leads, using certain characteristics we believe are common amongst those who
might buy our products. The AI tool can be embedded with the same characteristics and once so embedded will automatically search
the world wide web, seeking out prospects that meet our requirements. The AI tool will also automate the initial contact with the
prospects thus drastically reducing the time and energy our sales people have to invest in prospect identification. We believe
that a lack of knowledge about our company and products is one of the most significant inhibitors of our sales and as such we are
continuously seeking new ways to efficiently inform potential buyers of our product’s existence. We believe that the use
of AI will play a significant role in our future sales efforts.
Envision solar products
can have a long sales cycle. This is a sophisticated sale and often a large capital expense for our customers. Sales often hinge
on bureaucratic processes and funding approval. Political mandates do not always equal availability of resources to execute policy
into action. We will continue to strive to increase conversion rates by providing a “boutique like” sales experience
once prospects have been identified. The sales team uses
Salesforce
to track and maintain contact with customers and
Salesloft
to increase the efficiency of campaigns and measure effectiveness. Data metrics and a rigorous evaluation of budgets will be used
to maximize the impact of resources. Our sales team personnel are experts on our products and make sure our products are selected
and designed to exceed our customer's needs.
Historically, we concentrated
a sizeable portion of our resources on product development and engineering. We now have a reproducible suite of products which
address the three market verticals in which we operate (EV charging infrastructure; out of home advertising infrastructure; and
energy security). As a result, we have increased our focus on sales and marketing and intend to continue to grow this focus in
2018. In 2016, we hired employees to form a sales team to sell our products directly through telephone and emailing campaigns.
Our sales team has created a significant pipeline of prospective customers and has already converted such efforts into contracted
sales. Our current sales activities are undertaken in the following manner: direct sales efforts undertaken by our “in-house”
sales team, direct sales efforts undertaken by other independent contractors, direct sales efforts as a result of management relationships,
and follow-on sales to existing customers.
Our marketing efforts
are responsible for the generation of many of our sales leads and have included the following: attendance at trade shows and conferences,
often with live demonstrations of EV ARC™, deliveries of a demonstration EV ARC™ unit to potential customer sites so
the customer can directly experience the benefits of the product, web site and limited search engine optimization, direct electronic
mailings to prospects within our target markets, social media outreach on Facebook, Instagram, Twitter, and LinkedIn, video postings
on YouTube and Vimeo, distribution of printed materials promoting our products, industry speaking engagements and subject matter
expertise panel participation across the United States, and media interviews in print, radio and television. Currently we are targeting
Corporations, outdoor advertising companies, automotive related companies, municipalities, state and federal government entities,
utilities and commercial real estate.
We also have independently
contracted sales resources that are paid based upon performance. They are paid a percentage of revenue only when we actually receive
payment from our customers. Our team will assist such contractors in the creation of proposal documents when the prospective sale
appears to warrant the commitment of resources to such an activity. These contractors are responsible for their own costs except
in some instances where the Company’s management pre-approves an expenditure aimed at winning a sales contract.
We continue to explore
the use of sales channels to communicate the value of and sell our products. Examples of the types of channels we seek are: upstream
vendors such as solar module manufacturers, inverter manufacturers, battery manufacturers, EVSE manufactures, EV charging service
providers, Outdoor advertising companies, General contractors, Architects, and Engineers and consultants.
During 2016, we added
multiple members to be a part of our national sales team, including a new director of sales and business development who is a former
Navy Seal Intelligence Officer, as well as developed national sales strategies. We continue to pursue and make progress on promising
sales opportunities. Leveraging our contracts with the State of California and the City of New York, we continue to garner sales
and add new government customers. We have received follow on orders from New York City, Caltrans and others and added new California
ordering departments. We believe we are close to securing orders from other agencies. We continue to have discussions with other
governmental and private sector organizations which management believes will result in near term future orders. Additionally, we
have been delivering our EV ARC™ on our ARC Mobility™ trailer to a variety of locations during a “Guerilla”
marketing road show. The EV ARC™ is being delivered to corporate campuses in major California metropolitan areas such as
San Diego, Los Angeles, San Francisco and Silicon Valley. We pre-announce the free availability of solar powered EV charging –
“Driving on Sunshine” – through the human resource and marketing departments of the host companies. It is hoped
that the host companies and their employees will see the ease of deployment and the value of highly visible solar powered EV charging,
and as a result, buy our products. We believe that this has been a good way to raise awareness about the unique values that our
products deliver.
