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, 2016
and 2015
1
.
|
|
CORPORATE ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
CORPORATE ORGANIZATION
Envision Solar was incorporated
on June 12, 2006 as a limited liability company (“LLC”), under the name Envision Solar, LLC. In September 2007, the
company was reorganized as a California C Corporation and issued one share of common stock for each outstanding member unit in
the LLC. Also during 2007, the Company formed various wholly owned subsidiaries to account for its planned future operations, but
these entities were mostly dissolved over the subsequent years. The only remaining subsidiary included in these consolidated financial
statements is Envision Solar Construction Company, Inc.
On February 11, 2010, Envision
Solar International, Inc., a California corporation (Envision CA) was acquired by an inactive publicly-held company in a transaction
treated as a recapitalization of the company with Envision CA being the surviving business and becoming our wholly-owned subsidiary.
On March 11, 2010, Envision CA was merged into our publicly-held company and the name of the publicly-held company was changed
to Envision Solar International, Inc. (along with its subsidiary, hereinafter the “Company”, "us", "we",
"our" or "Envision"). The effects of the recapitalization have been retroactively applied to all periods presented
in the accompanying consolidated financial statements and footnotes.
NATURE OF OPERATIONS
Envision, a Nevada corporation,
invents, designs, and manufactures solar powered products and proprietary technology solutions targeting three verticals: electric
vehicle charging infrastructure, out of home advertising infrastructure, and energy security and disaster preparedness. The Company
focuses on creating renewably energized platforms for 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: impact free renewably energized EV
charging; media, branding, and advertising platforms; sustainable and secure energy production; architectural enhancement; reduced
carbon footprint; high visibility "green halo" branding; reduction of net operating costs through reduced utility bills;
and revenue creation opportunities through the sales of digital out of home (“DOOH”) media.
PRINCIPALS OF CONSOLIDATION
The consolidated financial
statements include the accounts of Envision Solar International, Inc. and its wholly-owned subsidiary, Envision Solar Construction
Company, Inc. All inter-company balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial
statements include the allowance for doubtful accounts receivable, valuation of inventory, depreciable lives of property and equipment,
estimates of costs to complete and earnings on uncompleted contracts, estimates of loss contingencies, valuation of derivatives,
valuation of beneficial conversion features in convertible debt, valuation of share-based payments, and the valuation allowance
on deferred tax assets.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
CONCENTRATIONS
Concentration of Credit
Risk
The Company
maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts through December 31, 2016. The Company did not have any bank balances in
excess of FDIC insured levels as of December 31, 2016 and December 31, 2015.
Concentration of Accounts
Receivable
At December
31, 2016 and 2015, customers that each accounted for more than 10% of our accounts receivable were as follows:
|
2016
|
2015
|
Customer 1
|
71%
|
–
|
Customer 2
|
25%
|
–
|
Customer 3
|
–
|
56%
|
Customer 4
|
–
|
39%
|
Concentration of Revenues
For the years
ended December 31, 2016 and 2015, customers that each represented more than 10% of our revenues were as follows:
|
2016
|
2015
|
Customer A
|
30%
|
–
|
Customer B
|
26%
|
–
|
Customer C
|
14%
|
26%
|
Customer D
|
–
|
39%
|
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 $0 and $14,376 cash equivalents at December 31, 2016 and December 31,
2015, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial
instruments, including cash, accounts receivable, accounts payable, accrued expenses and short term loans, are carried at historical
cost basis. At December 31, 2016 and 2015, the carrying amounts of these instruments approximated their fair values because of
the short-term nature of these instruments. See Note 9 for further discussion of fair value measurements.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
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.
INVENTORY
Inventory is stated
at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method of accounting.
Inventory costs primarily relate to purchased raw materials and components used in the manufacturing of our products, work in
process for products being manufactured, and finished goods. Included in these costs are direct labor and certain
manufacturing overhead costs associated with the manufacturing process. The Company regularly reviews inventory components
and quantities on hand, and performs 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 and/or for any inventory obsolescence.
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
Effective January 2015,
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, 2016 and 2015 respectively, patent amortization expense was $561 and $0.
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.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
ACCOUNTING FOR DERIVATIVES
The Company evaluates
its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those
contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The
result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded
as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the
statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities
at the fair value of the instrument on the reclassification date.
REVENUE AND COST RECOGNITION
Revenues are primarily
derived from the direct sales of products in addition to historical construction contracts for the production and installation
of integrated solutions and proprietary products, and on a limited basis, lease income from the lease of our products. Revenues
may also consist of revenues from professional services performed which typically stem from the modification, repair, or maintenance
of our installed product base.
Revenues from leases and professional
services are recognized as earned.
Revenues from inventoried
product sales are recognized upon the final delivery of such product to the customer. Any deposits received from a customer prior
to such delivery are accounted for as deferred revenue on the balance sheet. At December 31, 2016 and December 31, 2015, deferred
revenue amounted to $75,323 and $213,467 respectively. At December 31, 2016, the Company has received partial deposits for two
undelivered Solar Tree® units along with some other small initiatives to enhance previously deployed units.
Revenues and related costs
on construction projects are recognized using the “percentage of completion method” of accounting in accordance with
ASC 605-35, “Construction-Type and Production-Type Contracts.” Under this method, contract revenues are recognized
over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs
for the entirety of the contract. Costs include direct material, direct labor, subcontract labor, allocable depreciation and other
allocable indirect costs and are charged to the periods as incurred. All unallocable indirect costs and corporate general and administrative
costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded
as an asset in “costs and estimated earnings in excess of billings on uncompleted contracts.” Any billings of customers
in excess of recognized revenues are recorded as a liability in “Billings in excess of costs and estimated earnings on uncompleted
contracts.” However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is
determined.
For construction contracts
that do not qualify for use of the percentage of completion method, the Company accounts for such contracts using the “completed
contract method” in accordance with ASC 605-35. Under this method, contract costs are accumulated as deferred assets and
billings and/or cash receipts are recorded to a deferred revenue liability account during the periods of construction, but no revenues,
costs or profits are recognized in operations until the period upon completion of the contract. Costs include direct material,
direct labor, subcontract labor, allocable depreciation and other allocable indirect costs. All unallocable indirect costs and
corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is
foreseen, the Company will recognize the loss when such loss is determined. The deferred asset (accumulated contract costs) in
excess of the deferred liability (billings and/or cash received) is classified as a current asset under “Costs in excess
of billings on uncompleted contracts.” The deferred liability (billings and/or cash received) in excess of the deferred asset
(accumulated contract costs) is classified under current liabilities as “Billings in excess of costs on uncompleted contracts.”
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
A contract is considered
complete when all costs except insignificant items have been incurred and the installation is operating according to specifications
or has been accepted by the customer.
Although as of December
31, 2016, the Company no longer is involved in construction projects and has adjusted its business model to sell our product to
others for installation, the Company has historically had contracts in various stages of completion. Such contracts require estimates
to determine the appropriate cost and revenue recognition. Costs estimates would be reviewed periodically on a contract-by-contract
basis throughout the life of the contract such that adjustments to the profit resulting from revisions are made cumulative to the
date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects, must
be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional
information becomes available.
The Company includes shipping
and handling fees billed to customers as revenues, and shipping and handling costs as cost of revenues. Sales tax is recorded on
a net basis and excluded from revenue. The Company generally provides a one year warranty on its products for materials and workmanship
and will pass on the warranties from its vendors, if any, which generally covers this one year period. In accordance with ASC 450-20-25,
the Company accrues for product warranties when the loss is probable and can be reasonably estimated. At December 31, 2016,
the Company has no product warranty accrual given the Company’s de minimis historical financial warranty experience.
RESEARCH AND DEVELOPMENT
In accordance with ASC
730-10, “Research and Development,” expenditures for research and development of the Company’s products are expensed
when incurred, and are included in operating expenses. The Company recognized research and development costs, not including the
minimal amounts of labor associated with research and development projects, of $3,459 for the year ending December 31, 2016
and $888 for the year ending December 31, 2015.
