The accompanying unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
The accompanying unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
The accompanying
unaudited notes are an integral part of these unaudited Condensed Consolidated Financial Statements
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
1.
|
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
Envision
Solar International Inc. (along with its subsidiary, hereinafter the “Company”, “us”, “we”,
“our” or “Envision”), a Nevada corporation, invents, designs, and manufactures solar powered products and
proprietary technology solutions targeting three verticals: electric vehicle charging infrastructure, out of home advertising infrastructure,
and energy security and disaster preparedness. The Company focuses on creating renewably energized platforms for 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.
Basis of Presentation
The interim
unaudited condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the Company’s management, all adjustments (consisting
of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly our results of
operations and cash flows for the three months ended March 31, 2017 and 2016, and our financial position as of March 31, 2017,
have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be
expected for the full year.
Certain information
and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from
these interim financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016. The December
31, 2016 consolidated balance sheet is derived from those statements.
Principals of Consolidation
The unaudited
condensed consolidated financial statements include the accounts of Envision Solar International, Inc. and its wholly-owned subsidiary,
Envision Solar Construction Company, Inc. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited condensed consolidated
financial statements include the allowance for doubtful accounts receivable, valuation of inventory, 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
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
Concentrations
Concentration of Credit Risk
Financial instruments that potentially
subject us to concentrations of credit risk consist of cash and revenues.
The Company
maintains its cash in banks and financial institution deposits that at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts from inception through March 31, 2017. As of March 31, 2017, there were no amounts
greater than the federally insured limits.
Concentration of Accounts
Receivable
As of March
31, 2017, customers that each represented more than 10% of the Company’s net accounts receivable balance were as follows:
Customer A
|
34%
|
Customer B
|
19%
|
Customer C
|
18%
|
Customer D
|
15%
|
Concentration of Revenues
For the three months ended March
31, 2017, customers that each represented more than 10% of our net revenues were as follows:
Customer A
|
39%
|
Customer B
|
24%
|
Customer C
|
17%
|
Customer D
|
13%
|
Cash and Cash Equivalents
For the purposes
of the unaudited condensed consolidated statements of cash flows, the Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at March 31, 2017 and December
31, 2016 respectively.
Fair Value of Financial Instruments
The Company’s
financial instruments, including cash, accounts receivable, accounts payable, accrued expenses, and short term loans, are carried
at historical cost basis. At March 31, 2017, the carrying amounts of these instruments approximated their fair values because of
the short-term nature of these instruments. (See Note 6 for further discussion of fair value measurements.)
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
Accounting for Derivatives
The Company
evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components
of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging”. The
result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded
as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the
statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liability at
the fair value of the instrument on the reclassification date.
Revenue Recognition
Revenues
are primarily derived from the direct sales of products. Revenues may also consist of design fees for the design of solar systems
and arrays, and revenues from sales of professional services.
Revenues from leases, design services
and professional services are recognized as earned.
Revenues
from inventoried product sales are recognized upon the final delivery of such product to the customer.
Any deposits
received from a customer prior to delivery of the purchased product and additionally, monies received for leases prior to a given
lease period, are accounted for as deferred revenue on the balance sheet. At March 31, 2017 and December 31, 2016, deferred revenue
amounted to $115,980 and $75,323 respectively. At March 31, 2017, the Company has received partial deposits for three undelivered
EV ARC™ units and an initial deposit to plan and manufacture two Solar Tree® units.
The Company
includes shipping and handling fees billed to customers as revenues, and shipping and handling costs as cost of revenues. The Company
generally provides a standard one year warranty on its products for materials and workmanship but will pass on the warranties from
its vendors, if any, which generally cover at least such period. In accordance with ASC 450-20-25, the Company accrues for product
warranties when the loss is probable and can be reasonably estimated. At March 31, 2017, the Company has no product warranty
accrual given the Company’s de minimis historical financial warranty experience.