In December 2017, we
hosted our first community outreach event showcasing Envision’s products at our factory in San Diego, California. More than
100 local government and private sector workers who had expressed an interest in learning about our products attended. At a certain
point in the evening we demonstrated the delivery of an EV ARC™ product to a parking space in our lot. We timed the delivery
from the time our delivery truck crossed the property line to the time that an EV was plugged in and charging on the EV ARC™
product. In this manner we were able to demonstrate, to a large number of potential prospective buyers, our ability to deploy an
EV ARC™ in under eight minutes. We believe that this educational outreach was a success and that it has resulted in an enhanced
understanding and awareness of our products value and capabilities. We have executed more community outreach events and plan for
multiple locations across California, which started in Orange County in March 2018. Our intention is to educate the broadest possible
audience to our products’ capabilities. We intend to video the more polished performances and use those to reach a much wider
audience across the Internet and social media.
Major Customer Contracts
In 2017 and 2018, we
have had two major customers, the State of California and the City of New York, that have accounted for a substantial portion of
our revenue. The following summarizes the basic terms of the current contracts with them:
City of New York
Requirement Contract
. As of March 17, 2017, the Company received a Requirement Contract from the City of New York (the
“NY Contract”) for 36 EV ARCs™ and one single ARC Mobility™ unit for a total contract price of $2,448,356.
The NY Contract are purchase orders under the Company’s master contract with the City of New York. The term of the NY Contract
commences on April 17, 2017 and expires on April 16, 2020. When delivered, each unit must be ready for operation. The NY Contract
requires the following warranties: at least three years for each complete unit, and 25 years for each photovoltaic (solar) panel,
five years for each solar inverter, and two years for each integrated battery solution within each complete unit. We pass through
our vendor’s warranties on components such as solar modules. On September 10, 2018, the Company received a new $3,300,000
order from the City of New York for 50 EV ARC™ units for delivery in the fourth quarter of 2018 and the first quarter of
2019.
Contract with
the California Department of General Services
. On June 12, 2015, the Company’s bid for solicitation was accepted
by the California Department of General Services (the “California Contract”). The term of the California Contract was
for one year with two extension options for one year. The California Contract is mandatory for California state agencies and permits
local government agencies, including cities, counties, special districts, California State universities, University of California
systems, K-12 school districts, and community colleges, to purchase EV ARCs™, ARC Mobility™ Trailers, and related accessories
from the Company. In June 2018, our contract with the State of California was renewed for up to four more years (two years with
two additional one-year options), and its scope was expanded to include more of our products, including our EV ARC™ HP DC
Fast Charging Electric Vehicle Autonomous Renewable Charger, with a State estimated value of over $20 million.
Critical Accounting Policies
Use
of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying
unaudited condensed consolidated financial statements include the allowance for doubtful accounts receivable, valuation of inventory,
depreciable lives of property and equipment, estimates of loss contingencies, valuation of derivatives, valuation of beneficial
conversion features in convertible debt, valuation of share-based payments, and the valuation allowance on deferred tax assets
.
Revenue and Cost
Recognition.
As of January 1, 2018, Envision adopted the revenue standards of Financial Accounting Standards Board Update No.
2014-09: “Revenue from Contracts with Customers (Topic 606).” The core principle of this Topic is that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. Revenue is recognized in accordance with that core principle
by applying the following five steps: 1) identify the contracts with a customer; 2) identify the performance obligations in the
contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize
revenue when (or as) we satisfy a performance obligation.
Revenues are primarily
derived from the direct sales of manufactured products. Revenues may also consist of maintenance fees for the maintenance of previously
sold products, and revenues from sales of professional services.
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. Revenue values are fixed price arrangements determined at the time an order is placed or a contract is entered into. The
customer is typically obligated to make payment for such products within a 30-45 day period after delivery.
