Envision Solar International, Inc. and Subsidiary
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying
notes are an integral part of these Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
|
1.
|
CORPORATE ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
CORPORATE ORGANIZATION
Envision Solar was
incorporated in June 2006 as a limited liability company (“LLC”). Through a series of transactions and mergers, including
a series of 2010 transactions where the then existing entity was acquired by an inactive publicly-held company in a transaction
treated as a recapitalization of the company, the resulting entity became Envision Solar International, Inc., a Nevada Corporation
(along with its subsidiary, hereinafter the “Company”, "us", "we", "our" or "Envision").
Additionally, the Company had formed various wholly owned subsidiaries to account for its planned future operations, but these
entities were dissolved over the subsequent years. The only remaining subsidiary included in these consolidated financial statements
is Envision Solar Construction Company, Inc. which was a non-operational entity officially dissolved in 2017.
NATURE OF OPERATIONS
Envision invents, designs,
and manufactures solar powered products and proprietary technology solutions targeting three verticals: electric vehicle charging
infrastructure, out of home advertising infrastructure, and energy security and disaster preparedness. The Company focuses on creating
renewably energized platforms for 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.
PRINCIPALS OF CONSOLIDATION
The consolidated financial
statements include the accounts of Envision Solar International, Inc. and its inactive wholly-owned subsidiary, Envision Solar
Construction Company, Inc. All inter-company balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated
financial statements include the allowance for doubtful accounts receivable, valuation of inventory and standard cost allocations,
depreciable lives of property and equipment, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
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 bank and financial institution deposits that at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts through December 31, 2018. The Company did not have any bank balances in
excess of FDIC insured levels as of December 31, 2018 and had approximately $150,000 as of December 31, 2017.
Concentration of
Accounts Receivable
At December
31, 2018 and 2017, customers that each accounted for more than 10% of our accounts receivable were as follows:
|
2018
|
2017
|
Customer A
|
82%
|
–
|
Customer B
|
–
|
94%
|
Concentration of
Revenues
For the
years ended December 31, 2018 and 2017, customers that each represented more than 10% of our revenues were as follows:
|
2018
|
2017
|
Customer A
|
50%
|
28%
|
Customer C
|
–
|
12%
|
CASH AND CASH EQUIVALENTS
For the purposes of
the consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three
months or less when purchased to be cash equivalents. There were no cash equivalents at December 31, 2018 nor December 31, 2017,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s
financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and short term loans, are carried
at historical cost basis. At December 31, 2018 and 2017, the carrying amounts of these instruments approximated their fair values
because of the short-term nature of these instruments.
ACCOUNTS RECEIVABLE
Accounts receivable
are customer obligations due under normal trade terms. Management reviews accounts receivable on a periodic basis to determine
if any receivables may become uncollectible. Management’s evaluation includes several factors including the aging of the
accounts receivable balances, a review of significant past due accounts, dialogue with the customer, the financial profile of a
customer, our historical write-off experience, net of recoveries, and economic conditions. The Company includes any accounts receivable
balances that are determined to be uncollectible in its overall allowance for doubtful accounts. Further, the Company may record
a general reserve in its allowance for doubtful accounts to account for future changes that may negatively impact our overall collections.
After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
INVENTORY
Inventory is stated
at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method of accounting. Inventory
costs primarily relate to purchased raw materials and components used in the manufacturing of our products, work in process for
products being manufactured, and finished goods. Included in these costs are direct labor and certain manufacturing overhead costs
associated with the manufacturing process. The Company regularly reviews inventory components and quantities on hand, and performs
annual physical inventory counts. A reserve is established if this review process determines the net realizable value of such inventory
may be below the carrying value.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment
is recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related
assets of 3 to 7 years. Expenditures for maintenance and repairs, along with fixed assets below our capitalization threshold, are
expensed as incurred.
PATENTS
The Company believes
it will achieve future economic value for its various patents and patent ideas. All administrative costs for obtaining patents
are accumulated on the balance sheet as a Patent asset until such time as a patent is issued. The costs of these intangible assets
are classified as a long term asset and amortized on a straight line basis over the legal life of such asset, which is typically
20 years. In the event a patent is denied, all accumulated administrative costs will be expensed in that period. For the years
ended December 31, 2018 and 2017 respectively, patent amortization expense was $2,733 and $561.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts
for long-lived assets in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.”
This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
ACCOUNTING FOR DERIVATIVES
The Company
evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives
and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each
balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change
in fair value is recorded in the statement of operations as other income (expense). Upon conversion of a note where the
embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at
fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on
extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification
under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
REVENUE AND COST RECOGNITION
On 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.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
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.
The Company includes
shipping and handling fees billed to customers as revenues, and shipping and handling costs as cost of revenues.
Any deposits received
from a customer prior to delivery of the purchased product or monies paid to us 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 one year warranty on its products for materials and workmanship, but may provide multiple year warranties as negotiated,
and will pass on the warranties from its vendors, if any, which generally covers this one year period. In accordance with ASC
450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. At December
31, 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, all of which are included in inventory prior to a sale, 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.
RESEARCH AND DEVELOPMENT
In accordance with
ASC 730-10, “Research and Development,” expenditures for research and development of the Company’s products are
expensed when incurred, and are included in operating expenses. The Company recognized research and development costs, not including
minimal amounts of labor associated with research and development projects, of $3,585 for the year ending December 31, 2018
and $1,772 for the year ending December 31, 2017.
ADVERTISING
The Company conducts
advertising for the promotion of its products and services. In accordance with ASC 720-35, “Advertising Costs,” advertising
costs are charged to operations when incurred. Such amounts aggregated $114,408 in 2018 and $81,278 in 2017.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
STOCK-BASED COMPENSATION
The Company follows
ASC 718, “Compensation – Stock Compensation.” ASC 718 requires companies to estimate and recognize the fair value
of stock-based awards to employees and directors. The fair value of the portion of an award that is ultimately expected to vest
is recognized as an expense over the requisite service periods using the straight-line attribution method.
The Company accounts
for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “Equity-Based
Payments to Non-Employees”.
The Company estimates
the fair value of each stock option at the grant date by using the Black-Scholes option pricing model.
INCOME TAXES
The Company accounts
for income taxes pursuant to the provisions of ASC Topic 740, “Income Taxes,” which requires, among other things, an
asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which
management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows
the provisions of ASC 740-10-25-5,
“
Basic Recognition Threshold
.”
When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the
guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period
during which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount
of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.
The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected
as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain
of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of December
31, 2018, tax years 2015 through 2018 remain open for IRS audit. The Company has received no notice of audit from the IRS for any
of the open tax years.