Patents
The company
believes it is in a position to achieve future economic value benefits for its various patents and patent ideas. All administrative
costs for obtaining patents are accumulated on the balance sheet as a Patent asset until such time as a patent is issued. 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 the
period. Patent amortization expense was $140 in each of the three month periods ended March 31, 2017 and March 31, 2016.
Stock-Based Compensation
The Company
follows ASC 718, “Compensation – Stock Compensation.” ASC 718 requires companies to estimate and recognize the
fair value of stock-based awards to employees and directors. The fair value of the portion of an award that is ultimately expected
to vest is recognized as an expense over the requisite service periods using the straight-line attribution method.
The Company
accounts for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “Equity-Based
Payments to Non Employees.”
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
The Company
estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model.
Net Loss Per Share
Basic net
loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during
the periods presented. Diluted net loss per common share is computed using the weighted average number of common shares outstanding
for the period, and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments or other common
stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
Convertible
notes payable that are convertible into 1,816,875 common shares, options to purchase 18,917,007 common shares and warrants to purchase
16,716,745 common shares were outstanding at March 31, 2017. These shares were not included in the computation of diluted loss
per share for the three months ended March 31, 2017 because the effects would have been anti-dilutive. These options and warrants
may dilute future earnings per share.
Segments
The Company
follows ASC 280-10 for, "Disclosures about Segments of an Enterprise and Related Information." During 2017 and 2016,
the Company only operated in one segment; therefore, segment information has not been presented.
New Accounting Pronouncements
ASU 2017-01
In January
2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-01:
"Business Combinations (Topic
805)
-
to clarify the
definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for interim and annual reporting
periods beginning after December 15, 2017. The Company does not expect this ASU to have a material impact on its consolidated financial
statements.
ASU 2017-04
In January
2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-04:
"Intangibles - Goodwill
and Other (Topic 350)” -
to simplify how an entity is required to test goodwill for impairment by eliminating Step
2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting
unit’s goodwill with the carrying amount of that goodwill. This guidance is effective for interim and annual reporting periods
beginning after December 15, 2019. The Company does not expect this ASU to have a material impact on its consolidated financial
statements.
ASU 2017-05
In February
2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-05:
"Other Income - Gains and
Losses from the Derecognition of Nonfinancial Assets(Subtopic 610-20)” -
to clarify the scope of Subtopic 610-20,
“Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets”, and to add guidance for partial
sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial
assets in contracts with noncustomers. This guidance is effective for interim and annual reporting periods beginning after December
15, 2017. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
ASU 2017-08
In March
2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-08: “Receivables – Non-Refundable
fees and Other Costs (Subtopic 310-20)” to amend the amortization period for certain purchased callable debt securities held
at a premium. The Board is shortening the amortization period for the premium to the earliest call date. This guidance is effective
for interim and annual reporting periods beginning after December 15, 2018. The Company does not expect this ASU to have a material
impact on its consolidated financial statements.
ASU 2016-15
In August
2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments.
This guidance addresses eight specific cash flow issues with
the objective of reducing diversity in practice regarding how certain cash receipts and cash payments are presented in the statement
of cash flows. The standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment
costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination,
(4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies,
(6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately
identifiable cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim
period. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
ASU 2016-02
In February
2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02: “Leases (Topic 842)”
whereby lessees will need to recognize almost all leases on their balance sheet as a right of use asset and a lease liability.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company expects this
ASU will increase its current assets and current liabilities, but have no net material impact on its consolidated financial statements.
ASU 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.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
As reflected
in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2017, the Company
had a net loss of $619,573. Additionally, at March 31, 2017, the Company had a working capital deficit of $844,701, an accumulated
deficit of $35,855,022 and a stockholders’ deficit of $1,202,882. It is Management’s
opinion that these factors raise substantial doubt about the Company’s ability to continue as a going concern for a period
of twelve months from the filing of this report.