Revenues from maintenance
fees are recognized equally over the period of the maintenance term. Revenue values are fixed price arrangements determined at
the time an order is placed or a contract is entered into. The customer is typically obligated to make payment for the service
in advance of the maintenance period.
Revenues from professional
services are recognized as services are performed. Revenue values are based upon fixed fee arrangements or hourly fee-based arrangements
with agreed to hourly rates of service categories in line with expertise requirements. These services are billed to a customer
as such services are provided and the customer will be obligated to make payments for such services typically within a 30-45 day
period.
Any deposits received
from a customer prior to delivery of the purchased product or monies paid prior to the period for which a service is provided are
accounted for as deferred revenue on the balance sheet.
Sales tax is recorded
on a net basis and excluded from revenue.
The Company generally
provides a standard one year warranty on its products for materials and workmanship but will pass on the warranties from its vendors,
if any, which generally cover at least such period.
Cost of Revenues:
The Company records direct material and component costs, direct labor and associated benefits, and manufacturing overhead costs
such as supervision, manufacturing equipment depreciation, rent, and utility costs as costs of revenues. The Company further includes
shipping and handling fees billed to customers as revenues, and shipping and handling costs as cost of revenues.
Stock Based Compensation.
The Company follows ASC 718, “Compensation – Stock Compensation.” ASC 718 requires companies to estimate and
recognize the fair value of stock-based awards to employees and directors. The fair value of the portion of an award that is ultimately
expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. We
estimate the fair value of each stock option at the grant date by using the Black-Scholes option pricing model. Equity instruments
granted to non-employees are accounted for under ASC 505-50 “Equity Based Payments to Non-Employees.”
Accounts Receivable.
Accounts receivable are customer obligations due under normal trade terms. Management reviews accounts receivable on a periodic
basis to determine if any receivables may become uncollectible. Management’s evaluation includes several factors including
the aging of the accounts receivable balances, a review of significant past due accounts, dialogue with the customer, the financial
profile of a customer, our historical write-off experience, net of recoveries, and economic conditions. The Company includes any
accounts receivable balances that are determined to be uncollectible in its overall allowance for doubtful accounts. Further, the
Company may record a general reserve in its allowance for doubtful accounts to account for future changes that may negatively impact
our overall collections. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
Fair Value of Financial
Instruments.
We measure our financial assets and liabilities in accordance with generally accepted accounting principles. For
certain of our financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and short-term loans,
the carrying amounts approximate fair value due to their short maturities. Further, amounts recorded as long-term notes payable,
net of discount, also approximate fair value because current interest rates for debt that are available to us with similar terms
and maturities are substantially the same.
Inventory.
Inventories
are valued at the lower of cost or net realizable value and consist of certain purchased or manufactured components of our overall
product offering. Cost is determined using the first-in, first-out (FIFO) method, and includes material and labor costs. If the
Company determines that the carrying value of an item may not be realizable, an impairment reserve is recorded to adjust such items
to their realizable value.
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.
Changes in Accounting
Principles
. No significant changes in accounting principles were adopted during the three months ended September 30, 2018.
Results of Operations
Results of Operations for the Three
Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
Revenue.
For
the three months ended September 30, 2018, our revenues were $938,218 compared to $225,524 for the three months ended
September 30, 2017, a 316% increase. For the three months ended September 30, 2018, revenues were primarily derived from the
delivery of thirteen EV ARC™ units. For the three months ended September 30, 2017, revenues were primarily derived from
the delivery of three EV ARC™ units including a delivery of an EVARC Digital™ unit which was sold to a customer
who is using the digital advertising capabilities in its shopping center portfolio to offer businesses a way to promote
their brand in a positive and unique way while funding free EV Charging for consumers. As of September 30, 2018, our
contracted backlog was approximately $5.7 million.
Gross Profit (Loss).