The Company recognizes
the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides
guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an
examination by a taxing authority. For tax positions considered effectively settled, the Company recognizes the full amount of
the tax benefit.
BASIC AND DILUTED NET LOSS PER COMMON
SHARE
Basic net loss per
share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted
net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding for
the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental
common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments or other common stock equivalents.
Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Convertible debt convertible
into 20,914,405 common shares, options to purchase 14,820,589 common shares and warrants to purchase 6,717,950 common shares were
outstanding at December 31, 2018. Convertible debt convertible into 19,846,181 common shares, options to purchase 15,216,664 common
shares and warrants to purchase 5,781,900 common shares were outstanding at December 31, 2017. Dilutive common stock equivalents
were not included in the computation of diluted net loss per share in 2018 and 2017 because the effects would have been anti-dilutive
due to the net losses. Due to the net losses in 2018 and 2017, basic and diluted net loss per share amounts are the same. These
potential common shares may dilute future earnings per share.
CONTINGENCIES
Certain conditions
may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company, but which
will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such
contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related
to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's
legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that
a liability has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability would be
accrued in the Company's consolidated financial statements. If the assessment indicates that a potentially material loss contingency
is not probable but is reasonably possible, or is probable but cannot be reasonably estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable would be disclosed. The Company does not include
legal costs in its estimates of amounts to accrue.
SEGMENTS
The Company follows
the guidance of ASC 280-10 for “Disclosures about Segments of an Enterprise and Related Information." During 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 December 31, 2017, $62,616 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Other than the adoption
of ASC 606 “Revenue from Contracts with Customers,” there are no new accounting pronouncements that became effective
during the year ended December 31, 2018 that materially affect the consolidated financial position of the Company or the results
of its’ operations. Accounting Standard Updates which are not effective until after December 31, 2018, including the pronouncements
discussed below, disclose the potential effects on the Company’s consolidated financial position and/or results of its’
operations and financial statement disclosures.
ASU 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.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 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 employees. 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.
As reflected in the
accompanying consolidated financial statements for the years ended December 31, 2018 and 2017, the Company had net losses of $3,598,780
(which includes $349,072 of stock-based compensation expense) and $3,041,430 (which includes $430,084 of stock-based compensation
expense), respectively, and net cash used in operating activities of $712,456 and $3,437,312, respectively. Additionally, at December
31, 2018, the Company had a working capital deficit of $2,759,580, stockholders’ deficit of $2,480,679, and accumulated deficit
of $41,875,659. It is managements opinion that these factors raise substantial doubt about the Company’s ability to continue
as a going concern for a period of twelve months from the 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 public offering
of its common stock 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 in 2019. All such actions and funds, if
successful, may or may not be sufficient to cover monthly operating expenses or meet minimum payments with respect to the Company’s
liabilities over the next twelve months or provide additional working capital. From January 1, 2018 through December 31, 2018,
the Company raised $290,000 from a private securities offering, borrowed a net $750,000 from a certain loan facility but additionally,
made payments on other debt facilities totaling $212,685.
The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
|
3.
|
ACCOUNTS RECEIVABLE, AND DEFERRED REVENUE
|
Accounts Receivable
The Company
records accounts receivable as it bills its customers for products and services. The allowance for doubtful accounts is based upon
the Company’s policy (See Note 1). Accounts receivable throughout the year may decrease based on payments received, credits
for change orders, or back charges incurred.
At December 31, 2018
and 2017, accounts receivables were as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Accounts receivable
|
|
$
|
1,290,702
|
|
|
$
|
5,946
|
|
Less: Allowance for doubtful accounts
|
|
|
–
|
|
|
|
–
|
|
Accounts receivable, Net
|
|
$
|
1,290,702
|
|
|
$
|
5,946
|
|
There was no bad debt
expense for either 2018 nor 2017.
Deferred Revenue
Deferred
revenues are deposits from customers for product sales which have not yet been delivered and multi period maintenance contracts
(See Note 1 and 16). Deferred revenue was $835,785 and $77,514 at December 31, 2018 and December 31, 2017, respectively.
|
4.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and
other current assets are summarized as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Prepaid insurance
|
|
$
|
29,524
|
|
|
$
|
25,402
|
|
Deposit on future raw material purchases
|
|
|
226,547
|
|
|
|
30,272
|
|
Total prepaid expenses and other current assets
|
|
$
|
256,071
|
|
|
$
|
55,674
|
|
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Inventories
are stated at the lower of cost or net realizable value. Costs are determined using the first in- first out (FIFO) method. As
of December 31, 2018 and 2017, inventory consists of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
$
|
–
|
|
|
$
|
1,716,141
|
|
Work in process
|
|
|
443,701
|
|
|
|
311,481
|
|
Raw materials
|
|
|
698,689
|
|
|
|
300,479
|
|
Inventory reserve
|
|
|
(11,424
|
)
|
|
|
(8,601
|
)
|
Inventory, net
|
|
$
|
1,130,966
|
|
|
$
|
2,319,500
|
|
|
6.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consists
of the following:
|
|
Est. Useful
Lives
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Computer equipment and software
|
|
5 years
|
|
$
|
32,666
|
|
|
$
|
32,666
|
|
Furniture and fixtures
|
|
7 years
|
|
|
82,529
|
|
|
|
82,529
|
|
Office equipment
|
|
5 years
|
|
|
3,039
|
|
|
|
20,533
|
|
Machinery and equipment
|
|
1-5 years
|
|
|
305,337
|
|
|
|
341,583
|
|
Autos
|
|
3 years
|
|
|
49,238
|
|
|
|
49,238
|
|
Leasehold improvements
|
|
47 months
|
|
|
6,790
|
|
|
|
6,790
|
|
Total property and equipment
|
|
|
|
|
479,599
|
|
|
|
533,339
|
|
Less accumulated depreciation
|
|
|
|
|
(346,364
|
)
|
|
|
(307,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
|
$
|
133,235
|
|
|
$
|
226,112
|
|
Depreciation
expense for 2018 and 2017 was $60,106 and $68,820, respectively. In 2018 and 2017, respectively, approximately $22,200 and $22,000
of depreciation was capitalized into inventory as manufacturing overhead costs.
