CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
|
1.
|
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
Envision
Solar International, a Nevada corporation, invents, designs, and manufactures solar powered products and proprietary technology
solutions targeting three verticals: electric vehicle charging infrastructure, out of home advertising infrastructure, and energy
security and disaster preparedness. The Company focuses on creating renewably energized platforms for electric vehicle (“EV”)
charging, media and branding, and energy security which management believes are attractive, rapidly deployed, and of the highest
quality. Management believes that the Company’s chief differentiator is its ability to invent, design, engineer, and manufacture
solar products which are a complex integration of our own proprietary technology and other commonly available engineered components.
The resulting products are built to have the longest life expectancy in the industry while also delivering valuable amenities and
potentially highly attractive revenue opportunities for our customers. Management believes that Envision’s products deliver
multiple layers of value such as: environmental impact free renewably energized EV charging; media, branding, and advertising platforms;
sustainable and secure energy production; architectural enhancement; reduced carbon footprint; high visibility "green halo"
branding; reduction of net operating costs through reduced utility bills; and revenue creation opportunities through the sales
of digital out of home (“DOOH”) media.
Basis of Presentation
The interim
unaudited condensed 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) necessary to present fairly our results of operations and cash flows for the three
months ended March 31, 2019 and 2018, and our financial position as of March 31, 2019, 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 financial statements have been condensed or omitted from these interim
financial statements. Accordingly, these interim unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2018. The December 31, 2018 balance
sheet is derived from those statements.
Reverse Stock Split
The
Company completed a 1 for 50 reverse split of our common stock in April 2019, and all share and per share data in the
accompanying unaudited financial statements and footnotes for all periods presented have been retroactively adjusted for this
reverse stock split (See Note 15).
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 financial
statements include the allowance for doubtful accounts receivable, valuation of inventory and standard cost allocations, depreciable
lives of property and equipment, estimates of loss contingencies, estimates of the valuation of initial right of use assets and
corresponding lease liabilities, 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.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(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, 2019. As of March 31, 2019, there were no amounts
greater than the federally insured limits.
Concentration
of Accounts Receivable
As of March
31, 2019, there was a single customer that represented over 99% of the Company’s net accounts receivable balance.
As of December 31, 2018, that same
customer represented 82% of the Company’s net accounts receivable balance.
Concentration of Revenues
For the three months ended March
31, 2019, we had one customer that represented more than 99% of our net revenues.
For the three months ended March
31, 2018, customers that each represented more than 10% of our net revenues were as follows:
Customer A
|
69%
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Customer B
|
15%
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Cash and Cash Equivalents
For the purposes
of the unaudited condensed 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, 2019 and December 31,
2018 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, 2019, the carrying amounts of these instruments approximated their fair values because of
the short-term nature of these instruments.
Accounts Receivable
Accounts
receivable are customer obligations due under normal trade terms. Management reviews accounts receivable on a periodic basis to
determine if any receivables may become uncollectible. Management’s evaluation includes several factors including the aging
of the accounts receivable balances, a review of significant past due accounts, dialogue with the customer, the financial profile
of a customer, our historical write-off experience, net of recoveries, and economic conditions. The Company includes any accounts
receivable balances that are determined to be uncollectible in its overall allowance for doubtful accounts. Further, the Company
may record a general reserve in its allowance for doubtful accounts to account for future changes that may negatively impact our
overall collections. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
Inventory
Inventory
is stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method of accounting.
Inventory costs primarily relate to purchased raw materials and components used in the manufacturing of our products, work in process
for products being manufactured, and finished goods. Included in these costs are direct labor and certain manufacturing overhead
costs associated with the manufacturing process. The Company regularly reviews inventory components and quantities on hand, and
performs annual physical inventory counts. A reserve is established if this review process determines the net realizable value
of such inventory may be below the carrying value.
Patents
The company
believes it will 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 or abandoned, all accumulated administrative costs will be expensed
in the period in which the patent was denied or abandoned. Patent amortization expense was $783 and $140 in the three-month periods
ended March 31, 2019 and 2018, respectively.
Leases
In February
2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02: “Leases (Topic 842)”
whereby lessees need to recognize almost all leases on their balance sheet as a right of use asset and a corresponding lease liability.