For the three months ended September 30, 2018, we had a gross profit of $44,150 compared to a gross loss of $9,308 for the period
ended September 30, 2017, a 574% positive increase. Every unit sold during the three month period ended September 30, 2018 had
a direct positive gross margin associated with the sale and inclusive of standard overhead allocations. In 2017, our losses were
derived primarily from the costs, including depreciable costs, of our manufacturing environment that were unable to be absorbed
by the lower revenues in the period. Warranty costs remain di minimis at approximately $500 for the three months ended September
30, 2018 compared to $2,700 for the three months ended September 30, 2017.
Operating Expenses.
Total operating expenses were $519,468 for the three months ended September 30, 2018 compared to $489,540 for the same period
in 2017, a 6 % increase. Administrative and sales labor costs increased in 2018 by approximately $15,000 primarily due to modest
pay increases year over year. Stock option expense decreased by approximately $35,000 in 2018 due to prior issued stock options.
Consulting fees increased in 2018 by $21,000 related to the timing of expenses for summer interns, while director fees increased
by approximately $9,000 due to the acceleration of stock awards for a departed director. Travel expense increased by approximately
$12,000 in the three months ended September 30, 2018 compared to the three months ended September 30, 2017 due to the travel schedule
of our chief executive officer. All other costs remained generally consistent between the periods.
Interest Expense.
Interest expense was $148,316 for the three months ended September 30, 2018 compared to $65,413 for the same period in 2017,
a 127% increase. This increase in 2018 primarily related to amortized value associated with common stock purchase warrants provided
to our lenders at the onset of the financings of current debt facilities along with increased coupon interest associated with our
increased average debt balances in 2018.
Gain on Sale of
Fixed Assets.
We recorded a gain on the sale of a demonstration EV ARC™ unit amounting to $16,260 in the three month period
ended September 30, 2018 while there was no such sale of assets in the three month period ended September 30, 2017.
Net Loss.
We
had a net loss of $606,556 for the three months ended September 30, 2018 compared to net loss of $566,199 for the same period in
2017, an increase of 7%. Significant elements deriving these losses have been discussed above.
Results of Operations for the Nine Months
Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Revenue.
For
the nine months ended September 30, 2018, our revenues were $4,658,685 compared to $1,103,943 for the same period in 2017, an increase
of 322%. During the nine months ended September 30, 2018, we delivered sixty eight EV ARC™ units and an ARC Mobility trailer™
compared to the delivery of fifteen EVARC™ units and an ARC Mobility Trailer™ in 2017.
Gross Profit.
For the nine months ended September 30, 2018, we had a gross profit of $97,184 compared to a gross loss of $26,268 for the same
period in 2017, a 470% increase. Significant gross losses were recognized, primarily in December 2017, related to the 2018 deliveries
of 30 EVARCs™ to the city of New York, but almost every other unit delivered in the nine months ended September 30, 2018
had a direct positive gross margin associated with the sale and inclusive of standard overhead allocations. Management believes,
as long as we can continue to increase our sales and production volumes, that such margins will continue to improve over the remainder
of the year and beyond. In 2017, the loss was consistent with the direct costs and costs of the manufacturing environment including
tooling and depreciation costs that were unable to be absorbed with our lower production volumes. Warranty costs remain di minimis
at approximately $1,800 for the nine months ended September 30, 2018 compared to $6,000 for the nine months ended September 30,
2017.
Operating Expenses.
Total operating expenses were $1,701,788 for the nine months ended September 30, 2018 compared to $1,703,821 for the nine months
ended September 30, 2017. Labor costs increased in 2018 by approximately $31,000 which primarily related to modest pay increases
in 2018. Sales related costs increased by $31,000 in 2018 due to increased commissions related to increased revenues as well as
other sales related costs such as fees for a new sales support tool. Stock option expense decreased by approximately $106,000 in
2018 while marketing expenses increased by approximately $42,000 as the Company attended more trade shows and other marketing events
and spent more on various marketing collateral associated with this increased outreach. Utilities expenses decreased by approximately
$27,000 in 2018 primarily related to a back-charge received from our landlord in 2017 for prior year’s utilities costs. Director
fees increased by approximately $122,000 in 2018 while being offset by a decrease of $91,000 for other consulting expenses related
to 2017 investor relations and financial consulting fees. Other expenses remained relatively consistent between the years.
Interest Expense.