The major
components of accrued expenses are summarized as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Accrued vacation
|
|
$
|
196,888
|
|
|
$
|
152,051
|
|
Accrued interest
|
|
|
239,838
|
|
|
|
175,953
|
|
Accrued rent
|
|
|
66,349
|
|
|
|
77,164
|
|
Accrued loss contingency
|
|
|
71,744
|
|
|
|
44,423
|
|
Other accrued expense
|
|
|
39,351
|
|
|
|
2,333
|
|
Total accrued expenses
|
|
$
|
614,170
|
|
|
$
|
451,924
|
|
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
|
8.
|
LINE OF CREDIT/TERM DEBT – SILICON VALLEY BANK AND CONVERTIBLE LINE OF CREDIT
|
Line of Credit/Term
Debt – Silicon Valley Bank
In October
2015, the Company entered into a one year Loan and Security Agreement (the “LSA”) with Silicon Valley Bank (“Bank”),
pursuant to which the Bank agreed to provide the Company with a revolving line of credit in the aggregate principal amount of $1,000,000,
bearing interest at a floating per annum rate equal to the greater of three quarters of one percentage point (0.75%) above the
Prime Rate (as that term is defined in the LSA) or four percent (4.00%). The line of credit was secured by a second priority perfected
security interest in all of the assets of the Company in favor of the Bank.
The LSA contained certain
restrictions, subject to certain exceptions and qualifications, on the conduct of the Company and its subsidiary, including, among
other restrictions: incurring debt other than permitted indebtedness as defined, disposing of certain assets, making investments,
creating or suffering liens, completing certain mergers, consolidations and sales of assets, acquisitions, declaring dividends
to third parties, redeeming or prepaying other debt, and certain transactions with affiliates.
Under the
terms of the LSA, the Bank received a commitment fee of $2,500, reimbursement of Bank expenses for documentation of $10,000, and
a reimbursement of filing fees amounting to $1,836. These fees were recorded as Debt Issue Costs on the accompanying balance sheet
and were amortized over the one year term of the line of credit.
As of December
31, 2016, the term of the LSA was extended to January 28, 2017. Fees amounting to $2,400 relating to this extension were recorded
as Debt Issue Costs on the accompanying balance sheet and were amortized over the term of this extension.
As a condition
to the extension of credit to the Company under the LSA, Keshif Ventures, LLC (“Keshif”), a related party shareholder
with more than 10% of the outstanding stock of the Company, agreed to guarantee all of the Company’s obligations under the
LSA pursuant to a Master Unconditional Limited Guaranty between the Bank and Keshif (“Guaranty”). Keshif pledged cash
equivalent collateral to the Bank as security for the Guaranty. Keshif also agreed to subordinate to the Bank all of Company’s
indebtedness and other monetary obligations owing to Keshif pursuant to a Subordination Agreement (“Subordination Agreement”).
Pursuant to the terms of the SPA, for each six-month period from and after the six-month anniversary of October 29, 2015 (each,
a “Measurement Period”) that Keshif guarantees Borrower’s obligations under the LSA, Keshif will also receive
the number of additional shares of Envision’s common stock, rounded upward to the nearest whole number, equal to (a) two
and one half percent (2.5%) multiplied by the maximum outstanding principal amount of the LSA at any time during such Measurement
Period, such amount to be divided by (b) the twenty (20) day average closing price of the Company’s common stock, measured
for the twenty (20) consecutive trading days immediately prior to such Measurement Period, the quotient of which shall be multiplied
by (c) a fraction, the numerator of which is the number of calendar days during the Measurement Period which the Guaranty remained
in effect and the denominator of which is the number of calendar days in such Measurement Period. On April 29, 2017, the Company
issued 234,302 shares of its common stock valued at $0.15 per share, or $35,145, and expensed this over the six month Measurement
Period of the Guaranty. The Company recorded a gain on debt settlement of $2,355 on this transaction. Additionally, in September
2017, the Company issued 219,555 shares of its common stock valued at $0.15 per share, or $32,933 and expensed this over the final
Measurement Period of the Guaranty. The Company recorded a loss of $2,183 on this transaction (See Notes 14 and 18).
Additionally,
the Company issued a side letter to Keshif (the “Side Letter”), which in addition to confirming Keshif’s entitlement
to the Shares, provided certain contractual rights to Keshif in consideration for the Guaranty, including a covenant by the Company
to provide financial statements and other periodic reports to Keshif, an agreement to reimburse Keshif for payments made by Keshif
to the Bank in accordance with the Guaranty (“Reimbursement Obligation”), and the grant of a security interest, subordinated
to the Bank under the Subordination Agreement, to secure the Reimbursement Obligation. Keshif also had the right under the Side
Letter to invite one representative to attend all meetings of Envision’s Board of Directors and, in the event Envision was
unable to meet its obligations under the LSA, Keshif was to immediately become entitled to elect one member to Envision’s
Board of Directors.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Effective
March 30, 2017, the Company entered into an additional amendment to the LSA with Silicon Valley Bank as it relates to this debt.
The amendment (i) extended the maturity date to March 1, 2020, (ii) increased the loan to an aggregate principal amount of $1,500,000,
and (iii) changed the payment terms requiring monthly interest only payments through December 2017, and starting January 1, 2018,
the Company was required to repay the balance outstanding in twenty-seven equal monthly principal payments in addition to the monthly
accrued interest. The additional $500,000 of debt was funded to the Company in April 2017. Related to this amendment, the Company
paid $9,655 of fees to the Bank. These fees were recorded as debt discount and netted against the loan balance and amortized to
interest expense over the term of the debt facility.
As of September
25, 2017, the Company paid off the LSA in full with the proceeds of the “Lender” note as discussed in Note 10, and
the Guaranty and all other contractual rights related to this debt facility were cancelled.
Convertible Line
of Credit
On September
18, 2017, in addition to a convertible “Lender” note (See Note 10), 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.
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.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
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 (See Note 15). 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 consolidated 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 (See Note 15). 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 consolidated 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.
As of December
31, 2017, the convertible line of credit had a balance, net of a $226,768 debt discount, amounting to $923,232.
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 15). 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
year ended December 31, 2018, the Company received other funds on drawdowns totaling $1,513,013 and paid back drawdowns amounting
to $553,013. No warrants were owed on these drawdowns.
As of December
31, 2018, the convertible line of credit had a principal balance outstanding amounting to $960,000 with accrued interest amounting
to $12,909 which is included in accrued expenses (See Note 7).
|
9.
|
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 in Section 8.1(a) or 8.1(b) of the 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.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
All
deferred amounts are evidenced by an unsecured convertible promissory note payable by the Company to Mr. Wheatley amended and
signed in October 2018, 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 prior to June 30,
2018, there was no beneficial conversion feature to this note through this date. Subsequent to June 30, 2018 and through
December 31, 2018, and based on the average daily closing price of Our common stock, the Company recorded $8,672 of debt
discount for the beneficial conversion feature value which is being amortized to interest expense over the term of the note.