The Company adopted this standard as of January 1, 2019 using the effective date method and applying the package of practical
expedients to leases that commenced before the effective date whereby the Company elected not to reassess the following: (i) whether
any expired or existing contracts contain leases, and (ii) initial direct costs for any existing leases. For contracts entered
into after the effective date, at the inception of a contract the Company will assess whether the contract is, or contains, a
lease. The Company’s assessment will be based on: (1) whether the contract involves the use of a distinct identified asset,
(2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and
(3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each
lease component based on its relative stand-alone price to determine the lease payments. The Company has elected to not recognize
right of use assets and lease liabilities for short term leases that have a term of 12 months or less.
Revenue Recognition
On January
1, 2018, Envision adopted the revenue standards of Financial Accounting Standards Board Update No. 2014-09: “Revenue from
Contracts with Customers (Topic 606).” The core principle of this Topic is that an entity recognizes revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. Revenue is recognized in accordance with that core principle by applying the
following five steps: 1) identify the contracts with a customer; 2) identify the performance obligations in the contract; 3) determine
the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as)
we satisfy a performance obligation.
Revenues
are primarily derived from the direct sales of manufactured products. Revenues may also consist of maintenance fees for the maintenance
of previously sold products, and revenues from sales of professional services.
Revenues
from inventoried product sales are recognized upon the final delivery of such product to the customer or when legal transfer of
ownership takes place. Revenue values are fixed price arrangements determined at the time an order is placed or a contract is entered
into. The customer is typically obligated to make payment for such products within a 30-45 day period after delivery.
Revenues
from maintenance fees are recognized equally over the period of the maintenance term. Revenue values are fixed price arrangements
determined at the time an order is placed or a contract is entered into. The customer is typically obligated to make payment for
the service in advance of the maintenance period.
Revenues
from professional services are recognized as services are performed. Revenue values are based upon fixed fee arrangements or hourly
fee-based arrangements with agreed to hourly rates of service categories in line with expertise requirements. These services are
billed to a customer as such services are provided and the customer will be obligated to make payments for such services typically
within a 30-45 day period.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
The Company
includes shipping and handling fees billed to customers as revenues, and shipping and handling costs as cost of revenues.
Any deposits
received from a customer prior to delivery of the purchased product or monies paid prior to the period for which a service is provided
are accounted for as deferred revenue on the balance sheet.
Sales tax
is recorded on a net basis and excluded from revenue.
The Company
generally provides a standard one year warranty on its products for materials and workmanship but may provide multiple year warranties
as negotiated, and will pass on the warranties from its vendors, if any, which generally covers this one year period. In accordance
with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated.
Cost of Revenues
The Company
records direct material and component costs, direct labor and associated benefits, and manufacturing overhead costs such as supervision,
manufacturing equipment depreciation, rent, and utility costs, all of which are included in inventory prior to a sale, as costs
of revenues. The Company further includes shipping and handling fees billed to customers as revenues, and shipping and handling
costs as cost of revenues.
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
adopted ASU 2018-07 on January 1, 2019 and accounts for non-employee share-based awards in accordance with the measurement and
recognition criteria of ASC 718. The Company used the modified prospective method of adoption. There was no cumulative effect
of adoption on January 1, 2019.
The Company
estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model.
Net Loss Per Share
Basic net
loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during
the periods presented. Diluted net loss per common share is computed using the weighted average number of common shares outstanding
for the period, and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments or other common
stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
Convertible
notes payable that are convertible into 411,090 common shares, options to purchase 296,412 common shares and warrants to purchase
132,226 common shares were outstanding at March 31, 2019. These shares were not included in the computation of diluted loss per
share for the three months ended March 31, 2019 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 2019 and 2018,
the Company only operated in one segment; therefore, segment information has not been presented.
As reflected
in the accompanying unaudited condensed financial statements for the three months ended March 31, 2019, the Company had a net loss
and net cash used in operating activities of $949,631 and $222,177, respectively. Additionally, at March 31, 2019, the Company
had a working capital deficit of $4,215,214, an accumulated deficit of $42,825,290 and a stockholders’ deficit of $3,392,792.
Additionally, the Company has incurred significant losses from operations since inception, and such losses are expected to continue.