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 $58,149 in 2016 and $49,500 in 2015.
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.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
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, 2016, tax years 2013 through 2016 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.
Convertible debt convertible
into 6,123,370 common shares, options to purchase 19,917,007 common shares and warrants to purchase 28,196,822 common shares were
outstanding at December 31, 2016. Convertible debt convertible into 5,311,923 common shares, options to purchase 15,337,007 common
shares and warrants to purchase 29,219,441 common shares were outstanding at December 31, 2015. Dilutive common stock equivalents
were not included in the computation of diluted net loss per share in 2016 and 2015 because the effects would have been anti-dilutive
due to the net losses. Due to the net losses in 2016 and 2015, basic and diluted net loss per share amounts are the same. These
potential common shares may dilute future earnings per share.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
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 2016 and 2015,
the Company only operated in one segment; therefore, segment information has not been presented.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no new accounting
pronouncements that became effective during the period ended December 31, 2016 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, 2016, 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 2016-15
In August 2016,
the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments.
This guidance addresses eight specific cash flow issues with the
objective of reducing diversity in practice regarding how certain cash receipts and cash payments are presented in the statement
of cash flows. The standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment
costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination,
(4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies,
(6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately
identifiable cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim
period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
ASU 2016-02
In February 2016,
the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02: “Leases (Topic 842)” whereby
lessees will need to recognize almost all leases on their balance sheet as a right of use asset and a lease liability. This guidance
is effective for interim and annual reporting periods beginning after December 15, 2018. The Company expects this ASU will increase
its current assets and current liabilities, but have no net material impact on its consolidated financial statements.
ASU 2016-09
In March 2016,
the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-09:
"Compensation – Stock Compensation
(Topic 718)
-
I
mprovements
to Employee Share-Based Payment Accounting" which includes multiple provisions intended to simplify various aspects of
the accounting for share-based payments. This guidance is effective for interim and annual reporting periods beginning after December
15, 2016. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
ASU 2014-09
In May 2014,
the Financial Accounting Standards Board issued Update No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”
which requires that an entity recognize revenue to depict the transfer of promised goods and services to customers in an amount
that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Since the
issuance of the original standard, the FASB has issued several updates to the standard which i) clarify the application of the
principal versus agent guidance; ii) clarify the guidance relating to performance obligations and licensing; iii) clarify assessment
of the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts
at transaction; and iv) clarify narrow aspects of ASC 606 or corrects unintended application of the guidance. The new revenue recognition
standard, amended by the updates, becomes effective in the first quarter of 2018 and is to be applied retrospectively using one
of two prescribed methods. Early adoption is permitted. The Company currently plans to adopt the new standard effective January
1, 2018 and does not believe the adoption of this standard will have a material impact on the amount or timing of its revenues.
ASU 2015-03
In April 2015,
the FASB issued ASU No. 2015-03,
“Simplifying the Presentation of Debt Issuance Costs,”
which changes
the presentation of debt issuance costs in financial statements. Under this guidance such costs would be presented as a direct
deduction from the related debt liability rather than as an asset. This guidance is effective for interim and annual reporting
periods beginning after December 15, 2015. As of December 31, 2016 and 2015, this ASU has not had a material impact on the consolidated
balance sheets current presentation.
ASU 2015-17
In November 2015,
the FASB issued ASU No. 2015-17, “
Balance Sheet Classification of Deferred Taxes
,” which requires that an entity
classify deferred tax assets and liabilities as noncurrent on the balance sheet. Prior to the issuance of the standard, deferred
tax assets and liabilities were required to be separated into current and noncurrent amounts on the basis of the classification
of the related asset or liability. This ASU is effective for the Company on April 1, 2017, with early adoption permitted. The adoption
of ASU No. 2015-17 is not expected to have a material impact on the Company's consolidated financial statements or related disclosures.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
ASU 2014-15
In August 2014,
the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Topic 205-40)”, which requires
management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each
annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard was effective
for the Company for its annual period beginning December 31, 2016. The Company has reflected the related disclosure requirements
associated with the standard in Note 2.
As reflected in the accompanying
consolidated financial statements for the years ended December 31, 2016 and 2015, the Company had net losses of $2,633,516 (which
includes $911,087 of stock based compensation expense) and $1,839,533 (which includes $121,915 of stock based compensation expense),
respectively, and net cash used in operating activities of $1,798,726 and $2,469,343, respectively. Additionally, at December 31,
2016, the Company had a working capital deficit of $1,877,415, stockholders’ deficit of $1,385,104, and accumulated deficit
of $35,235,449. It is managements opinion that these factors raise substantial doubt about the Company’s ability to continue
as a going concern.
Envision is pursuing a
capital raise to provide funds during the upcoming months and will look to raise additional funds for further operating capital
and working capital. Further, the Company will seek additional sales that would provide additional revenues
and possible gross profits. All such actions and funds, if successful, may or may not be sufficient to cover monthly operating
expenses or meet minimum payments with respect to the Company’s liabilities over the next twelve months or providing additional
working capital. From January 1, 2016 through December 31, 2016, the Company raised $1,820,000 from a securities offering and drew
down $200,000 on a $1,000,000 line of credit that was established in 2015.
The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
3
.
|
|
CONTRACT ACCOUNTING, ACCOUNTS RECEIVABLE, AND DEFERRED REVENUE
|
Costs and Estimated
Earnings in Excess of Billings on Uncompleted Contracts
Costs and estimated earnings
in excess of billings on uncompleted contracts represents costs and estimated earnings in excess of billings and/or cash received
on uncompleted contracts accounted for under the percentage of completion method (See Note 1).
There were no costs and
estimated earnings in excess of billings on unrecognized contracts as of December 31, 2016.
At December 31, 2015, costs
and estimated earnings in excess of billings on uncompleted contracts consisted of the following for contracts accounted for using
the percentage of completion method:
Costs and estimated earnings recognized
|
|
$
|
511,108
|
|
Less: Billings or cash received
|
|
|
(489,050
|
)
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
22,058
|
|
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
Billings in Excess of
Costs and Estimated Earnings on Uncompleted Contracts
Billings in excess of costs
and estimated earnings on uncompleted contracts represents billings and/or cash received that exceed accumulated revenues recognized
on uncompleted contracts accounted for under the percentage of completion method (See Note 1).
As of December 31, 2016
and 2015, there were no billings in excess of costs and estimated earnings on uncompleted contracts accounted for using the percentage
of completion method.
Accounts Receivable
The Company records accounts
receivable related to its construction contracts and its design services based on billings or on amounts due under the contractual
terms. 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, 2016 and
2015, accounts receivable were as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Accounts receivable
|
|
$
|
1,161,064
|
|
|
$
|
855,017
|
|
Less: Allowance for doubtful accounts
|
|
|
–
|
|
|
|
(23,400
|
)
|
Accounts receivable, Net
|
|
$
|
1,161,064
|
|
|
$
|
831,617
|
|
Bad debt expense for 2016
and 2015 was $510 and $11,700, respectively.
Deferred Revenue
Deferred revenues are deposits
from customers for product sales which have not yet been delivered (See Note 1). Deferred revenue was $75,323 and $213,467 for
the years ended December 31, 2016 and December 31, 2015, respectively.