Additionally, on March 29, 2017 the board of directors granted Mr. Wheatley a $35,000 bonus for which Mr. Wheatley agreed to
defer such bonus under the same terms of his salary deferral. The balance of the note as of December 31, 2017 is $135,000.
The balance of the note as of December 31, 2018, is $177,251, net of debt discount amounting to $7,749, with accrued and
unpaid interest amounting to $28,220 which is included in accrued expenses (See Notes 7 and 18). This Note is classified as
short term as of December 31, 2017 and long term as of December 31, 2018 on the accompanying consolidated balance sheet as a
result of the August 2018 amendment changing the due date to December 1, 2020.
|
10.
|
CONVERTIBLE NOTES PAYABLE AND FAIR VALUE MEASUREMENTS
|
As of December
31, 2017, the following summarizes amounts owed under convertible notes payable:
|
|
Amount
|
|
|
Discount
|
|
|
Convertible Notes Payable, net of discount
|
|
Evey Note
|
|
$
|
62,616
|
|
|
$
|
–
|
|
|
$
|
62,616
|
|
Pegasus Note
|
|
|
100,000
|
|
|
|
–
|
|
|
|
100,000
|
|
“Lender” Note
|
|
|
1,500,000
|
|
|
|
175,668
|
|
|
|
1,324,332
|
|
|
|
$
|
1,662,616
|
|
|
$
|
175,668
|
|
|
$
|
1,486,948
|
|
As of December
31, 2018, the following summarizes amounts owed under convertible notes payable:
|
|
Amount
|
|
|
Unamortized Discount
|
|
|
Convertible Notes Payable, net of discount
|
|
Evey Note
|
|
$
|
50,616
|
|
|
$
|
15,480
|
|
|
$
|
35,136
|
|
“Lender” Note
|
|
|
1,500,000
|
|
|
|
430,901
|
|
|
|
1,069,099
|
|
Convertible Notes Payable - Current Portion
|
|
$
|
1,550,616
|
|
|
$
|
446,381
|
|
|
$
|
1,104,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pegasus Note
|
|
$
|
100,000
|
|
|
$
|
–
|
|
|
$
|
100,000
|
|
Convertible Notes Payable - Long Term Portion
|
|
$
|
100,000
|
|
|
$
|
–
|
|
|
$
|
100,000
|
|
Gemini Third Amended
and Restated Secured Bridge Note – Current Group
At the end
of 2010, the Company had a series of outstanding convertible notes to Gemini Master Fund, Ltd which were due December 31, 2011.
These notes bore interest at a rate of 12% per annum and, with the exception of one note, had a conversion feature whereby, the
lender, at its option, may at any time convert this loan into common stock at $0.25 per share. Interest under these notes is due
on the first business day of each calendar quarter, however, upon three days advance notice, the Company may elect to add such
interest to the note principal balance effectively making the interest due at note maturity. The note was secured by substantially
all assets of the Company and its subsidiary, and was unconditionally guaranteed by the subsidiary.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Through
a series of amendments, the Company modified the terms of all notes so that the terms of these notes became equivalent. Further,
the interest rates were reduced to 10%; the conversion prices were reduced $0.15; the beneficial holder ceiling was increased to
9.9% and the terms were extended to June 30, 2015.
In June 2015,
Gemini sold a 70.0066819% stake in its’ note to Robert Noble, our past Chairman, in a private transaction. The Company issued
two replacement notes for their respective ownership values based on this transaction with the Noble note having a balance of $600,000
and the Gemini note having a balance of $256,325. Each note has the same terms and conditions as existed prior to this transaction
and as discussed above. There were no accounting effects for this transaction.
In September
2015, the Company made a payment to pay off the balance of the Gemini note and its accrued interest.
In regards
to the then remaining note, Robert Noble agreed to an extension to March 31, 2016. Additionally, during 2015, the Company made
a $100,000 payment to Mr. Noble to pay down the accrued interest on this note.
Effective
January 20, 2016, Mr. Noble entered into a Purchase Option Agreement with Greencore Capital LLC (“GreenCore”), a firm
affiliated with Jay S. Potter, a former director of the Company (the “Optionee”), pursuant to which the Optionee has
the right to purchase or arrange for the purchase of the Note from Mr. Noble and all of Mr. Noble’s shares in the Company
(the “Option”), at any time prior to March 31, 2016, which date was subsequently extended. The Company had consented
to the original Purchase Option Agreement.
During the
fourth quarter of 2016, the Company was notified that a transaction, or series of transactions, arranged by GreenCore, had officially
closed whereas the convertible note and the “Noble” shares were ultimately obtained by a group of various shareholders,
some of which were related parties to the Company.
Effective
as of February 15, 2017, the Company received conversion notices from all the then current note holders effecting the conversion
of the entire principal balance of the note amounting to $600,000 and accrued and unpaid interest, as of February 15, 2017, amounting
to $104,709. The Company issued 4,698,060 shares of common stock at the contracted conversion price of $0.15 per share, to retire
the entirety of this convertible note (See Notes 14 and 18).
At December
31, 2017, there is no outstanding balance owed for this convertible note.
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.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 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.
For the year
ended December 31, 2018, in lieu of interest payments, the Company made principal payments totaling $12,000. As of December 31,
2018, this note has a balance, net of $15,480 of discount, amounting to $35,136 with accrued interest amounting to $73,382 which
is included in accrued expenses (See Note 7). The note continues to bear interest at a rate of 10%
.
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 December
31, 2018, the note had a balance of $100,000 with accrued and unpaid interest amounting to $90,137 which is included in accrued
expenses (See Note 7).
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
“Lender”
Note
On September
18, 2017, in addition to entering into a revolving convertible line of credit (See Note 8), the Company also entered into a $1,500,000
secured convertible promissory note with the same unaffiliated lender (the “Lender”). The proceeds from this funding
were used to pay off the Line of Credit/Term Debt – Silicon Valley Bank (See Note 8). This 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 initially amended to be payable in full by December 1, 2018 but the
Company did not make the December 1, 2018 principal payment which non payment was a defined event of default. In March 2019, but
effective December 1, 2018, the Company entered into second amendment to extend the term of the note to be payable in full by
(i) June 30, 2019 or (ii) the closing of the public offering by borrower. This modification was treated as a debt 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 $472,718 for the value of the beneficial conversion
feature and is amortizing this to interest expense over the remaining term of the note. Additionally, the Company paid $30,000
of lender fees which were also recorded as debt discount and are also being amortized to interest expense over the term of the
note. 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 $232,768 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 (See Note 15).
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 December 31, 2018, the convertible note had a balance, net of $430,901 of discount, amounting to $1,069,099 with accrued
and unpaid interest amounting to $9,094 which is included in accrued expenses (See Note 7).