On April
18, 2019, the Company closed a transaction entered into pursuant to that certain Underwriting Agreement dated as of April 16,
2019 (the “Underwriting Agreement”) with Maxim Group LLC (“Maxim”), as representative for the several
underwriters (the “Underwriters”), pursuant to which the Company agreed to issue and sell to the Underwriters an aggregate
of 2,000,000 units with each unit consisting of one (1) share of the Company’s common stock, par value $0.001 per share
(the “Common Stock”), and a warrant to purchase one (1) share of Common Stock at an exercise price equal to $6.30
per share (the “Warrants”). The Company received gross proceeds of approximately $12,000,000, before deducting underwriting
discounts and commissions and estimated offering expenses. The total expenses of the offering, including underwriters’ discounts
and commissions, were approximately $1,350,000 (See Note 15).
With this
subsequent financing, management believes it has sufficient cash to fund its liabilities and operations for the upcoming year.
Inventories are stated at the
lower of cost or net realizable value. Costs are determined using the first in- first out (FIFO) method. Inventory consists approximately
of the following:
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March 31,
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|
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December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Work in Process
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$
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745,544
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|
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$
|
443,701
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|
Raw Materials
|
|
|
535,950
|
|
|
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698,689
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|
Inventory Allowance
|
|
|
(11,424
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)
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|
|
(11,424
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)
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Total Inventory
|
|
$
|
1,270,070
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|
|
$
|
1,130,966
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|
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
The major components of accrued
expenses – short-term portion are summarized as follows:
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March 31,
2019
|
|
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December 31,
2018
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Accrued vacation
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$
|
206,798
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|
|
$
|
196,888
|
|
Accrued interest
|
|
|
298,021
|
|
|
|
239,838
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|
Accrued rent
|
|
|
–
|
|
|
|
66,349
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|
Accrued loss contingency
|
|
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33,762
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|
|
|
71,744
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|
Lease Liability
|
|
|
523,739
|
|
|
|
–
|
|
Other accrued expense
|
|
|
99,867
|
|
|
|
39,351
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|
Total accrued expenses – Short-Term Portion
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|
$
|
1,162,187
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|
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$
|
614,170
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|
The balance
of Accrued Expenses – Long-Term Portion, amounting to $218,224, is related entirely to the lease liability.
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5.
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CONVERTIBLE LINE OF CREDIT
|
On September
18, 2017, in addition to a convertible “Lender” note (See Note 7), the Company entered into a revolving secured convertible
promissory note (the “Revolver”) with an unaffiliated lender (the “Lender”). Pursuant to the Revolver,
the Company has the right to make borrowings from the Lender in amounts of up to 70% of the value of any specific purchase order
(each a “PO”) received by the Company from a credit worthy customer (each a “Draw Down”), up to a maximum
of $3,000,000, commencing on the date of the Revolver and originally terminating 300 days after the date of the Revolver, but subsequently
extended through December 31, 2019. The Revolver bears simple interest at the floating rate per annum equal to the 12 month USD
LIBOR index rate quoted from time to time in New York, New York by the Bloomberg Service plus 600 basis points (the “Interest
Rate”). The Interest Rate will be adjusted on the first day of each calendar month during the term of this Note to reflect
any changes in the 12 month LIBOR rate as quoted on that day, or if that day is not a business day, on the next business day thereafter.
The principal and accrued unpaid interest with respect to each Draw Down is due and payable within five (5) business days of receipt
from the Customer by the Company of a payment due under the applicable PO (with respect to each Draw Down, the “Maturity
Date”). Each Draw Down is secured by a perfected recorded second priority security interest in all of the Company’s
assets, as set forth in that certain Security Agreement by and between the Company and the Lender. The Lender will have the right
at any time until the Maturity Date of a Draw Down, provided the Lender gives the Company written notice of the Lender’s
election to convert prior to any prepayment of such Draw Down by the Company with respect to converting that portion of such Draw
Down covered by the prepayment, to convert all or any portion of the outstanding principal and accrued unpaid interest (the “Conversion
Amount”), into such number of fully paid and nonassessable shares of the Company’s common stock as is determined by
dividing the Conversion Amount by the greater of (i) seven dollars and 50 cents ($7.50) or (ii) 75% of the Volume Weighted Average
Price of the Company’s common stock that is quoted on a public securities trading market (if more than one, the one with
the then highest trading volume), during the five (5) consecutive trading days immediately prior to the date of the Lender’s
written notice of the Lender’s election to convert.