4
.
|
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other
current assets are summarized as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Prepaid insurance
|
|
$
|
26,124
|
|
|
$
|
20,035
|
|
Deposit on future raw materials
|
|
|
21,168
|
|
|
|
31,752
|
|
Prepaid consulting services
|
|
|
46,875
|
|
|
|
–
|
|
Total prepaid expenses and other current assets
|
|
$
|
94,167
|
|
|
$
|
51,787
|
|
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
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, 2016 and 2015, inventory consists of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Finished goods
|
|
$
|
22,375
|
|
|
$
|
85,487
|
|
Work in process
|
|
|
164,915
|
|
|
|
234,226
|
|
Raw materials
|
|
|
93,113
|
|
|
|
130,245
|
|
Inventory reserve
|
|
|
(8,601
|
)
|
|
|
(27,783
|
)
|
Inventory, net
|
|
$
|
271,802
|
|
|
$
|
422,175
|
|
6.
|
|
PROPERTY AND EQUIPMENT
|
Property and equipment
consists of the following:
|
|
Est. Useful
Lives
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Computer equipment and software
|
|
5 years
|
|
$
|
28,344
|
|
|
$
|
155,620
|
|
Furniture and fixtures
|
|
7 years
|
|
|
82,529
|
|
|
|
202,009
|
|
Office equipment
|
|
5 years
|
|
|
20,533
|
|
|
|
28,289
|
|
Machinery and equipment
|
|
1-5 years
|
|
|
322,010
|
|
|
|
348,045
|
|
Autos
|
|
3 years
|
|
|
49,238
|
|
|
|
49,238
|
|
Leasehold improvements
|
|
47 months
|
|
|
6,790
|
|
|
|
18,541
|
|
Total property and equipment
|
|
|
|
|
509,444
|
|
|
|
801,742
|
|
Less accumulated depreciation
|
|
|
|
|
(216,403
|
)
|
|
|
(557,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
|
$
|
293,041
|
|
|
$
|
243,961
|
|
Depreciation
expense for 2016 and 2015 was $123,483 and $139,032, respectively. In 2016 and 2015, the amount of depreciation that was
capitalized into inventory as manufacturing overhead costs was approximately $21,600 and $20,000, respectively.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
The major components
of accrued expenses are summarized as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Accrued vacation
|
|
$
|
136,410
|
|
|
$
|
135,940
|
|
Accrued officers’ salary
|
|
|
–
|
|
|
|
68,749
|
|
Accrued interest
|
|
|
235,776
|
|
|
|
142,261
|
|
Accrued loan guaranty
|
|
|
8,333
|
|
|
|
–
|
|
Accrued rent
|
|
|
26,091
|
|
|
|
–
|
|
Accrued commissions
|
|
|
18,828
|
|
|
|
–
|
|
Other accrued expense
|
|
|
4,995
|
|
|
|
1,517
|
|
Total accrued expenses
|
|
$
|
430,433
|
|
|
$
|
348,467
|
|
In October 2015, the Company
entered into a one year Loan and Security Agreement (the “LSA”) with Silicon Valley Bank (“Bank”), pursuant
to which the Bank agreed to provide the Company with a revolving line of credit in the aggregate principal amount of $1,000,000,
bearing interest at a floating per annum rate equal to the greater of three quarters of one percentage point (0.75%) above the
Prime Rate (as that term is defined in the LSA) or four percent (4.00%). The line of credit is secured by a second priority perfected
security interest in all of the assets of the Company in favor of the Bank.
The LSA contains certain
restrictions, subject to certain exceptions and qualifications, on the conduct of the Company and its subsidiary, including, among
other restrictions: incurring debt other than permitted indebtedness as defined, disposing of certain assets, making investments,
creating or suffering liens, completing certain mergers, consolidations and sales of assets, acquisitions, declaring dividends
to third parties, redeeming or prepaying other debt, and certain transactions with affiliates.
Under the terms of the
LSA, the Bank received a commitment fee of $2,500, reimbursement of Bank expenses for documentation of $10,000, and a reimbursement
of filing fees amounting to $1,836. These fees are recorded as Debt Issue Costs on the accompanying balance sheet and 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 are recorded as Debt
Issue Costs on the accompanying balance sheet and are being amortized over the term of this extension.
As a condition to the original
extension of credit to the Company under the LSA, Keshif Ventures, LLC (“Keshif”), a related party shareholder with
more than 10% of the outstanding stock of the Company, agreed to guarantee all of the Company’s obligations under the LSA
pursuant to a Master Unconditional Limited Guaranty between Bank and Keshif (“Guaranty”). Keshif pledged cash equivalent
collateral to the Bank as security for the Guaranty. Keshif also agreed to subordinate to the Bank all of Company’s indebtedness
and other monetary obligations owing to Keshif pursuant to a Subordination Agreement (“Subordination Agreement”). In
consideration for the Guaranty, Envision issued 571,429 shares of its common stock, with a per share value of $0.15 (based on contemporaneous
cash sales prices) or $85,714 (the “Shares”) to Keshif pursuant to a stock purchase agreement (“SPA”).
These shares, along with legal costs associated with the issuance of this guaranty amounting to $11,435, were recorded as Debt
Issue Costs in the accompanying balance sheet and were amortized over the one year term of the line of credit. Pursuant to the
terms of the SPA, for each six-month period from and after the six-month anniversary of October 29, 2015 (each, a “Measurement
Period”) that Keshif guarantees Borrower’s obligations under the LSA, Keshif will also receive the number of additional
shares of Envision’s common stock, rounded upward to the nearest whole number, equal to (a) two and one half percent (2.5%)
multiplied by the maximum outstanding principal amount of the LSA at any time during such Measurement Period, such amount to be
divided by (b) the twenty (20) day average closing price of the Company’s common stock, measured for the twenty (20) consecutive
trading days immediately prior to such Measurement Period, the quotient of which shall be multiplied by (c) a fraction, the numerator
of which is the number of calendar days during the Measurement Period which the Guaranty remained in effect and the denominator
of which is the number of calendar days in such Measurement Period. Related to this guaranty, as of October 29, 2016, the Company
issued 147,493 shares of its common stock valued at $0.15 per share, or $22,123, and expensed this over the six month term of the
guaranty. The Company recorded a gain on debt settlement of $2,877 on this transaction. As of December 31, 2016, the Company is
currently obligated to issue 156,201 shares of its common stock representing $25,000 of obligation and is expensing this over the
current six month term of the guaranty. Related to this obligation, the Company accounted for an accrued loan guaranty expense
amounting to $8,333 that is recorded in accrued expenses on the accompanying balance sheet (See Note 7).
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
The Company also issued
a side letter to Keshif (the “Side Letter”), which in addition to confirming Keshif’s entitlement to the Shares,
provided certain contractual rights to Keshif in consideration for the Guaranty, including a covenant by the Company to provide
financial statements and other periodic reports to Keshif, an agreement to reimburse Keshif for payments made by Keshif to the
Bank in accordance with the Guaranty (“Reimbursement Obligation”), and the grant of a security interest, subordinated
to the Bank under the Subordination Agreement, to secure the Reimbursement Obligation. Keshif also has the right under the Side
Letter to invite one representative to attend all meetings of Envision’s Board of Directors and, in the event Envision is
unable to meet its obligations under the LSA, Keshif will immediately become entitled to elect one member to Envision’s Board
of Directors (see Notes 12, 13 and 16).
The outstanding balance
on the line of credit at December 31, 2016 is $1,000,000 leaving no credit line available to the Company.
Subsequent to December
31, 2016, and effective March 27, 2017, the Company entered into an additional amendment to the LSA with Silicon Valley Bank as
it relates to our revolving line of credit. The amendment (i) extends the maturity date to March 1, 2020, (ii) increases the line
to an aggregate principal amount of $1,500,000, and (iii) changes the payment terms requiring monthly interest only payments through
December 2017 and starting January 1, 2018, the Company shall repay the balance outstanding in twenty-seven equal monthly principal
payments in addition to the monthly accrued interest.