Fair
Value Measurements – Derivative Liability – relating to the Gemini Third Amended and Restated Secured Bridge Note –
Current Group discussed above
The accounting
guidance for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding
fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would
be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants
on the measurement date. The accounting guidance established a fair value hierarchy which requires an entity to maximize
the use of observable inputs, where available. This hierarchy prioritizes the inputs into three broad levels as follows. Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are
quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either
directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level
3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. An
asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant
to the fair value measurement.
As a result
of the February 2017 conversion discussed above, there was no embedded conversion option liability as of December 31, 2017.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
The following
is a summary of activity of Level 3 liabilities for the periods ended December 31, 2017:
Balance at December 31, 2016
|
|
$
|
107,081
|
|
Gain on debt extinguishment
|
|
|
(107,081
|
)
|
Balance at December 31, 2017
|
|
$
|
–
|
|
Changes
in fair value of the embedded conversion option liability are included in other income (expense) in the accompanying consolidated
statements of operations.
Gemini Special Opportunities
Fund, LP
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”) (See Note 19). The Company may prepay the Note, provided if the Company repaid 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. During the year ending December 31, 2018, the Company recorded an increase in the Note Payable balance
of $112,500 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 15).
As of December
31, 2018, this note has a balance, net of $74,315 of unamortized discount, amounting to $788,185 with accrued interest amounting
to $26,096 which is included in accrued expenses (See Note 7).
Vendor Note Payable
On June 1,
2010, the Company entered into a Promissory Note with one of its vendors in exchange for the vendor cancelling its open invoices
to the Company. Total outstanding payables recorded by the Company at the time of settlement were $179,702. The note amount was
for $160,633 and bears interest at 10%. The note can be converted only at the option of the Company, at any time, into common stock
with an original conversion price of $0.33 per share. During 2011, 2012 and 2013, the company made partial conversions of this
note. Further, through a series of amendments, the note was extended to December 31, 2014 and the conversion price of the note
was reduced to $0.20 per share of common stock.
Through a
series of amendments, the maturity date of the note was extended through June 30, 2016. There were no accounting effects for these
amendments.
In December
2017 the Company made a $40,000 settlement payment to pay off this note, and all accrued interest, in full. The Company recorded
a gain on debt settlement of $25,352 related to this transaction.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
In October
2015, the Company purchased a new vehicle and financed the purchase through a dealer auto loan. The loan has a term of 60 months,
requires minimum monthly payments of approximately $950, and bears interest at a rate of 5.99 percent. As of December 31, 2017,
the loan has a short-term portion of $9,862 and a long-term portion of $20,620. As of December 31, 2018, the loan has a short-term
portion of $10,520 and a long-term portion of $9,277.
|
13.
|
COMMITMENTS AND CONTINGENCIES
|
Leases:
In August
2016, the Company entered into a sublease for its current corporate headquarters and manufacturing facility. The sublease expires
in August 2020 which is the same term of the master lease for which the Company is the subtenant. As part of the sublease, the
Company provided a $146,091 deposit to the landlord which will be reduced in months nineteen and thirty-one of the sublease, as
defined, in lieu of rent payments. At the end of the lease period, $50,619 of the deposit will remain as security for the surrender
of the premises.
Future annual
minimum lease payments related to our facility lease are as follows:
2019
|
|
$
|
543,180
|
|
2020
|
|
|
404,952
|
|
Total
|
|
$
|
948,132
|
|
Administrative
rent expense was $111,655 for each of the years ended December 31, 2018 and 2017, respectively. Further, for each of the years
ended December 31, 2018 and 2017, $446,618 of rent was capitalized into inventory as manufacturing overhead costs.
Additionally,
at December 31, 2018 the Company owed two month’s rent totaling $97,344 which is recorded in Accounts Payable in the accompanying
balance sheet.
As of December
31, 2018, there are no other lease agreements with non-cancelable terms in excess of one year.
Legal Matters:
From time
to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As
of December 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect
on the results of our operations.
Other Commitments:
The Company
enters into various contracts or agreements in the normal course of business whereby such contracts or agreements may contain commitments.
During 2018 and 2017, the Company has agreements to act as a reseller for certain vendors; sales agent agreements whereby sales
agents would receive a fee equal to a percentage of revenues generated by the agent; business development agreements and strategic
alliance agreements where both parties have agreed to cooperate and provide business opportunities to each other; agreements with
vendors where the vendor may provide marketing, public relations, technical consulting or subcontractor services and financial
advisory agreements where the financial advisor would receive a fee and/or commission for advising and raising capital for the
Company. All expenses and liabilities relating to such contracts were recorded in accordance with generally accepted accounting
principles during the periods. Although such agreements increase the risk of legal actions against the Company for potential non-compliance,
other than sales agent agreements and revenue generating sales contracts, there are no firm commitments in such agreements as of
December 31, 2018.
The Company
enters into various other agreements with third party vendors who will provide services and/or products to the Company. Such vendor
agreements may call for a deposit along with certain other payments based on the delivery of goods or services.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Shares
Issued
Issuances
of the Company’s common stock during the years ended December 31, 2018 and 2017, respectively, are as follows:
2018
Stock Issued in Cash Sales
During the
year ended December 31, 2018 pursuant to private placements, the Company issued 1,933,333 shares of common stock for cash with
a per share price of $0.15 per share or $290,000 and the Company incurred $12,000 of capital raising fees that were paid in cash
and charged to additional paid-in capital. Additionally, 50,000 common stock purchase warrants were issued as offering costs to
the placement agents (see Note 15).
Stock Issued for
Director Services
During the
year ended December 31, 2018, the Company released and issued a total of 625,000 vested shares of common stock (related to previous
years grants to each of three 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 $93,750 (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 $93,750 was expensed during the year ended December 31, 2018
(See Note 18).
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 18). These shares were 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 (See Note 18).
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 per quarter, prorata, 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
.
During the year ended December 31, 2018, the Company released and issued a total of 62,500 vested shares of common stock
to Mr. Schweitzer with a per share fair value of $0.20, or $12,500 (based on the market price at the time of the agreement), for
his service as defined in his respective Restricted Stock Grant Agreement. The $12,500 was expensed during the year ended December
31, 2018 (See Note 18).
As of December
31, 2018, there were unreleased shares of common stock representing $512,500 of unrecognized restricted stock grant expense related
to the Restricted Stock Grant Agreements for our Directors.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
2017
Stock Issued in Cash Sales
During the
year ended December 31, 2017 pursuant to private placements, the Company issued 15,633,327 shares of common stock for cash with
a per share price of $0.15 per share or $2,345,000 and the Company incurred $53,600 of capital raising fees that were paid in cash
and charged to additional paid-in capital. Additionally, as of December 31, 2017, related to the Company’s private placement,
the company was obligated to issue 223,337 common stock purchase warrants to the placement agents which were issued in 2018 upon
the closing of the offering. There was no financial statement 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 recording the issuance of these warrants (see Note 15).