As additional
consideration for any Draw Downs made by the Company as evidenced by the Revolver, the Company agreed to issue to the Lender common
stock purchase warrants exercisable for a period of three years from the date of issuance with an exercise price equal to the greater
of (i) $7.50 per share or (ii) 75% of the Volume Weighted Average Price of the Company’s common stock that is quoted on a
public securities trading market (if more than one, the one with the then highest trading volume), during the five (5) consecutive
trading days immediately prior to the date of the applicable Draw Down. The number of warrants issuable to the Lender will equal
25% of the increase over the highest dollar amount previously drawn down by the Company on the Revolver divided by the greater
of (i) seven dollars and fifty cents ($7.50) or (ii) 75% of the Volume Weighted Average Price of the Company’s common stock
that is quoted on a public securities trading market (if more than one, the one with the then highest trading volume), during the
five (5) consecutive trading days immediately prior to the date of the applicable Draw Down which causes the increase over the
previous highest amount borrowed.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
The Company
received funds for an initial Draw Down on September 26, 2017 in the amount of $850,000. As a result of this Draw Down, the Company
issued 28,333 common stock purchase warrants having a value of $122,992 using the Black-Scholes valuation methodology, and each
with a $7.50 exercise price and three year term. As a result of this transaction and including the relative fair value of the issued
warrants, the Company recorded $243,223 of value of beneficial conversion features and warrants, which was recorded as debt discount
on the accompanying balance sheet and was amortized to interest expense over the term of the Draw Down. This Draw Down was paid
back to the Lender during the three month period ended March 31, 2018.
The Company
received funds for a second Draw Down on October 24, 2017 in the amount of $300,000. As a result of this Draw Down, the Company
issued 10,000 common stock purchase warrants having a value of $56,620 using the Black-Scholes valuation methodology, and each
with a $7.50 exercise price and three year term. As a result of this transaction and including the relative fair value of the issued
warrants, the Company recorded $175,261 of value of beneficial conversion features and warrants, which was recorded as debt discount
on the accompanying balance sheet and was amortized to interest expense over the term of the Draw Down. This Draw Down was paid
back to the Lender during the three month period ended March 31, 2018.
The Company
received funds for a third Draw Down on February 20, 2018 in the amount of $290,000. As a result of this Draw Down, the Company
issued 8,156 common stock purchase warrants having a fair value of $61,282 using the Black-Scholes valuation methodology, and each
with a $8.89 exercise price and three year term (See Note 12). As a result of this transaction, the Company recorded $212,420 of
debt discount consisting of the relative fair value of warrants of $50,591 and a beneficial conversion feature value of $161,829
which was amortized to interest expense over the term of the Draw Down. This drawn down was paid back to the Lender during the
three month period ended June 30, 2018.
During the
year ended December 31, 2018, the Company received other funds on drawdowns totaling $1,513,013 and paid back drawdowns amounting
to $553,013. No warrants were owed on these drawdowns.
As of December
31, 2018, the convertible line of credit had a principal balance outstanding amounting to $960,000 with accrued interest amounting
to $12,909 which is included in accrued expenses.
During the
three months ended March 31, 2019 the Company received other funds on drawdowns totaling $158,442. No warrants were owed on these
drawdowns.
As of March
31, 2019, the convertible line of credit had a balance amounting to $1,118,442 with accrued interest amounting to $34,705 which
is included in accrued expenses (See Notes 4 and 15).
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6.
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CONVERTIBLE NOTE PAYABLE - RELATED PARTY
|
On October
18, 2016, the Company entered into a five year employment agreement, effective as of January 1, 2016, with Mr. Desmond Wheatley,
the Chief Executive Officer, President, and Chairman of the Company (the “Agreement”). Pursuant to the Agreement, Mr.
Wheatley will receive an annual deferred salary of $50,000 which Mr. Wheatley would have deferred until such time as Mr. Wheatley
and the Board of Directors agreed that payment of the deferred salary and/or cessation of the deferral was appropriate. In certain
circumstances upon the Company achieving specified milestones, which are described in the Agreement, Mr. Wheatley could have demanded
payment of all or any portion of the deferred amount, and the Company must comply with such demand. In August 2018 this agreement
was amended to where his salary shall defer until the earliest to occur of the following: (i) a permissable event specified in
Section 409A of the Code, or (ii) December 31, 2020, or (iii) an event specified below in Section 8.1(a) or 8.1(b) of this Agreement.