The Company
has incurred significant losses from operations, and such losses are expected to continue. In addition, the Company has limited
working capital. In the upcoming months, Management's plans include seeking additional operating and working capital through a
combination of private and debt financings. There is no guarantee that additional capital or debt financing will be available when
and to the extent required, or that if available, it will be on terms acceptable to the Company. Further, the Company continues
to seek out sales contracts for new projects and product sales that should provide additional revenues and, in the long term, gross
profits. Additionally, Envision intends to renegotiate the debt instruments that are currently due or become due later in 2017.
All such actions and funds, if successful, may not be sufficient to cover monthly operating expenses or meet minimum payments with
respect to the Company’s liabilities over the next twelve months.
The unaudited
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
Inventories are stated at the
lower of cost or net realizable value. Costs are determined using the first in- first out (FIFO) method. Inventory consists approximately
of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Finished Goods
|
|
$
|
–
|
|
|
$
|
22,375
|
|
Work in Process
|
|
|
327,462
|
|
|
|
164,915
|
|
Raw Materials
|
|
|
33,821
|
|
|
|
93,113
|
|
Inventory Allowance
|
|
|
(8,601
|
)
|
|
|
(8,601
|
)
|
Total Inventory
|
|
$
|
352,682
|
|
|
$
|
271,802
|
|
The major components of accrued
expenses are summarized as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accrued vacation
|
|
$
|
139,874
|
|
|
$
|
136,410
|
|
Accrued interest
|
|
|
147,748
|
|
|
|
235,776
|
|
Accrued loan guaranty
|
|
|
31,250
|
|
|
|
8,333
|
|
Accrued rent
|
|
|
45,659
|
|
|
|
26,091
|
|
Accrued commissions
|
|
|
7,479
|
|
|
|
18,828
|
|
Accrued insurance financing
|
|
|
31,250
|
|
|
|
–
|
|
Other accrued expenses
|
|
|
97,009
|
|
|
|
4,995
|
|
Total accrued expenses
|
|
$
|
500,269
|
|
|
$
|
430,433
|
|
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
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 were recorded as Debt Issue Costs on the accompanying balance sheet
and were amortized over the initial one year term of the line of credit.
As a condition
to the extension of credit to the Company under the LSA, Keshif Ventures, LLC (“Keshif”), a related party shareholder
with more than 10% of the outstanding stock of the Company, agreed to guarantee all of the Company’s obligations under the
LSA pursuant to a Master Unconditional Limited Guaranty between Bank and Keshif (“Guaranty”). Keshif pledged cash equivalent
collateral to the Bank as security for the Guaranty. Keshif also agreed to subordinate to the Bank all of Company’s indebtedness
and other monetary obligations owing to Keshif pursuant to a Subordination Agreement (“Subordination Agreement”). In
consideration for the Guaranty, Envision issued 571,429 shares of its common stock, with a per share value of $0.15 (based on contemporaneous
cash sales prices) or $85,714 (the “Shares”) to Keshif pursuant to a stock purchase agreement (“SPA”).
These shares, along with legal costs associated with the issuance of this guaranty amounting to $11,435, were recorded as Debt
Issue Costs in the accompanying balance sheet and were amortized over the initial one year term of the line of credit. Pursuant
to the terms of the SPA, for each six-month period from and after the six-month anniversary of October 29, 2015 (each, a “Measurement
Period”) that Keshif guarantees Borrower’s obligations under the LSA, Keshif will also receive the number of additional
shares of Envision’s common stock, rounded upward to the nearest whole number, equal to (a) two and one half percent (2.5%)
multiplied by the maximum outstanding principal amount of the LSA at any time during such Measurement Period, such amount to be
divided by (b) the twenty (20) day average closing price of the Company’s common stock, measured for the twenty (20) consecutive
trading days immediately prior to such Measurement Period, the quotient of which shall be multiplied by (c) a fraction, the numerator
of which is the number of calendar days during the Measurement Period which the Guaranty remained in effect and the denominator
of which is the number of calendar days in such Measurement Period. Related to this guaranty, as of October 29, 2016, the Company
issued 147,493 shares of its common stock valued at $0.15 per share, or $22,123, and expensed this over the six month Measurement
Period of the Guaranty. The Company recorded a gain on debt settlement of $2,877 on this transaction. Further related to the Guaranty,
in April 2017, the Company expects to issue 234,302 shares of its common stock representing $37,500 of obligation and is expensing
this over the current six month Measurement Period of the Guaranty. The Company has accounted for an accrued loan guaranty expense
amounting to $31,250 that is recorded in accrued expenses on the accompanying balance sheet (See Note 4, Note 9, and Note 12).