9
.
|
|
CONVERTIBLE NOTES PAYABLE – RELATED PARTIES AND FAIR VALUE MEASUREMENTS
|
As of December 31, 2016
and 2015, the following summarizes amounts owed under short-term convertible notes –related parties:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Evey Note
|
|
$
|
74,616
|
|
|
$
|
86,616
|
|
Wheatley Note
|
|
|
50,000
|
|
|
|
–
|
|
Gemini Master Fund – Third Amended and Restated Secured Bridge Note – Current
Group
|
|
|
600,000
|
|
|
|
600,000
|
|
|
|
$
|
724,616
|
|
|
$
|
686,616
|
|
Evey Note
Prior to 2011, the Company
was advanced monies by John Evey, our former chairman and director, and executed a 10% convertible promissory note which was convertible
into shares of common stock at $0.33 per share. There was no beneficial conversion feature at the note date and this note is subordinate
to the Gemini Master Funds notes. Through a series of amendments, the conversion price of the convertible note was reduced to $0.20
and the maturity date was extended to December 31, 2014.
Effective December 31,
2014, the Company entered into a further extension agreement to extend the maturity date of this note to December 31, 2015. There
were no additional fees or discounts associated with this extension. Per generally accepted accounting principles, 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, but as the market price of the Company’s stock was below the conversion
price at the time of the modification, there was no beneficial conversion feature that needed to be recorded. During the fiscal
year ended December 31, 2015, in lieu of interest payments, the Company made principal payments on this note amounting to $12,000.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
Effective December 31,
2015, the Company entered into a further extension agreement to extend the maturity date of this note to December 31, 2016. There
were no additional fees or discounts associated with this extension. This modification was treated as an extinguishment 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. During the fiscal year ended December 31, 2016, in lieu of interest
payments, the Company made principal payments on this note amounting to $12,000.
Effective December 31,
2016, the Company entered into a further extension agreement to extend the maturity date of this note to December 31, 2017. There
were no additional fees or discounts associated with this extension. This modification was treated as an extinguishment as the
change in fair value of the embedded conversion option just before and just after the modification was more than 10% of the carrying
amount of the note. The market price of the Company’s stock was below the conversion price at the time of the modification,
therefore no beneficial conversion feature needed to be recorded.
Although Mr. Evey is no
longer a director as of December 31, 2016, because he was our Chairman and a related party throughout most of 2016, we have continued
to classify this note as a Convertible note payable - related parties in the accompanying balance sheet. The note continues to
bear interest at a rate of 10%. The balance of the note as of December 31, 2016, is $74,616 with accrued and unpaid interest amounting
to $49,019 which is included in accrued expenses (See Note 7 and Note 16).
Wheatley Note
On October 18, 2016, the
Company entered into a five year employment agreement, effective as of January 1, 2016, with Mr. Desmond Wheatley, the Chief Executive
Officer, President, and Chairman of the Company (the “Agreement”). Pursuant to the Agreement, Mr. Wheatley will receive
an annual deferred salary of $50,000 which Mr. Wheatley will defer until such time as Mr. Wheatley and the Board of Directors agree
that payment of the deferred salary and/or cessation of the deferral is appropriate. In certain circumstances upon the Company
achieving specified milestones, which are described in the Agreement, Mr. Wheatley can demand payment of all or any portion of
the deferred amount, and the Company must comply with such demand. All deferred amounts are evidenced by an unsecured convertible
promissory note payable by the Company to Mr. Wheatley, bearing simple interest at the rate of 10% per annum, accruing until paid,
convertible into shares of the Company’s common stock at $0.15 per share at any time in whole or in part at Mr. Wheatley’s
discretion, with a maturity date of December 31, 2020. As the conversion price was equivalent to the market price at the time of
issuance, there is no beneficial conversion feature to this note. The balance of the note as of December 31, 2016, is $50,000 with
accrued and unpaid interest amounting to $2,410 which is included in accrued expenses (See Note 7).
Gemini Third Amended and Restated Secured
Bridge Note – Current Group
At the end of 2010, the
Company had a series of outstanding convertible notes to Gemini Master Fund, Ltd which were due December 31, 2011. These notes
bore interest at a rate of 12% per annum and, with the exception of one note, had a conversion feature whereby, the lender, at
its option, may at any time convert this loan into common stock at $0.25 per share. Interest under these notes is due on the first
business day of each calendar quarter, however, upon three days advance notice, the Company may elect to add such interest to the
note principal balance effectively making the interest due at note maturity. With regard to the conversion feature of these notes,
the conversion rights contain price protection whereby if the Company sold equity or converted existing instruments to common stock
at a price less than the effective conversion price, the conversion price will be adjusted downward to the sale price. Furthermore,
if the Company issues new rights, warrants, options or other common stock equivalents at an exercise price that is less than the
stated conversion price, then the conversion price shall be adjusted downward to a new price based on a stipulated formula. The
holder may not convert the debt if it results in the holder beneficially holding more than 4.9% of the Company’s common stock.
The note is secured by substantially all assets of the Company and its subsidiary, and is unconditionally guaranteed by the subsidiary.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
Prior to June 30, 2010
all shares underlying the Gemini Master Fund convertible debt were subject to a lock-up agreement, and the shares were not easily
convertible to cash thus, the embedded conversion option did not need to be bifurcated and recorded as a fair value derivative
due to the price protection provision in the notes. Subsequent to June 30, 2010, such lock-up provisions expired and as such, the
Company determined that the embedded conversion option met the definition of a derivative liability and needed to be bifurcated
and recorded as a derivative at fair value.
Through a series of amendments,
the Company modified terms of all notes so that the terms of these notes became equivalent. Further, the interest rates were reduced
to 10%; the conversion prices were reduced $0.15; and the terms were extended to December 31, 2013.
Effective February 28,
2014 the Company entered into an additional extension and amendment agreement with a simultaneous principal conversion agreement
related to these convertible notes payable. With this agreement, all outstanding notes were merged into one note, the term of the
note was extended to June 30, 2015 and the beneficial holder ceiling was increased to 9.9%. No other terms of the notes were modified.
These changes were accounted for as a debt modification but not as a debt extinguishment because the embedded conversion feature
is bifurcated and treated as a derivative and no other debt extinguishment criteria were met. As a result of this transaction,
the Company recorded $478,561 of embedded conversion option based effective interest based on the increase in the fair value of
the embedded conversion option due to the modification which is recorded as debt discount and was amortized over the then remaining
term of the loan. The Company further issued 1,500,000 common stock purchase warrants valued at $193,625 using the Black-Scholes
valuation methodology, each with a three year term and $0.20 strike price, to the holder which was recorded as debt discount and
is being amortized over the remaining term of the note. The Company agreed to pay a $6,500 fee to cover legal and document fees
which was capitalized as an asset on the balance sheet as “Debt issue costs” and was amortized over the remaining term
of the note. Simultaneously, Gemini converted $550,000 of principal convertible debt, and all accrued interest through 2013, and
further, the accrued interest through the conversion date for the converted debt, totaling $155,161 into 4,701,076 shares of common
stock of the Company (3,666,666 shares for principal and 1,034,410 for interest) at the contracted conversion price of $0.15 per
share. The conversion was recorded to equity with no gain or loss on such conversion related to the principal portion, while the
Company recorded a loss of $20,689 related to the conversion of accrued interest. As an inducement to Gemini to convert the principal
debt amount, the Company issued 3,727,778 common stock purchase warrants, each with a strike price of $0.20 and a three year term.
These warrants are valued at $482,300 using the Black-Scholes option pricing model and were expensed at the date of the transaction.
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. Each note has the same terms and conditions as existed prior
to this transaction and as discussed above. There were no accounting effects for this transaction.
In September 2015, the
Company made a payment of $306,624 to pay off the balance of the Gemini note and its accrued interest, and recorded a loss on debt
settlement of $2,925.
In regards to the remaining
note, Robert Noble agreed to an extension to March 31, 2016. Additionally, during 2015, the Company made a $100,000 payment to
Mr. Noble to pay down the accrued interest on this note.