Stock Issued for Loan
Conversion
During the
year ended December 31, 2017, and effective as of February 15, 2017, the Company issued 4,698,060 shares of common stock at the
contracted conversion price of $0.15 per share, or $704,709 effecting the conversion of the entire principal balance of the note
amounting to $600,000 and accrued and unpaid interest, as of February 15, 2017, amounting to $104,709 (See Note 10).
Stock Issued for Services
During the
year ended December 31, 2017, as payment for professional services provided, the Company issued 15,000 shares of the Company’s
common stock with a per share fair value of $0.15 (based on contemporaneous cash sales prices) or $2,250. These shares were fully
earned, and were expensed, upon issuance.
Stock Issued for Services
– Related Party
For
professional services provided per the terms of a consulting agreement with GreenCore Capital LLC (“GreenCore”), and
during the year ended December 31, 2017, the Company issued 180,000 shares of the Company’s common stock with a per share
fair value of $0.15 (based on contemporaneous cash sales prices)
or
$27,000.
Jay Potter, our director, is the managing member of GreenCore and the individual performing the services. (See Note 18)
Stock Issued for Director
Services
As of December
31, 2016, the board approved a modified compensation program, effective January 1, 2017, for all non-executive directors where
each director would receive 750,000 restricted shares of common stock, pursuant to a restricted stock grant agreement (“New
Program RSA”) with vesting 62,500 per quarter over a 36 month period commencing on March 31, 2017 or upon the date for which
a new director is named, issuable on the last day of each calendar quarter so long as such director serves as a director of the
Company at that time. Each director that had a previous agreement agreed to terminate their rights to any previously issued shares
and cancel such previous agreements. As such, the Company granted 2,250,000 shares to directors on January 1, 2017 having a total
value of $337,500. The Company intended to grant up to an additional 750,000 shares of its common stock to each director based
on their achieving certain performance criteria to be agreed upon by the Board of Directors after discussion with senior management.
During the
year ended December 31, 2017, the Company released 750,000 shares of common stock with a per share fair value of $0.15, or $112,500
(based on the market price at the time of the agreements), to three directors for their service as defined in their respective
restricted stock grant agreements. The payments were expensed at issuance (See Note 18).
The total unrecognized restricted stock grant expense related to the Restricted Stock Agreements of our
directors amounted to $562,500 at December 31, 2017.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Stock Issued for Loan
Guaranty
During the
year ended December 31, 2017, and in consideration for the continued Guaranty of the Company’s obligations extended under
a now terminated line of credit, the Company issued 453,857 shares of its common stock, with a per share value of $0.15 (based
on contemporaneous cash sales prices) or $68,078 to Keshif Ventures LLC, a related party, pursuant to a stock purchase agreement.
These shares were expensed to interest expense over the term of the Guaranty period. The Company recorded a gain on debt settlement
of $172 related to this transaction (See Note 8).
Nonvested Shares
A summary of activity of the nonvested shares
as of December 31, 2017 and 2018 is as follows:
|
|
Nonvested Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Nonvested at December 31, 2017
|
|
3,750,000
|
|
$0.15
|
Granted
|
|
1,500,000
|
|
$0.20
|
Vested
|
|
(1,562,500)
|
|
$0.15
|
Forfeited
|
|
(750,000)
|
|
$0.15
|
Nonvested at December 31, 2018
|
|
2,937,500
|
|
$0.17
|
|
15.
|
STOCK OPTIONS AND WARRANTS
|
On August
10, 2011, the Company’s Board of Directors approved and caused the Company to adopt the Envision Solar International, Inc.
2011 Stock Incentive Plan (the “Plan”), which authorizes the issuance of up to 31,500,000 shares of the Company’s
common stock pursuant to the exercise of stock options or other awards granted under the Plan.
In 2008,
the Board approved the 2008 equity Incentive Plan, which authorizes 6,108,571 shares under the plan. Exercise rights may not expire
more than three months after the date of termination of the employee but may expire in less time as stipulated in the individual
grant notice. For disability or death, the optionee or estate will generally have up to twelve months to exercise their options.
For certain options the Company may have rights of first refusal for a stipulated period of time, under a separate stock restriction
agreement, whereby if the holder exercise the options and then desires to sell the underlying shares, the Company has the right
to repurchase such shares at a price to which the holder has agreed to sell them to a third party.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Stock Options
The Company
follows the provisions of ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 establishes standards
surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic
718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions,
such as options issued under the Company’s Stock Option Plans. The Company’s stock option compensation expense was
$111,572 and $220,084 for the years ended December 31, 2018 and 2017, respectively, and there was $6,638 of total unrecognized
compensation cost related to unvested options granted under the Company’s options plans as of December 31, 2018. This
stock option expense will be recognized through December 2019.
The fair
value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain
assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected
option life and expected volatility in the market value of the underlying common stock.
From January
1, 2017 through December 31, 2017, the Company issued 645,000 stock options under the plans with a total valuation of $61,632.
All of these options have a 10 year term.
From January
1, 2018 through December 31, 2018, the Company issued 707,500 stock options under the plans with a total valuation of $94,204.
All of these options have a 10 year term.
We used the
following assumptions for options granted in fiscal 2018 and 2017:
|
2018
|
2017
|
Expected volatility
|
82.40%
|
81.05%
|
Expected term
|
5 Years
|
5 Years
|
Risk-free interest rate
|
2.59%
|
1.5%
|
Expected dividend yield
|
None
|
None
|
The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company’s stock options and warrants have characteristics different from those of its
traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The
risk free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the
expected term. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s
current expectation of future action surrounding dividends. Expected volatility was based on historical data for the trading of
our stock on the open market. The expected lives for such grants were based on the simplified method for employees and directors.
All options
qualify as equity pursuant to ASC 815-40-25, “Contracts in Entity’s Own Equity.”