Additionally,
the Company issued a side letter to Keshif (the “Side Letter”), which in addition to confirming Keshif’s entitlement
to the Shares, provided certain contractual rights to Keshif in consideration for the Guaranty, including a covenant by the Company
to provide financial statements and other periodic reports to Keshif, an agreement to reimburse Keshif for payments made by Keshif
to the Bank in accordance with the Guaranty (“Reimbursement Obligation”), and the grant of a security interest, subordinated
to the Bank under the Subordination Agreement, to secure the Reimbursement Obligation. Keshif also 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.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
Effective
March 30, 2017, the Company entered into an additional amendment to the LSA with Silicon Valley Bank as it relates to this debt.
The amendment (i) 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.
As
of March 31, 2017, the line of credit has a short-term portion of $166,667 and a long-term portion of $833,333.
Subsequent to March 31, 2017, and on April 7, 2017, the additional $500,000 was funded to the Company pursuant to this LSA.
As of April 7, 2017, there is no additional credit available to the Company under this LSA.
6.
|
CONVERTIBLE NOTES PAYABLE - RELATED PARTIES AND FAIR VALUE MEASUREMENTS
|
As of March
31, 2017, the following summarizes amounts owed under short-term convertible notes –related parties:
|
|
Amount
|
|
Evey Note
|
|
$
|
71,616
|
|
Wheatley Note
|
|
|
97,500
|
|
|
|
$
|
169,116
|
|
Evey Note
Prior to
fiscal 2011, the Company was advanced monies by John Evey, our former 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, 2017.
Although
as of December 31, 2016, Mr. Evey is no longer a director, because he was our Chairman and a related party since 2010, we have
continued to classify this note as a Convertible Note Payable - related parties in the accompanying balance sheet. For the three
month period ended March 31, 2017, the Company made principal payments totaling $3,000. The balance of the note as of March 31,
2017 is $71,616 with accrued interest amounting to $52,073 which is included in accrued expenses (See note 4). The note continues
to bear interest at a rate of 10%
.
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.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
Additionally, on March 29, 2017
the board of directors granted Mr. Wheatley a $35,000 bonus for which Mr. Wheatley agreed to defer such bonus under the same terms
of his salary deferral. The balance of the note as of March 31, 2017, is $97,500 with accrued and unpaid interest amounting to
$3,772 which is included in accrued expenses (See Note 4).
Gemini Master Fund 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.
Prior to
June 30, 2010 all shares underlying the Gemini Master Fund convertible debt were subject to a lock-up agreement, and the shares
were not easily convertible to cash thus, the embedded conversion option did not need to be bifurcated and recorded as a fair value
derivative due to the price protection provision in the notes. Subsequent to June 30, 2010, such lock-up provisions expired and
as such, the Company determined that the embedded conversion option met the definition of a derivative liability and needed to
be bifurcated and recorded as a derivative at fair value.
Through
a series of amendments, the Company modified terms of all notes so that the terms of these notes became equivalent. Further, the
interest rates were reduced to 10%; the conversion prices were reduced to $0.15; and the terms were extended to June 30, 2015 and
the beneficial holder ceiling was increased to 9.9%. No other terms of the notes were modified.
In February
2014, 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.
In June 2015,
Gemini sold a 70.0066819% stake in its’ note to Robert Noble, our former Chairman, in a private transaction. The Company
issued two replacement notes for their respective ownership values based on this transaction. Each note has the same terms and
conditions as existed prior to this transaction and as discussed above. There were no accounting effects for this transaction.
In September
2015, the Company made a payment of $306,624 to pay off the balance of the Gemini note and its accrued interest, and recorded a
loss on debt settlement of $2,925.