Effective January 20, 2016,
Mr. Noble entered into a Purchase Option Agreement with Greencore Capital LLC (“GreenCore”), a firm affiliated with
Jay S. Potter, a director of the Company (the “Optionee”), pursuant to which the Optionee has the right to purchase
or arrange for the purchase of the Note from Mr. Noble and all of Mr. Noble’s shares in the Company (the “Option”),
at any time prior to March 31, 2016, which date was subsequently extended. The Company had consented to the original Purchase Option
Agreement. Under a Note Settlement and General Release Agreement, provided that the Option is fully exercised and honored, the
Company agreed to grant Mr. Noble the right to acquire, for one dollar, at any time until June 30, 2017, a worldwide, perpetual,
irrevocable, nonexclusive, royalty-free license to utilize all of the Company’s intellectual property developed prior to
January 1, 2011, except for the following: (i) EV ARC™ and (ii) EnvisionTrak™. Further, provided the Option is exercised
in full and Mr. Noble complies with it, the Company agreed to extend the expiration date of the 1,138,120 warrants to purchase
1,138,120 shares of the Company’s common stock owned by Mr. Noble (the “Warrants”) from December 31, 2016 to
December 31, 2017, and agreed to reduce the exercise price of such Warrants from $0.24 to $0.20 per share. (see Note 14)
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
During the fourth quarter
of 2016, the Company was notified that a transaction, or series of transactions, arranged by GreenCore, had officially closed whereas
the convertible note and the “Noble” shares were ultimately obtained by a group of various shareholders, some of which
are related parties to the Company. As the note is partially held by a related party shareholder and was held by other related
party shareholders during the year, the note is classified as Convertible Notes Payable- Related Parties in the accompanying balance
sheets (See Note 16).
At December 31, 2016, the
remaining note had a balance of $600,000, and accrued interest of $96,009 which is included in accrued expenses (See Note 7).
Subsequent to December
31, 2016 and effective as of February 15, 2017, the Company received conversion notices from all of the current note holders effecting
the conversion of the entire note balance and all accrued and unpaid interest, (see Note 17)
Fair Value Measurements – Derivative
liability:
The accounting
guidance for fair value measurements provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price
that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between
market participants on the measurement date. The accounting guidance established a fair value hierarchy which requires an
entity to maximize the use of observable inputs, where available. This hierarchy prioritizes the inputs into three broad
levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the
asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the
financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to
measure assets and liabilities at fair value. An asset or liability’s classification within the hierarchy is determined
based on the lowest level input that is significant to the fair value measurement.
Assets and liabilities
measured at fair value on a recurring and non-recurring basis consisted of the following at December 31, 2015 and 2016:
|
|
Carrying Value at
|
|
|
Fair Value Measurements at December 31, 2015
|
|
|
|
December 31, 2015
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Embedded Conversion Option Liability
|
|
$
|
87,992
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
87,992
|
|
|
|
Carrying Value at
|
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
December 31, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Embedded Conversion Option Liability
|
|
$
|
107,081
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
107,081
|
|
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
The following is
a summary of activity of Level 3 liabilities for the period ended December 31, 2015 and 2016:
Balance at December 31, 2014
|
|
$
|
355,611
|
|
Change in fair value
|
|
|
(267,619
|
)
|
Balance at December 31, 2015
|
|
$
|
87,992
|
|
Change in fair value
|
|
|
19,089
|
|
Balance at December 31, 2016
|
|
$
|
107,081
|
|
Changes in fair
value of the embedded conversion option liability are included in other income (expense) in the accompanying consolidated statements
of operations.
The Company
estimates the fair value of the embedded conversion liability utilizing the Black-Scholes pricing model, which is dependent upon
several variables such as the expected term (based on contractual term), expected volatility of our stock price over the expected
term (based on historical volatility), expected risk-free interest rate over the expected term, and the expected dividend yield
rate over the expected term. The Company believes this valuation methodology is appropriate for estimating the fair value
of the derivative liability. The following table summarizes the assumptions the Company utilized to estimate the fair value
of the embedded conversion option at December 31, 2016 and 2015:
Assumptions
|
December 31, 2016
|
December 31, 2015
|
Expected remaining term
|
0.25
|
0.25
|
Expected Volatility
|
103%
|
113%
|
Risk free rate
|
0.50%
|
0.16%
|
Dividend Yield
|
0.00%
|
0.00%
|
There were no
changes in the valuation techniques during 2016. The Company did however compute the valuation of this derivative liability using
a binomial lattice model noting no material differences in valuation results. The weighted average interest rate for short term
notes as of December 31, 2016 was 10%.
10.
|
|
NOTE PAYABLE AND AUTO LOAN
|
Note Payable
On June 1, 2010, the Company
entered into a Promissory Note with one of its vendors in exchange for the vendor cancelling its open invoices to the Company.
Total outstanding payables recorded by the Company at the time of settlement were $179,702. The note amount was for $160,633 and
bears interest at 10%. The note can be converted only at the option of the Company, at any time, into common stock with an original
conversion price of $0.33 per share. During 2011, 2012 and 2013, the company made partial conversions of this note. Further, through
a series of amendments, the note was extended to December 31, 2014 and the conversion price of the note was reduced to $0.20 per
share of common stock.
Through a series of amendments,
the maturity date of the note was extended through June 30, 2016. There were no accounting effects for these amendments.
As of December 31, 2016,
the note was past due and had a remaining balance due of $43,033 with accrued and unpaid interest amounting to $18,146 which is
included in accrued expenses (See Note 7).
Auto Loan
In October 2015, the Company
purchased a new vehicle and financed the purchase through a dealer auto loan. The loan has a term of 60 months, requires minimum
monthly payments of approximately $950, and bears interest at a rate of 5.99 percent. As of December 31, 2016, the loan had a short-term
portion of $9,337 and a long-term portion of $29,678.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
11.
|
|
CONVERTIBLE NOTES PAYABLE
|
On December 19, 2009, the
Company entered into a convertible promissory note for $100,000 to a new landlord in lieu of paying rent for one year for new office
space. The interest is 10% per annum with the note principal and interest originally due December 18, 2010 and subsequently extended
until December 31, 2012. However, if the Company receives greater than $1,000,000 of proceeds from debt or equity financing, 25%
of the amount in excess of $1,000,000 shall be used to pay down the note. This note is subordinate to all existing senior indebtedness
of the Company. This note is convertible at $0.33 per share and had no beneficial conversion feature at the note date.
Through a series of amendments,
the term of the note was extended until December 31, 2015, and waived, through December 31, 2014, the requirement to pay down the
note with financing proceeds received by the Company.
Effective December 31,
2015, the Company entered into an additional modification extending the term of the note to December 31, 2016, and waiving, through
December 31, 2015, the requirement to pay down the note with financing proceeds received by the Company in the period. There was
no accounting effect for this transaction.
As of December 31, 2016,
the note was past due, had a balance of $100,000 with accrued and unpaid interest amounting to $70,192 which is included in accrued
expenses (See Note 7).
12.
|
|
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:
2017
|
|
$
|
507,200
|
|
2018
|
|
|
522,288
|
|
2019
|
|
|
543,180
|
|
2020
|
|
|
404,952
|
|
Total
|
|
$
|
1,977,620
|
|
Rent expense
was $59,228 and $30,765 for the years ended December 31, 2016 and 2015, respectively. Further, for the years ended December 31,
2016 and 2015, respectively, $337,287 and $268,487 of rent was capitalized into inventory as manufacturing overhead costs.
As of December
31, 2016, there are no other lease agreements with non-cancelable terms in excess of one year.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
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, 2016, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on
the results of our operations.
Other Commitments:
The Company enters
into various contracts or agreements in the normal course of business whereby such contracts or agreements may contain commitments.
During 2016 and 2015, the Company has agreements to act as a reseller for certain vendors; joint development contracts with third
parties; 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, 2016.
Upon the signing
of customer contracts, the Company enters into various other agreements with third party vendors who will provide services and/or
products to the Company. Such vendor agreements may call for a deposit along with certain other payments based on the delivery
of goods or services.