Interest expense was $806,330 for the nine months ended September 30, 2018 compared to $167,019 for the same period in 2017,
a 383% increase. This increase in 2018 primarily related to approximately $652,000 of amortized debt discount associated primarily
with the value of the beneficial conversion features of our notes and common stock purchase warrants provided to our lenders. Additionally,
there was increased coupon interest of approximately $68,000 associated with our increased average monthly debt balances in 2018.
Gain on Sale of
Fixed Assets.
We recorded a gain on the sale of a demonstration EV ARC unit amounting to $16,260 in the nine month period ended
September 30, 2018 while there was no such sale of assets in the nine month period ended September 30, 2017.
Gain on Debt Extinguishment.
We recorded a gain of $107,081 during the nine months ended September 30, 2017. There was no gain in the nine months ended
September 30, 2018 as the debt associated with this liability was converted into equity in 2017 and thus had been previously eliminated.
Net Loss.
We
had a net loss of $2,392,434 for the nine months ended September 30, 2018 compared to net loss of $1,790,104 for the same period
in 2017. Significant elements deriving these losses have been discussed above.
Liquidity and Capital Resource
At September 30, 2018,
we had cash of $254,940. We have historically met our cash needs through a combination of proceeds from private placements of our
securities, and from loans. Our cash requirements are generally for operating activities.
Our operating
activities resulted in cash used in operations of $409,135 for the nine months ended September 30, 2018, compared to cash
used in operations of $1,446,699 for the same period in 2017, a 72% improvement. The primary driver of this improvement was
related to the decrease in inventory value amounting to $1,609,838 primarily related to 30 EVARC™ units that were built
in 2017, but not delivered until January 2018. Other principal elements of cash flow for the nine months ended September 30,
2018 include the net loss of the Company offset by depreciation and amortization of $51,816, common stock share value issued
for director services of $206,250, and $651,638 of the amortization of debt discount to interest expense associated with
common stock purchase warrants provided to our lender at the onset of the financings of the current debt facilities. Further,
cash from operations for the period included of a net increase in accounts receivable of $787,746 directly related to the
increase in revenue in the period; a use of cash of $315,285 related to the increase in prepaid expenses primarily for
funding deposits needed for the purchase of batteries used in our EVARC™ units along with our annual business insurance
policies; a generation of cash associated with reduction of deposits which was used to offset a monthly rent payment per the
terms of our lease; a generation of cash of $259,938 related to the increase in accounts payable mainly due to the timing of
purchases; a generation of cash amounting to $143,088 related to the increase in deferred revenue for a prepayment for two
EVARC™ units by a customer; and a generation of cash amounting to $46,579 related to the increase in sales tax payable
associated with certain sales made during the period for which such sales tax had not been due to be submitted to the
state.
Cash used in investing
activities was $5,798 and $7,846 for the nine months ended September 30, 2018 and 2017, respectively, a 26% decrease. In 2018,
$56,065 was used to fund patent related costs while being offset by $50,267 generated from the sale of a fixed asset.
Cash generated by our
financing activities was $266,398 for the nine months ended September 30, 2018 compared to $1,577,485 for the same period in 2017,
a 83% decrease. In 2018 the cash used was primarily net borrowings on our credit facilities amounting to $101,595 in
addition to a net $278,000 invested into the Company through private placements of our common stock offset by prepaid offering
costs of $113,197 associated with our planned public offering of our common stock.
As of September 30,
2018, current liabilities exceeded current assets by $2,247,435. In 2018, current assets decreased by approximately $639,000 resulting
primarily from the increase in accounts receivable associated with the increased amount of revenues in the period offset by a decrease
of $1,563,003 in inventory related to this same revenue increase in the period. In 2018, current liabilities decreased by approximately
$822,000 primarily as a result of an increase in our outstanding debt balances along with increases in accounts payable balances,
other accrued expenses, and deferred expenses.