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Option activity
for the years ended December 31, 2018 and 2017 under the 2008 and 2011 Plans are as follows:
|
|
Number of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2016
|
|
|
19,917,007
|
|
|
$
|
0.25
|
|
Granted
|
|
|
645,000
|
|
|
|
0.16
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(1,095,000
|
)
|
|
|
0.19
|
|
Expired
|
|
|
(4,250,343
|
)
|
|
|
0.33
|
|
Outstanding at December 31, 2017
|
|
|
15,216,664
|
|
|
$
|
0.23
|
|
Granted
|
|
|
707,500
|
|
|
|
0.20
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(1,015,000
|
)
|
|
|
0.19
|
|
Expired
|
|
|
(88,575
|
)
|
|
|
0.63
|
|
Outstanding at December 31, 2018
|
|
|
14,820,589
|
|
|
$
|
0.23
|
|
Exercisable at December 31, 2018
|
|
|
14,674,758
|
|
|
$
|
0.23
|
|
Weighted average grant date fair value
|
|
|
|
|
|
$
|
0.13
|
|
The following
table summarizes information about employee stock options outstanding at December 31, 2018:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Price
|
|
Number
Outstanding at
December 31, 2018
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
Exercisable
at
December 31,
2018
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
$0.13-0.33
|
|
|
14,820,589
|
|
|
4.75 Years
|
|
$
|
0.23
|
|
|
$
|
–
|
|
|
|
14,674,758
|
|
|
$
|
0.23
|
|
|
$
|
–
|
|
|
|
|
14,820,589
|
|
|
4.75 Years
|
|
$
|
0.23
|
|
|
$
|
–
|
|
|
|
14,674,758
|
|
|
$
|
0.23
|
|
|
$
|
–
|
|
As the Company’s
stock price was lower than the weighted average exercise price at December 31, 2018, there is no aggregate intrinsic value of the
options.
Options exercisable
have a weighted average remaining contractual life of 4.73 years as of December 31, 2018.
The weighted average grant date fair value of options granted in 2018 and 2017 was $0.13 and $0.10 respectively.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
Warrants
2018
For the year
ended December 31, 2018, as a part of the Company’s private placement, the Company issued 273,333 warrants to the placement
agents (See Note 14). 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.
During the
year ended December 31, 2018 as a result of Draw Downs on our Convertible Line of Credit with Lender, 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. As a
result of this transaction, the Company recorded $50,591 of debt discount consisting of the relative fair value of the warrants
which is being amortized to interest expense over the term of the drawdown (See Note 8).
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. 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 11).
During the
year ended December 31, 2018, 645,067 warrants had expired.
2017
During the
year ended December 31, 2017, and as additional consideration for the funding of the Convertible Note payable by the Lender, the
Company issued 2,500,000 common stock purchase warrants having a value of $187,142 using the Black-Scholes valuation methodology,
and each with a $0.15 exercise price and a three year term (See Note 10). The assumptions used in the valuation of these warrants
include volatility of 85.78%, expected dividends of 0.0%, a discount rate of 1.50%, and expected term of 3 years.
During the
year ended December 31, 2017 as a result of Draw Downs on our Convertible Line of Credit with the Lender, the Company issued 1,916,667
common stock purchase warrants having a value of $179,612 using the Black-Scholes valuation methodology, and each with a $0.15
exercise price and three year term (See Note 8). The assumptions used in the valuation of these warrants include volatility of
83.67-85.78, expected dividends of 0.0%, a discount rate of 1.50%, and expected term of 3 years.
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
As of December
31, 2017, related to the Company’s private placement, the company was obligated to issue 223,337 common stock purchase warrants
to the placement agents which were issued in 2018. There was no financial statement 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 recording the issuance of these warrants.
During the
year ended December 31, 2017, 26,831,589 warrants had expired.
Warrant activity
for the years ended December 31, 2018 and 2017 are as follows:
|
|
Number of Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2016
|
|
|
28,196,822
|
|
|
$
|
0.17
|
|
Granted
|
|
|
4,416,667
|
|
|
|
0.15
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(26,831,589)
|
|
|
|
0.16
|
|
Outstanding at December 31, 2017
|
|
|
5,781,900
|
|
|
$
|
0.17
|
|
Granted
|
|
|
1,581,117
|
|
|
$
|
0.21
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(645,067
|
)
|
|
|
0.25
|
|
Outstanding at December 31, 2018
|
|
|
6,717,950
|
|
|
$
|
0.17
|
|
Exercisable at December 31, 2018
|
|
|
6,717,950
|
|
|
$
|
0.17
|
|
Weighted average grant date fair value
|
|
|
|
|
|
$
|
0.13
|
|
Warrants
exercisable have a weighted average remaining contractual life of 2.22 years as of December 31, 2018.
For each
of the identified periods, revenues can be categorized into the following:
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Product Sales
|
|
$
|
6,144,251
|
|
|
$
|
1,401,103
|
|
Maintenance Fees
|
|
|
7,576
|
|
|
|
7,114
|
|
Professional Services
|
|
|
10,575
|
|
|
|
3,825
|
|
Total Revenues
|
|
$
|
6,162,402
|
|
|
$
|
1,412,042
|
|
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
At December
31, 2018 and December 31, 2017, deferred revenue amounted to $835,785 and $77,514 respectively. At December 31, 2018, the Company
has received an initial deposit to plan and manufacture two Solar Tree® units, and a deposit for two of our new HP EVARC units,
in addition to deposits for multi-year maintenance plans for previously sold products. As of December 31, 2018, deferred revenue
associated with product deposits are $791,913 and the delivery of such products are expected within the following six months, while
deferred maintenance fees amounted to $43,872 and pertain to services to be provided through the second quarter of 2022.
There was
no Federal income tax expense for the years ended December 31, 2018 and 2017 due to the Company’s net losses. Income tax
expense represents minimum state taxes due.
The blended
Federal and State tax rate of 27.98% applies to loss before taxes. The Company’s tax expense differs from the “expected”
tax expense for Federal income tax purposes, (computed by applying the United States Federal tax rate of 21% to loss before taxes),
as follows:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Computed “expected” tax expense (benefit)
|
|
$
|
(755,744
|
)
|
|
$
|
(1,034,086
|
)
|
State taxes, net of federal benefit
|
|
|
(251,217
|
)
|
|
|
(171,202
|
)
|
Goodwill impairment and other non-deductible items
|
|
|
(74,120
|
)
|
|
|
643,016
|
|
Change in federal tax rates
|
|
|
–
|
|
|
|
4,145,380
|
|
Change in deferred tax asset valuation allowance
|
|
|
1,081,081
|
|
|
|
(3,583,108
|
)
|
Income tax expense
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred income
taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The effects of temporary differences that gave rise to significant
portions of deferred tax assets and liabilities at December 31, are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Charitable contributions
|
|
$
|
2,900
|
|
|
$
|
2,900
|
|
Reserve for bad debt
|
|
|
17,805
|
|
|
|
17,948
|
|
Stock options
|
|
|
3,448,014
|
|
|
|
3,416,792
|
|
Deferred Revenue
|
|
|
233,883
|
|
|
|
–
|
|
Depreciation
|
|
|
22,937
|
|
|
|
6,920
|
|
Other
|
|
|
19,661
|
|
|
|
17,674
|
|
Net operating loss carryforward
|
|
|
7,755,622
|
|
|
|
6,957,507
|
|
Total gross deferred tax assets
|
|
|
11,500,822
|
|
|
|
10,419,741
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(11,432,888
|
)
|
|
|
(10,351,807
|
)
|
Total net deferred tax assets
|
|
|
67,934
|
|
|
|
67,934
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accrued salaries
|
|
|
(67,934
|
)
|
|
|
(67,934
|
)
|
Total deferred tax liabilities
|
|
|
(67,934
|
)
|
|
|
(67,934
|
)
|
Total net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
As a result
of the Company’s history of incurring operating losses, a full valuation allowance has been established. The valuation allowance
at December 31, 2018 was $11,432,888. The increase in the valuation allowance during 2018 was $1,081,081.