Related
to the Guaranty issued by Keshif whereas Keshif guaranteed the Company’s obligations under the LSA with Silicon
Valley Bank (see Note 8), the Company is obligated to issue additional shares of its common stock based on the formula as
defined in the stock purchase agreement signed with Keshif related to the Guaranty. The Company is obligated to issue 156,201
shares of its common stock in April 2017 with a contractual value of $25,000. The value of this share issuance is being
expensed over the current six month period of the Guaranty. As of December 31, 2016, the Company recorded $8,333 of guaranty
costs which is included in accrued expenses (see Note 7).
Shares Issued
Issuances of
the Company’s common stock during the years ended December 31, 2016 and 2015, respectively, are as follows:
2016
Stock Issued in Cash Sales
During the year
ended December 31, 2016 pursuant to private placements, the Company issued 12,133,333 shares of common stock for cash with a per
share price of $0.15 per share or $1,820,000 and the Company incurred $68,800 of capital raising fees that were paid in cash and
charged to additional paid-in capital. Further, the Company leases a small office space in our corporate facility to a registered
broker currently selling our securities, as an individual, at an equivalent rate equal to our lease rate. As of December
31, 2016, this individual owes $7,500 in rent.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
Stock Issued for Services
For professional
services provided per the terms of a consulting agreement with an investor relations consulting firm, the Company issued 1,000,000
shares of the Company’s common stock with a per share fair value of $0.15 per share (based on contemporaneous cash sales
prices) or $150,000. These payments are being expensed over the term of the agreement. As of December 31, 2016, $46,875 is recorded
in prepaid expenses (See note 4).
Stock Issued for Services
– Related Party
For
professional services provided per the terms of a consulting agreement with GreenCore Capital LLC (“GreenCore”), and
during the year ended December 31, 2016, the Company issued 464,115 shares of the Company’s common stock with a per share
fair value between $0.14 and $0.17 (based on an average market value of the stock when earned as defined in the agreement)
or
$69,603. The Company recorded a gain on debt settlement of $2,396 on
these transactions. These payments were expensed at time of issuance. Jay Potter, our director, is the managing member of GreenCore
and the individual performing the services. (See Note 16)
Stock Issued for Director
Services
On February 12,
2016, the Board approved a compensation program for all non executive directors that do not otherwise have a pre-existing compensation
plan. Starting for the 2016 year of service, each of two directors will receive 1,000,000 shares of common stock, with a
per share value of $0.15 (based on contemporaneous cash sales prices), or $150,000, that will vest equally at the end of each
calendar quarter that such director remains in service as a director over a three year period.
On February 19,
2016, Mr. Anthony Posawatz accepted an appointed as a new director of the Company effective February 19, 2016. In consideration
for Mr. Posawatz’s acceptance to serve as a director of the Company, the Company agreed to grant him 1,000,000 restricted
shares of its common stock, with a per share value of $0.15 (based on contemporaneous cash sales prices), or $150,000, vesting
according to the following vesting schedule: 27,777 per month over a 36 month period commencing on March 31, 2016, issuable on
the last day of each calendar quarter so long as Mr. Posawatz serves as a director of the Company, subject to the grantee’s
right to waive vesting and issuance on a quarterly basis.
On September
8, 2016, Mr. Peter Davidson accepted an appointment as a new director of the Company effective September 8, 2016. In consideration
for Mr. Davidson’s acceptance to serve as a director of the Company, the Company granted 750,000 restricted shares of its
common stock to him, subject to the terms and conditions set forth in the Restricted Stock Grant Agreement including but not limited
to the following vesting schedule: 62,500 shares or prorate portion thereof per calendar quarter over a 36 month period commencing
on September 30, 2016. The value of this stock grant is $0.15 per share (based on contemporaneous cash sales prices) or $112,500,
and is being expensed proportionately as the shares vest. The Company intends to grant up to an additional 750,000 shares of its
common stock to Mr. Davidson based on Mr. Davidson’s achieving certain performance criteria to be agreed upon by the Board
of Directors after discussion with senior management at a future date. No such criteria were established as of December 31, 2016
or the date of these financial statements.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
During the year
ended December 31, 2016, the Company released 1,152,776 shares of common stock with a per share fair value of $0.15, or $172,916
(based on the market price at the time of the agreement), to five directors for their service as defined in their respective Restricted
Stock Grant Agreements and as discussed above. The payments were expensed at issuance (See Note 16).
The total unrecognized
restricted stock grant expense related to the above discussed stock issuances amounted to $337,500 at December 31, 2016.
Stock Issued for Loan
Guaranty – Related Party
During the year
ended December 31, 2016, and in consideration for the continued Guaranty of the Company’s obligations extended under a line
of credit, the Company issued 147,493 shares of its common stock, with a per share value of $0.15 (based on contemporaneous cash
sales prices) or $22,123 to Keshif Ventures LLC, a related party, pursuant to a stock purchase agreement. These shares were expensed
to interest expense over the term of the Guaranty period. The Company recorded a gain on debt settlement of $2,877 related to this
transaction. (See Note 16)
2015
Stock Issued in Cash Sales
During the year
ended December 31, 2015 pursuant to private placements, the Company issued 5,433,334 shares of common stock for cash with a per
share price of $0.15 per share or $815,000 and the Company incurred $8,900 of capital raising fees that were paid in cash and charged
to additional paid-in capital.
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, 2015, the Company issued 373,107 shares of the Company’s common stock with a per share
fair value between $0.13 and $0.18 (based on an average market value of the stock when earned as defined in the agreement)
or
$54,000. The difference between the grant date fair value and contractual
value was de minimis. These payments were expensed at time of issuance. Jay Potter, our director, is the managing member of GreenCore
and the individual performing the services. (See Note 16)
Stock Issued for Director
Services
During the year
ended December 31, 2015, the Company released 347,220 shares of common stock with a per share fair value of $0.15, or $52,082 (based
on the market price at the time of the agreement), to two directors for their service as defined in their respective Restricted
Stock Grant Agreements. The payments were expensed at issuance (See Note 16).
Stock Issued for Loan Guaranty
During the year
ended December 31, 2015, and in consideration for the Guaranty of the Company’s obligations extended under a line of credit,
the Company issued 571,429 shares of its common stock, with a per share value of $0.15 (based on contemporaneous cash sales prices)
or $85,714 to Keshif Ventures LLC, a related party, pursuant to a stock purchase agreement. These shares are recorded as Debt Issue
Costs in the accompanying balance sheet and were amortized over the one year term of the line of credit (See Note 8 and Note 16).
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
14.
|
|
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 30,000,000 shares of the
Company’s common stock (plus annual increases as defined in the plan of 1,500,000 shares for a total of 31,500,000
shares at December 31, 2016) 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.
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 $442,871
and $15,833 for the years ended December 31, 2016 and 2015, respectively, and there was $198,378 of total unrecognized compensation
cost related to unvested options granted under the Company’s options plans as of December 31, 2016. This stock option
expense will be recognized through March 2020.
The fair value
of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain
assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected
option life and expected volatility in the market value of the underlying common stock.
From January
1, 2015 through December 31, 2015, the Company issued 150,000 stock options under the plans which all vest over 4 years, have a
term of 10 years, and a total valuation of $18,483.
From January
1, 2016 through December 31, 2016, the Company issued 5,380,000 stock options under the plans with a total valuation of $622,109.
Of these stock options, 200,000 have a 5 year term while the remaining 5,180,000 have a 10 year term.
We used the following
assumptions for options granted in fiscal 2016 and 2015:
|
2016
|
2015
|
Expected volatility
|
103.59% -114.93%
|
169.62%
|
Expected remaining term
|
2.5-6.5 Years
|
7 Years
|
Risk-free interest rate
|
0.16% -0.50%
|
0.66%
|
Expected dividend yield
|
None
|
None
|
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
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.”