In the case of a cessation of the deferral, the Company’s Board of Directors may unilaterally affect such a result by a resolution
duly adopted by it without the agreement or participation of the Employee and with Employee recusing himself from the vote. Employee
will be paid all of the deferred amount upon the occurrence of (a) if and when the Company experiences a “change of control”
whereby more than 50% of the outstanding equity of the Company changes ownership in a single transaction or series of related transactions,
or otherwise as defined in Section 15.6 of the Original Agreement, (b) a sale of all or substantially all of the assets of the
Company, (c) a permissible event specified in Section 409A of the Code, or (d) on December 31, 2020.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
All
deferred amounts are evidenced by an unsecured convertible promissory note payable by the Company to Mr. Wheatley amended and
signed in October 2018, bearing simple interest at the rate of 10% per annum, accruing until paid, convertible into shares of
the Company’s common stock at $7.50 per share at any time in whole or in part at Mr. Wheatley’s discretion. As
the conversion price was equivalent to the fair value of the common stock at various salary deferral dates prior to June 30,
2018, there was no beneficial conversion feature to this note through such date. Subsequent to June 30, 2018 and through
December 31, 2018, and based on the average daily closing price of our common stock, the Company recorded $8,672 of debt
discount for the beneficial conversion feature value which is being amortized to interest expense over the term of the note.
For the three months ended March 31, 2019, and based on the average daily closing price of our common stock, the Company
recorded $3,967 of debt discount for the beneficial conversion feature value which is also being amortized to interest
expense over the term of the note. Additionally, on March 29, 2017 the board of directors granted Mr. Wheatley a $35,000
bonus for which Mr. Wheatley agreed to defer such bonus under the same terms of his salary deferral. The balance of the note
as of March 31, 2019, is $187,017, net of debt discount amounting to $10,483, with accrued and unpaid interest amounting to
$32,910 which is included in accrued expenses (See Notes 4 and 14). This note is presented as a long-term liability on the
accompanying balance sheets as a result of the August 2018 amendment changing the due date to December 1, 2020.
|
7.
|
CONVERTIBLE NOTES PAYABLE
|
As of March
31, 2019, the following summarizes amounts owed under convertible notes payable:
|
|
Amount
|
|
|
Unamortized Discount
|
|
|
Convertible
Notes Payable,
net of discount
|
|
Pegasus Note
|
|
$
|
100,000
|
|
|
$
|
–
|
|
|
$
|
100,000
|
|
Evey Note
|
|
|
50,616
|
|
|
|
7,740
|
|
|
|
42,876
|
|
“Lender” Note
|
|
|
1,500,000
|
|
|
|
215,450
|
|
|
|
1,284,550
|
|
Convertible Notes Payable
|
|
$
|
1,650,616
|
|
|
$
|
223,190
|
|
|
$
|
1,427,426
|
|
Pegasus Note
On December
19, 2009, the Company entered into a convertible promissory note for $100,000 to a new landlord in lieu of paying rent for one
year for new office space. The interest is 10% per annum with the note principal and interest originally due December 18, 2010.
However, if the Company receives greater than $1,000,000 of proceeds from debt or equity financing, 25% of the amount in excess
of $1,000,000 shall be used to pay down the note. This note is subordinate to all existing senior indebtedness of the Company.
This note is convertible at $16.50 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.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
Effective
June 13, 2018, the Company entered into a further amendment to extend the maturity date of this note to December 31, 2019 and waive
the past requirements to pay the note with financing proceeds received by the Company. Additionally, the note holders agreed not
to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible
into common stock, before December 31, 2019. There were no additional fees or discounts associated with this amendment. This modification
was treated as an extinguishment as the change in fair value of the embedded conversion option just before and just after the modification
was more than 10% of the carrying amount of the note. The market price of the Company’s stock was below the conversion price
at the time of the modification, therefore no beneficial conversion feature needed to be recorded.
As of March
31, 2019, the note had a balance of $100,000 with accrued and unpaid interest amounting to $92,603 which is included in accrued
expenses (See Note 4 and 15).
Evey Note
Prior to
fiscal 2011, the Company was advanced monies by John Evey, our former director, and executed a 10% convertible promissory note
with compounding interest which was convertible into shares of common stock at $16.50 per share. There was no beneficial conversion
feature at the note date and this note is subordinate to the then existing notes. Through a series of amendments from the original
due date, the conversion price of the convertible note was reduced to $10.00 and the maturity date was extended to December 31,
2017.
Effective
June 27, 2018, the Company entered into a further extension agreement to extend the maturity date of this note to July 1, 2019.