At December 31,
2018, the Company has a net operating loss carry forward of $27,714,883 available to offset future net income through 2038. The
NOL expires during the years 2018 to 2038. The utilization of the net operating loss carryforwards is dependent upon the ability
of the Company to generate sufficient taxable income during the carryforward period. In the event that a significant change in
ownership of the Company occurs as a result of the Company’s issuance of common stock, the utilization of the NOL carry forward
will be subject to limitation under certain provisions of the Internal Revenue Code. Management does not presently believe that
such a change has occurred.
On December
22, 2017, the United States enacted the Tax Cuts and Jobs Act (Act). The Act makes significant modifications to the provisions
of the Internal Revenue Code, including but not limited to, a corporate tax rate decrease to 21% effective as of January 1, 2018.
The Company’s net deferred tax assets and liabilities have been revalued at the newly enacted U.S. Corporate rate in the
year of enactment. The adjustment related to the revaluation of the deferred tax asset and liability balances is a net charge
of approximately $4.1 million. This expense is fully offset by a change in valuation allowance. Accordingly, there is no impact
on income tax expense as of December 31, 2017 nor 2018.
|
18.
|
RELATED PARTY TRANSACTIONS
|
Accounts Payable
and Related Party Vendor Payments
During the
year ended December 31, 2017, the Company made cash payments totaling $54,000, and issued 180,000 shares of the Company’s
common stock with a total value of $27,000 to GreenCore for professional services provided to the Company as detailed in a March
28, 2014 consulting agreement. There were no balances owed to GreenCore as of December 31, 2017. Jay Potter, our former director
at the time of such payments, is the managing member of GreenCore (See Note 14).
Director Compensation
On or about
December 31, 2016, Mr. Jay S. Potter, Mr. Tony Posawatz, and Mr. Peter Davidson, all directors of the Company, each entered into
an Amendment to their Restricted Stock Agreement with the Company (each an “Amendment”). Pursuant to their Amendments,
each director agreed to terminate his rights to unvested restricted shares of the Company’s common stock under their previous
respective Restricted Stock Agreements, in consideration for which the Company granted to each director 750,000 restricted shares
of the Company’s common stock, vesting 1/36 per month over a 36 month period commencing on the date of grant, issuable quarterly
on the last day of each calendar quarter (the first vesting is scheduled to occur on January 31, 2017 and be for 20,833 shares
and the first issuance is scheduled to occur on March 31, 2017 and be for 62,499 shares) so long as each director serves as a director,
employee, consultant or officer of the Company at the time of scheduled vesting. The Company may also grant an additional 750,000
restricted shares of the Company’s common stock to each director to vest in the future from time to time, based on their
achieving certain performance criteria to be agreed upon by the Board of Directors after discussion with senior management at a
future date.
During the
year ended December 31, 2017, the Company released 750,000 shares of common stock with a per share fair value of $0.15, or $112,500
(based on the market price at the time of the agreement), to three directors for their service as defined in their respective Restricted
Stock Grant Agreements. The payments were expensed at issuance (See Note 14).
ENVISION SOLAR INTERNATIONAL INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2018 and 2017
During the
year ended December 31, 2018, the Company released and issued a total of 625,000 vested shares of common stock (related to previous
years grants to each of three 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 $93,750 (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 (See Note 14). The $93,750 was expensed during the year ended
December 31, 2018.
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, split between 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 were 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 (See Note 14).
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 per quarter, prorata, 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
.
During the year ended December 31, 2018, the Company released and issued a total of 62,500 vested shares of common stock
to Mr. Schweitzer with a per share fair value of $0.20, or $12,500 (based on the market price at the time of the agreement), for
his service as defined in his respective Restricted Stock Grant Agreement. The $12,500 was expensed during the year ended December
31, 2018 (See Note 14).
Stock Issued for Loan
Guaranty and Cash Sales
During the
year ended December 31, 2017, and in consideration for the continued Guaranty of the Company’s obligations extended under
a now terminated line of credit, the Company issued 453,857 shares of its common stock, with a per share value of $0.15 (based
on contemporaneous cash sales prices) or $68,078 to Keshif Ventures LLC, a related party, pursuant to a stock purchase agreement.
These shares were expensed to interest expense over the term of the Guaranty period. Additionally, during the year ended December
31, 2017, pursuant to a private placement, the Company issued 1,333,333 shares of common stock for cash, with a per share price
of $0.15 per share or $200,000 to Keshif (See Note 8).
Convertible Notes Payable
to Related Parties
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 December 31, 2017 is $135,000. The balance of the note as of December
31, 2018, net of discount amounting to $7,749, is $177,251, with accrued and unpaid interest amounting to $28,220 which is included
in accrued expenses (See Notes 7 and 9). This Note is classified as short term as of December 31, 2017 and long term as of December
31, 2018 on the accompanying consolidated balance sheet.
Effective
as of February 15, 2017, the Company received conversion notices from all the current note holders effecting the conversion of
the entire principal balance of a convertible note outstanding and owed by the Company amounting to $600,000 and accrued and unpaid
interest, as of February 15, 2017, amounting to $104,709. The Company issued 4,698,060 shares of common stock at the contracted
conversion price of $0.15 per share, to retire the entirety of this convertible note. Of these shares, 2,315,940 shares were issued
to Keshif Ventures, LLC.
The
Note Payable with Gemini Special Operations Fund, LP became due as of February 28, 2019 and thus is in technical default (See
Note 11). However, effective that date, an oral forbearance agreement was granted by lender for any defaults, confirmed in writing,
and is meant to be in effect until the Lender and the Company complete an amendment extending the maturity date of the note, or
the note is sooner repaid by the Company.