Option activity
for the years ended December 31, 2016 and 2015 under the 2008 and 2011 Plans are as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2014
|
|
|
15,387,007
|
|
|
$
|
0.28
|
|
Granted
|
|
|
150,000
|
|
|
|
0.13
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
200,000
|
|
|
|
0.22
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2015
|
|
|
15,337,007
|
|
|
$
|
0.28
|
|
Granted
|
|
|
5,380,000
|
|
|
|
0.15
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
800,000
|
|
|
|
0.19
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2016
|
|
|
19,917,007
|
|
|
$
|
0.25
|
|
Exercisable at December 31, 2016
|
|
|
16,555,133
|
|
|
$
|
0.28
|
|
Weighted average grant date fair value
|
|
|
|
|
|
$
|
0.12
|
|
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
The following
table summarizes information about employee stock options outstanding at December 31, 2016:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Price
|
|
Number
Outstanding at
December 31, 2016
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
Exercisable
at
December 31, 2016
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
$0.13-1.31
|
|
|
19,917,007
|
|
|
5.16 Years
|
|
$
|
0.25
|
|
|
$
|
–
|
|
|
|
16,555,133
|
|
|
$
|
0.28
|
|
|
$
|
–
|
|
|
|
|
19,917,007
|
|
|
5.16 Years
|
|
$
|
0.25
|
|
|
$
|
–
|
|
|
|
16,555,133
|
|
|
$
|
0.28
|
|
|
$
|
–
|
|
As the Company’s
stock price was lower than the weighted average exercise price at December 31, 2016, there is no aggregate intrinsic value of the
options.
Options exercisable
have a weighted average remaining contractual life of 4.22 years as of December 31, 2016.
Warrants
2016
As a part of
the Company’s private placement, the Company effectively issued 291,667 warrants in the twelve months ended December 31,
2016 to the placement agents. These warrants, valued at $30,419, are exercisable for 5 years at an exercise price of
$0.15 per share. The Company estimated the fair value of the warrants utilizing the Black-Scholes pricing model. The assumptions
used in the valuation of these warrants include volatility of 102.99%, expected dividends of 0.0%, a discount rate of 0.50%, and
expected term of 5 years. There was no financial statement accounting effect for the issuance of these warrants as their fair value
has been charged to Additional Paid-in-Capital as an offering cost and was offset by a credit to Additional Paid-in-Capital for
their fair value when recording the issuance of these warrants.
During the twelve
months ended December 31, 2016, 1,314,286 warrants had expired.
In December 2015,
The Company had consented to the original Purchase Option Agreement between GreenCore and Mr. Robert Noble (our founder and former
Chairman) in which Mr. Noble agreed to sell his interest in a convertible note issued by the Company in addition to all of his
shares in the Company. Under a Note Settlement and General Release Agreement, provided the Option is exercised in full and Mr.
Noble complies with it, the Company agreed to extend the expiration date of the 1,138,120 warrants to purchase 1,138,120 shares
of the Company’s common stock owned by Mr. Noble (the “Warrants”) from December 31, 2016 to December 31, 2017,
and agreed to reduce the exercise price of such Warrants from $0.24 to $0.20 per share (see Note 9). The Company was notified and
has agreed that this transaction closed in December 2016 and has effected the change to the warrant terms. As such, the Company
has recorded a warrant modification expense amounting to $48,302.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
2015
There was no
new warrant activity during 2015.
Warrant activity
for the years ended December 31, 2016 and 2015 are as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2014
|
|
|
29,219,441
|
|
|
$
|
0.18
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2015
|
|
|
29,219,441
|
|
|
$
|
0.18
|
|
Granted
|
|
|
291,667
|
|
|
$
|
0.15
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
1,314,286
|
|
|
|
0.33
|
|
Outstanding at December 31, 2016
|
|
|
28,196,822
|
|
|
$
|
0.17
|
|
Exercisable at December 31, 2016
|
|
|
28,196,822
|
|
|
$
|
0.17
|
|
Weighted average grant date fair value
|
|
|
|
|
|
$
|
0.10
|
|
Warrants exercisable
have a weighted average remaining contractual life of 0.60 years as of December 31, 2016.
There was no
Federal income tax expense for the years ended December 31, 2016 and 2015 due to the Company’s net losses. Income tax expense
represents minimum state taxes due.
The blended Federal
and State tax rate of 39.83% applies to loss before taxes. The Company’s tax expense differs from the “expected”
tax expense for Federal income tax purposes, (computed by applying the United States Federal tax rate of 34% to loss before taxes),
as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Computed “expected” tax expense (benefit)
|
|
$
|
(895,395
|
)
|
|
$
|
(625,441
|
)
|
State taxes, net of federal benefit
|
|
|
(154,764
|
)
|
|
|
(122,700
|
)
|
Goodwill impairment and other non-deductible items
|
|
|
(31,134
|
)
|
|
|
(106,020
|
)
|
Change in deferred tax asset valuation allowance
|
|
|
1,081,293
|
|
|
|
854,161
|
|
Income tax expense
|
|
$
|
–
|
|
|
$
|
–
|
|
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
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:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Charitable contributions
|
|
$
|
4,128
|
|
|
$
|
4,128
|
|
Reserve for bad debt
|
|
|
25,548
|
|
|
|
25,345
|
|
Stock options
|
|
|
4,776,104
|
|
|
|
4,599,689
|
|
Inventory Adjustment
|
|
|
–
|
|
|
|
11,067
|
|
Depreciation
|
|
|
33,638
|
|
|
|
–
|
|
Other
|
|
|
25,159
|
|
|
|
19,634
|
|
Net operating loss carryforward
|
|
|
9,167,042
|
|
|
|
8,297,039
|
|
Total gross deferred tax assets
|
|
|
14,031,619
|
|
|
|
12,956,902
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(13,934,915
|
)
|
|
|
(12,853,622
|
)
|
Total net deferred tax assets
|
|
|
96,704
|
|
|
|
103,280
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accrued salaries
|
|
|
(96,704
|
)
|
|
|
(96,704
|
)
|
Depreciation
|
|
|
–
|
|
|
|
(6,576
|
)
|
Total deferred tax liabilities
|
|
|
(96,704
|
)
|
|
|
(103,280
|
)
|
Total net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
The valuation
allowance at December 31, 2016 was $13,934,915. The increase in the valuation allowance during 2016 was $1,081,293.
At December 31,
2016, the Company has a net operating loss carry forward of $23,012,877 available to offset future net income through 2036. The
NOL expires during the years 2016 to 2036. 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.
16.
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RELATED PARTY TRANSACTIONS
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Accounts Payable and
Related Party Vendor Payments
During 2016,
the Company made cash payments totaling $69,500, and issued 464,115 shares of the Company’s common stock with a total value
of $69,603 to GreenCore for professional services provided to the Company as detailed in a March 28, 2014 consulting agreement.
Additionally, as of December 31, 2016, the Company has an accounts payable balance of $27,000 owed to Greencore. Jay Potter, our
director, is the managing member of GreenCore (See Note 13).
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
During 2015,
the Company made cash payments totaling $76,000, accrued an additional $22,500, and additionally issued 373,107 shares of the Company’s
common stock with a total value of $54,000 to GreenCore for professional services provided to the Company. Jay Potter, our director,
is the managing member of GreenCore (See Note 13).
During 2015,
pursuant to April 2015 lease agreement, the Company made cash payments to Desmond Wheatley, our President and CEO, totaling $13,480
for the lease of a vehicle owned by Mr. Wheatley but used exclusively by the Company for Company business. The lease was later
terminated in 2015.