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 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. 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 was 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.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
During the
fourth quarter of 2016, the Company was notified that a transaction, or series of transactions, arranged by GreenCore, had officially
closed whereas the convertible note and the “Noble” shares were ultimately obtained by a group of various shareholders,
some of which are related parties to the Company. As the note was partially held by a related party shareholder at the end of 2016
and was held by other related party shareholders during its existence, the note was classified as Convertible Notes Payable- Related
Parties in the accompanying balance sheets.
Effective
as of February 15, 2017, the Company received conversion notices from all the current note holders effecting the conversion of
the entire principal balance of the note amounting to $600,000 and accrued and unpaid interest, as of February 15, 2017, amounting
to $104,709. The Company issued 4,698,060 shares of common stock at the contracted conversion price of $0.15 per share, to retire
the entirety of this convertible note (See Note 10).
At March
31, 2017, there is no outstanding balance owed for this convertible note.
Fair Value Measurements
– Derivative liability:
The
accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded
disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset
or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly
transaction between market participants on the measurement date. The accounting standard established a fair value
hierarchy which requires an entity to maximize the use of observable inputs, where available. This hierarchy
prioritizes the inputs into three broad levels as follows. Level 1 input are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on
the Company’s own assumptions used to measure assets and liabilities at fair value. An asset or liability’s
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value
measurement.
As of February
15, 2017, the balance of the convertible note payable was converted into common stock and there is no continuing embedded conversion
option liability.
The following is a summary of
activity of Level 3 liabilities for the three month period ended March 31, 2017:
Balance December 31, 2016
|
|
$
|
107,081
|
|
Change in Fair Value
|
|
|
(107,081
|
)
|
Balance March 31 2017
|
|
$
|
–
|
|
Changes in
fair value of the embedded conversion option liability are included in other income (expense) in the accompanying unaudited condensed
consolidated statements of operations.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
7.
|
CONVERTIBLE NOTE PAYABLE
|
On December
19, 2009, the Company entered into a convertible promissory note for $100,000 to a new landlord in lieu of paying rent for one
year for new office space. The interest is 10% per annum with the note principal and interest originally due December 18, 2010
and subsequently extended until December 31, 2012. However, if the Company receives greater than $1,000,000 of proceeds from debt
or equity financing, 25% of the amount in excess of $1,000,000 shall be used to pay down the note. This note is subordinate to
all existing senior indebtedness of the Company. This note is convertible at $0.33 per share and had no beneficial conversion feature
at the note date.
Through a
series of amendments, the term of the note was extended until December 31, 2016, and waived, through December 31, 2015, the requirement
to pay down the note with financing proceeds received by the Company.
As of March 31, 2017, the
note was past due and has a balance of $100,000 with accrued and unpaid interest amounting to $72,685 which
is included in accrued expenses (See Note 4).
8.
|
NOTE PAYABLE AND AUTO LOAN
|
Note Payable
The Company
has an outstanding Promissory Note with one of its vendors that was entered into in exchange for the vendor cancelling its open
invoices to the Company. The original loan amount was for $160,633 and bears interest at 10%. The note can be converted only at
the option of the Company, at any time, into common stock with an original conversion price of $0.33 per share. Partial conversions
of the note occurred in 2011, 2012 and 2013, and further, through a series of amendments, the note, plus the accrued interest became
due and payable on December 31, 2015. No other terms of the note were changed.
Effective
December 31, 2015, the Company entered into a further amendment to this note extending the maturity date of the note to June 30,
2016. There was no accounting effect for this extension.
As of
March 31, 2017, the note was past due and had a remaining balance due of $43,033 with accrued and unpaid interest amounting
to $19,219 which is included in accrued expenses (See Note 4).
Auto Loan
In October
2015, the Company purchased a new vehicle and financed the purchase through a dealer auto loan. The loan has a term of 60 months,
requires minimum monthly payments of approximately $950, and bears interest at a rate of 5.99 percent. As of March 31, 2017, the
loan has a short-term portion of $9,477 and a long term portion of $27,262.