While the Company has
been attempting to grow market awareness and focusing on the generation of sales to get our product out into the marketplace, prior
to 2018 the Company had not generally earned a gross profit on its sales of products and services. It has been pricing its
products and services in an attempt to forge durable long-term customer relationships, to gain market share, and to establish its
brand. Management believes that with increased production volumes that we believe are forthcoming, efficiencies will continue
to improve, and total per unit production costs will decrease, thus allowing for consistent gross profits on the EV ARC ™
product as we move forward. The Company will continue to rely on capital infusions from the private or public placement of
its securities as well as initiating future debt instruments until it achieves positive cash flow from its business, which is predicated
on increasing sales volumes and the continuation of production cost reduction measures. Management cannot currently predict
when or if it will achieve positive cash flow.
Management believes
that evolution in the operations of the Company may allow it to execute on its strategic plan and enable it to experience profitable
growth in the future. This evolution is anticipated to include the following continual steps: addition of sales personnel and independent
sales channels, continued management of overhead costs, process improvements and vendor negotiations leading to cost reductions,
increased public awareness of the Company and its products, and the maturation of certain long sales cycle opportunities. Management
believes that these steps, if successful, may enable the Company to generate sufficient revenue and raise additional growth capital
to allow the Company to manage its debt burden appropriately and to continue operations. There is no assurance, however, as to
if or when the Company will be able to achieve those investment and operating objectives. The Company does not have sufficient
capital to meet its current cash needs, which include the costs of compliance with the continuing reporting requirements of the
Securities Exchange Act of 1934, as amended. The Company is also in the process of seeking additional capital and long and short-term
debt financing to attempt to overcome its working capital deficiencies. The Company is currently seeking financing, but there is
no assurance that the Company can raise sufficient capital or obtain sufficient financing to enable it to sustain monthly operations.
The Company will attempt to renegotiate the maturity dates of its current debt financings as needed and as it has done successfully
in the past, but there is no assurance that these efforts will be successful. In order to address its working capital deficit,
the Company is also seeking to increase sales of its existing products and services. There may not be sufficient funds available
to the Company to enable it to remain in business and the Company’s needs for additional financing are likely to persist.
Capitalization
On July 2, 2018, we
filed with the Securities and Exchange Commission a Registration Statement on Form S-1 to raise equity capital through the offer
and sale of units consisting of shares of our common stock and warrants to purchase additional shares of common stock. The Company
is also applying to list its common stock for trading on the NASDAQ Capital Market upon the closing of the offering, if it closes.
The public offering is expected to be made through a firm commitment underwriting conducted by Maxim Capital Group, Inc., a registered
member of the Financial Industry Regulatory Authority (“FINRA”). The offering is expected to raise $10,000,005 through
the sale of 666,667 units, for $15.00 per unit, each unit consisting of one share of the Company’s common stock coupled with
a warrant to purchase a future share of the Company’s common stock for $18.00 per share. The Company will perfect a 75 to
1 reverse split as a part of this transaction. See our filing at www.sec.gov for a copy of the registration statement.
Going Concern Qualification
As reflected in the
accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2018, the Company had
a net loss and net cash used in operating activities of $2,392,434 and $409,135, respectively. Additionally, at September 30, 2018,
the Company had a working capital deficit of $2,247,435, an accumulated deficit of $40,669,313 and a stockholders’ deficit
of $1,885,518. It is management’s 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 issuance date of this report.
The Company has incurred
significant losses from operations, and such losses are expected to continue. In addition, the Company has limited working
capital. In the upcoming months, management's plans include seeking additional operating and working capital through a combination
of financings. There is no guarantee that additional capital or debt financing will be available when and to the extent required,
or that if available, it will be on terms acceptable to the Company. Further, the Company continues to seek sales contracts
for new product sales that should provide additional revenues and, gross profits. Additionally, Envision intends to renegotiate
the debt instrument that becomes due later in 2018. All such actions and funds, if successful, may not be sufficient to cover
monthly operating expenses or meet minimum payments with respect to the Company’s liabilities over the next twelve months.
The Company’s
Independent Registered Public Accounting Firm has included a “Going Concern Qualification” in their report for the
years ended December 31, 2017 and 2016. The condensed consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern. The “Going Concern Qualification” might make
it substantially more difficult to raise capital.
Off-Balance Sheet Arrangements
We do not have any
off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources,
that are material to investors.