Director Compensation
On February 12,
2016, the Company issued 200,000 stock options to each of the three non executive directors that served as a director during 2015,
other than Mr. Moody, for a total of 600,000 stock options. These options were granted as compensation for the services provided
in 2015, will vest immediately, and were valued using the Black-Scholes option pricing methodology. Jay Potter and John Evey each
received 200,000 options exercisable at a price of $0.125 per share for a period of 10 years from the date of grant, with a combined
total valuation of $40,100. Robert Noble received 200,000 options exercisable at a price of $0.1375 per share for a period of 5
years from the date of grant for a total valuation of $15,493. The assumptions used in the valuation of these options include volatility
of 114.93%, expected dividends of 0.0%, a discount rate of 0.16%, and expected terms, applying the simplified method, of 5 years
for Mr. Potter and Mr. Evey and 2.5 years for Mr. Noble.
On February 12,
2016, the Board approved a compensation program for all non executive directors that do not otherwise have a pre-existing compensation
plan. Starting for the 2016 year of service, each of two directors will receive 1,000,000 shares of common stock, with a
per share value of $0.15 (based on contemporaneous cash sales prices), or $150,000, that will vest equally at the end of each calendar
quarter that such director remains in service as a director over a three year period.
During the year
ended December 31, 2016, the Company released 1,152,776 shares of common stock with a per share fair value of $0.15, or $172,916
(based on the market price at the time of the agreement), to five directors for their service as defined in their respective Restricted
Stock Grant Agreements. The payments were expensed at issuance (See Note 13).
On or about December
31, 2016, Mr. Jay S. Potter, Mr. Tony Posawatz, and Mr. Peter Davidson, all directors of the Company, each entered into an Amendment
to their Restricted Stock Agreement with the Company (each an “Amendment”). Pursuant to their Amendments, each director
agreed to terminate his rights to unvested restricted shares of the Company’s common stock under their previous respective
Restricted Stock Agreements, in consideration for which the Company granted to each director 750,000 restricted shares of the Company’s
common stock, vesting 1/36 per month over a 36 month period commencing on the date of grant, issuable quarterly on the last day
of each calendar quarter (the first vesting is scheduled to occur on January 31, 2017 and be for 20,833 shares and the first issuance
is scheduled to occur on March 31, 2017 and be for 62,499 shares) so long as each director serves as a director, employee, consultant
or officer of the Company at the time of scheduled vesting. The Company will also grant an additional 750,000 restricted shares
of the Company’s common stock to each director to vest in the future from time to time, based on their achieving certain
performance criteria to be agreed upon by the Board of Directors after discussion with senior management at a future date. No such
criteria were established as of December 31, 2016, nor the date of these financial statements.
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
During the year
ended December 31, 2015, the Company released 347,220 shares of common stock with a per share fair value of $0.15, or $52,082 (based
on the market price at the time of the agreement), to two directors for their service as defined in their respective Restricted
Stock Grant Agreements. The payments were expensed at issuance (See Note 13).
Stock Issued for Loan Guaranty
and Cash Sales
During the year
ended December 31, 2016, and in consideration for the continuing Guaranty of the Company’s obligations extended under a line
of credit, the Company issued 147,493 shares of its common stock or $22,123 to Keshif Ventures LLC, a related party by virtue of
owning more than 10% of the Company’s common stock outstanding, pursuant to a stock purchase agreement (See Notes 8 and Note
13). Additionally, during the year ended December 31, 2016, pursuant to a private placement, the Company issued 3,333,333 shares
of common stock for cash, with a per share price of $0.15 per share or $500,000 to Keshif Ventures LLC.
During the year
ended December 31, 2015, and in consideration for the Guaranty of the Company’s obligations extended under a line of credit,
the Company issued 571,429 shares of its common stock or $85,714 to Keshif Ventures LLC, pursuant to the stock purchase agreement
(See Notes 8 and Note 13). Additionally, during the year ended December 31, 2015, pursuant to a private placement, the Company
issued 3,666,667 shares of common stock for cash, with a per share price of $0.15 per share or $550,000 to Keshif Ventures LLC.
Convertible Notes Payable to Related
Parties
In 2009, the
Company executed a 10% convertible note payable in the amount of $102,236 due December 31, 2010 to John Evey for amounts loaned
to the Company. Mr. Evey joined the Board of Directors on April 27, 2010. Through a series of extensions, the note due date was
extended to December 31, 2017. During the fiscal year ended December 31, 2015, in lieu of interest payments, the Company made principal
payments on this note amounting to $12,000. During the fiscal year ended December 31, 2016, in lieu of interest payments, the Company
made principal payments on this note amounting to $12,000. The balance of the note as of December 31, 2016 is $74,616 with accrued
and unpaid interest amounting to $49,019 (See Note 9). Although Mr. Evey is no longer a director as of December 31, 2016, because
he was our Chairman and a related party throughout most of 2016, we have continued to classify this note as a Convertible note
payable - related parties in the accompanying balance sheet.
In
June 2015, Gemini Master Fund Ltd sold a 70.0066819% stake in its’ note to Robert Noble, our past Chairman in a private transaction.
The Company issued two replacement notes for their respective ownership values based on this transaction. During the twelve months
ended December 31, 2015, the Company made a $100,000 payment to Mr. Noble to pay down the accrued interest on this note. Effective
January 20, 2016, Mr. Noble entered into a Purchase Option Agreement with Greencore (the “Optionee”), pursuant to which
the Optionee had 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. During the
fourth quarter of 2016, the Company was notified that a transaction, or series of transactions, arranged by GreenCore, had officially
closed whereas the convertible note and the “Noble” shares were ultimately obtained by a group of various shareholders,
some of which are related parties to the Company. Keshif Ventures, LLC, obtained 49.3% stake in the outstanding note balance. As
the note is partially held by a related party shareholder and was held by other related party shareholders during the year, the
note is classified as Convertible Notes Payable- Related Parties in the accompanying balance sheets.
At December 31, 2016,
the remaining note had a balance of $600,000, and accrued interest of $96,009 which is included in accrued expenses (See Note 7
and 9).
ENVISION SOLAR INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
Stock Issued in Cash Sales
Subsequent to
December 31, 2016 pursuant to private placements, the Company issued 200,000 shares of common stock for cash with a per share
price of $0.15 per share or $30,000 and the Company incurred $2,400 of capital raising fees that were paid in cash and charged
to additional paid-in capital. Related to these sales, the Company is further obligated to issue 10,000 warrants as an offering
cost to a third party, each with a 5 year term and a strike price of $0.15 per share, at the close of the private placement offering.
There will be no accounting effect for the issuance of these warrants as their fair value will be charged to Additional Paid-in-Capital
as an offering cost and offset by a credit to Additional Paid-in-Capital for their fair value when issuing these warrants.
Stock Issued for Services
In
March 2017, for professional services provided per the terms of a consulting agreement, the Company issued 15,000 shares of
Common Stock with a per share value of $0.15 (based on contemporaneous cash sales prices) or $2,250.
Line of Credit
Subsequent to
December 31, 2016, and effective March 27, 2017, the Company entered into an additional amendment to the LSA with Silicon Valley
Bank as it relates to our revolving line of credit. The amendment (i) extends the maturity date to March 1, 2020, (ii) increases
the line to an aggregate principal amount of $1,500,000, and (iii) changes the payment terms requiring monthly interest only payments
through December 2017 and starting January 1, 2018, the Company shall repay the balance outstanding in twenty seven equal monthly
principal payments in addition to the monthly accrued interest.
Convertible Note – Related
Parties
Gemini Third
Amended and Restated Secured Bridge Note – Current Group
Subsequent
to December 31, 2016 and effective as of February 15, 2017, the Company received conversion notices from all the current note
holders effecting the conversion of the entire principal balance of the note amounting to $600,000 and accrued and unpaid
interest, as of February 15, 2017, amounting to $104,709. The Company issued 4,698,060 shares of common stock at the
contracted conversion price of $0.15 per share. (see Note 9). As a part of this transaction, Keshif Ventures LLC, a related
party, received 2,315,940 shares based on their ownership percent of the convertible note.