9.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Matters:
From time
to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As
of March 31, 2017, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on
the results of our operations.
Leases:
In August
2016, the Company entered into a sublease for its current corporate headquarters and manufacturing facility. The sublease expires
in August 2020 which is the same term of the master lease for which the Company is the subtenant. Monthly lease payments range
from $40,000 per month currently increasing to $50,619 per month for the final year of the lease.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
Other Commitments:
The Company
enters into various contracts or agreements in the normal course of business whereby such contracts or agreements may contain commitments.
Since inception, the Company entered into agreements to act as a reseller for certain vendors; joint development contracts with
third parties; referral agreements where the Company would pay a referral fee to the referrer for business generated; sales agent
agreements whereby sales agents would receive a fee equal to a percentage of revenues generated by the agent; business development
agreements and strategic alliance agreements where both parties agree to cooperate and provide business opportunities to each other
and in some instances, provide for a right of first refusal with respect to certain projects of the other parties; agreements with
vendors where the vendor may provide marketing, investor relations, public relations, technical consulting or subcontractor services,
vendor arrangements with non binding minimum purchasing provisions, and financial advisory agreements where the financial advisor
would receive a fee and/or commission for raising capital for the Company. All expenses and liabilities relating to such contracts
were recorded in accordance with generally accepted accounting principles during the periods. Although such agreements increase
the risk of legal actions against the Company for potential non-compliance, there are no firm commitments in such agreements.
Related to the Guaranty
issued by Keshif whereas Keshif guaranteed the Company’s obligations under the LSA with Silicon Valley Bank, the Company
is obligated to issue additional shares of its common stock based on the formula as defined in the stock purchase agreement
signed with Keshif. The Company is obligated to issue 234,302 shares of its common stock in April 2017 with a contractual value
of $37,500. The value of this share issuance is being expensed over the current Measurement Period of the Guaranty maturing on
April 29, 2017 (See Note 4, Note 5, and Note 12).
Stock Issued in Cash Sales
During the
three months ended March 31, 2017 pursuant to a private placement, 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. Additionally, the Company is 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
During
the three months ended March 31, 2017, as payment for professional services provided, the Company issued 15,000 shares of the Company’s
common stock with a per share fair value of $0.15 (based on contemporaneous cash sales prices)
or
$2,250.
These shares were fully earned, and were expensed, upon issuance.
Stock Issued in
Conversion of Convertible Debt
During the
three months ended March 31, 2017, and effective as of February 15, 2017, the Company issued 4,698,060 shares of common stock at
the contracted conversion price of $0.15 per share, to retire the entirety of a certain convertible note (See Note 6).
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
Director Compensation
During the
three month period ended March 31, 2017, the Company released 187,500 shares of common stock with a per share fair value of $0.15,
or $28,125 (based on the market price at the time of the agreement), to three directors for their service as defined in their respective
Restricted Stock Grant Agreements. The payments were expensed at issuance (See Note 12). As of March 31, 2017, there were 2,062,500
unreleased shares of common stock representing $309,375 of unrecognized restricted stock grant expense related to these Restricted
Stock Grant Agreements.
11.
|
STOCK OPTIONS AND WARRANTS
|
Stock Options
There were
no stock options issued during the three months ended March 31, 2017.
During
the three months ended March 31, 2017, the Company recorded stock option based compensation of $39,111 related to
prior grants. As of March 31, 2017 there is $152,870 of unrecognized stock option based compensation expense that will be
recognized over the next three years.
Warrants
There was
no warrant activity during the three months ended March 31, 2017. However, pursuant to a private placement, the Company is 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.
12.
|
RELATED PARTY TRANSACTIONS
|
In 2009,
the Company executed a 10% convertible note payable in the amount of $102,236 originally due December 31, 2010 to John Evey for
amounts loaned to the Company. Mr. Evey joined the Board of Directors on April 27, 2010. Through a series of extensions, the note
due date was extended to December 31, 2017. During the three month period ended March 31, 2017, the Company made principal payments
totaling $3,000 on this note. The balance of the note as of March 31, 2017 is $71,616 with accrued interest amounting to $52,073
(See Note 6). Although as of December 31, 2016, Mr. Evey is no longer a director, because he was our Chairman and a related party
since 2010, we have continued to classify this note as a Convertible Note Payable - related parties in the accompanying balance
sheet.
In June 2015,
Gemini Master Fund Ltd sold a 70.0066819% stake in its’ note to Robert Noble, our former Chairman and former owner of over
10% of our outstanding common stock, in a private transaction. The Company issued two replacement notes for their respective ownership
values based on this transaction. In regards to the note for Mr. Noble, he agreed to an extension of his note to March 31, 2016.
During the twelve months ended December 31, 2015, the Company made a $100,000 payment to Mr. Noble to pay down the accrued interest
on this note. Effective January 20, 2016, Mr. Noble entered into a Purchase Option Agreement with a firm affiliated with Jay S.
Potter, a director of the Company (the “Optionee”), pursuant to which the Optionee has the right to purchase or arrange
for the purchase of the Note from Mr. Noble and all of Mr. Noble’s shares in the Company (the “Option”), at any
time until March 31, 2016. This date was subsequently extended. The Company consented to the Purchase Option Agreement. Under a
Note Settlement and General Release Agreement, provided that the Option is fully exercised and honored, the Company agreed to grant
Mr. Noble the right to acquire, for one dollar, at any time until June 30, 2017, a worldwide, perpetual, irrevocable, nonexclusive,
royalty-free license to utilize all of the Company intellectual property developed prior to January 1, 2011, except for the following:
(i) EV ARC™ and (ii) EnvisionTrak™. Further, provided the Option was exercised in full and Mr. Noble complied with
it, the Company would extend the expiration date of the 1,138,120 warrants to purchase 1,138,120 shares of the Company’s
common stock owned by Mr. Noble (the “Warrants”) from December 31, 2016 to December 31, 2017, and will reduce the exercise
price of such Warrants from $0.24 to $0.20 per share (See Note 6). During the fourth quarter of 2016, the Company was notified
that a transaction, or series of transactions, arranged by GreenCore, had officially closed whereas the convertible note and the
“Noble” shares were ultimately obtained by a group of various shareholders, some of which are related parties to the
Company. As the note was partially held by a related party shareholder at the end of 2016 and was held by other related party shareholders
during its existence, the note was classified as Convertible Notes Payable- Related Parties in the accompanying balance sheets.
Effective as of February 15, 2017, the Company received conversion notices from all the current note holders effecting the conversion
of the entire principal balance of the note amounting to $600,000 and accrued and unpaid interest, as of February 15, 2017, amounting
to $104,709. The Company issued 4,698,060 shares of common stock at the contracted conversion price of $0.15 per share, to retire
the entirety of this convertible note. Of these shares, 2,315,940 shares were issued to Keshif Ventures, LLC, a related party by
virtue of owning more than 10% of the Company’s stock.
ENVISION SOLAR INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
During
the three months ended March 31, 2017, the Company released 187,500 shares of common stock valued at $0.15 per share (based
on the share value at the time of their agreements) or $28,125, to three directors under their respective agreements. These
payments were expensed at issuance (See Note 10).
Subsequent to March 31, 2017,
pursuant to a private placement, the Company issued to one shareholder a total of 100,000 shares of common stock for cash at $0.15 per share or $15,000. The Company incurred $1,200 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 5,000 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.
Related
to the Guaranty issued by Keshif whereas Keshif guaranteed the Company’s obligations under the LSA with Silicon Valley
Bank, as of April 30, 2017, the Company issued 234,302 shares of its common stock with a contractual value of $37,500. The
value of this share issuance is being expensed over the current Measurement Period of the Guaranty currently maturing on
April 29, 2017 (See Note 5 and Note 9). The Company will record a gain on conversion of $2,355 related to this
transaction.