Additionally, Mr. Evey agreed not to offer for sale, issue, sell, contract to sell, or otherwise dispose of any of our common stock
or securities convertible into common stock on or before December 31, 2018 and not to offer for sale, issue, sell, contract to
sell, pledge, or otherwise dispose of any of our common stock issuable upon the conversion of the note, on or before July 1, 2019.
There were no additional fees or discounts associated with this extension. This modification was treated as an extinguishment as
the change in fair value of the embedded conversion option just before and just after the modification was more than 10% of the
carrying amount of the note. The Company recorded debt discount amounting to $30,960 for the value of the beneficial conversion
feature and is amortizing this to interest expense over the remaining term of the loan.
As of March
31, 2019, this note has a balance, net of $7,740 of discount, amounting to $42,876 with accrued interest amounting to $76,440 which
is included in accrued expenses (See Note 4 and 15). The note continues to bear interest at a rate of 10%
.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
“Lender” Note
On September
18, 2017, in addition to entering into a revolving convertible line of credit (See Note 5), the Company also entered into a $1,500,000
secured convertible promissory note with the same unaffiliated lender (the “Lender”). The Note bears simple interest
at the floating rate per annum equal to the 12 month USD LIBOR index rate quoted from time to time in New York, New York by the
Bloomberg Service plus 400 basis points (the “Interest Rate”). The Interest Rate will be adjusted on the first day
of each calendar month during the term of the Note to reflect any changes in the 12 month LIBOR rate as quoted at on that day,
or if that day is not a business day, on the next business day thereafter. Interest will only accrue on outstanding principal.
Accrued unpaid interest is payable monthly on the first calendar day of each month for interest accrued during the previous month,
with all outstanding principal and accrued unpaid interest originally payable in full on or before September 17, 2018 to the extent
not converted into shares of the Company’s common stock. This note was initially amended to be payable in full by December
1, 2018 but the Company did not make the December 1, 2018 principal payment which non payment was a defined event of default. In
March 2019, but effective December 1, 2018, the Company entered into second amendment to extend the term of the note to be payable
in full by (i) June 30, 2019 or (ii) the closing of the public offering by borrower. This modification was treated as a debt extinguishment
as the change in fair value of the embedded conversion option just before and just after the modification was more than 10% of
the carrying amount of the note. The Company recorded debt discount amounting to $472,718 for the value of the beneficial conversion
feature and is amortizing this to interest expense over the remaining term of the note. Additionally, the Company paid $30,000
of lender fees which were also recorded as debt discount and are also being amortized to interest expense over the term of the
note. The Note is secured by a perfected recorded first priority security interest in all of the Company’s assets, as set
forth in a certain Security Agreement by and between the Company and the Lender, dated September 18, 2017. At any time until the
Maturity Date, and provided Lender gives the Company written notice of Lender’s election to convert prior to any prepayment
of this Note by the Company with respect to converting that portion of this Note covered by the prepayment, the Lender has the
right to convert all or any portion of the outstanding principal and accrued interest (the “Conversion Amount”), into
such number of fully paid and nonassessable shares of the Company’s common stock as is determined by dividing the Conversion
Amount by the greater of (i) seven dollars and fifty cents ($7.50) or (ii) 75% of the Volume Weighted Average Price of the Company’s
common stock that is quoted on a public securities trading market (if more than one, the one with the then highest trading volume),
during the five (5) consecutive trading days immediately prior to the date of the Lender’s written notice of its election
to convert.
As additional
consideration for the loan evidenced by the Note, the Company agreed to issue to the Lender common stock purchase warrants exercisable
for a period of three years from the date of issuance with an exercise price equal to $7.50 per share. The number of warrants issuable
to the Lender is equal to 25% of the loan Amount divided by seven dollars and fifty cents ($7.50). As of September 18, 2017, the
Company issued 50,000 common stock purchase warrants under this provision having a fair value of $187,142 using the Black-Scholes
valuation methodology, and each with a $7.50 exercise price. As a result of this transaction, the Company recorded $232,767 of
debt discount consisting of the relative fair value of the warrants of $166,384 and a beneficial conversion feature of $66,384,
which was amortized to interest expense over the original term of the note.
During any
time when the Note is outstanding, or when the Lender holds any Company stock, or any warrants to acquire Company stock where the
combination of both could result in the Lender owning stock with a current value of one million dollars or greater, in the Company,
the Lender will have certain review and consulting rights as described in the Note.
As of March
31, 2019, the convertible note had a balance, net of discount of $215,450, amounting to $1,284,550 with accrued interest amounting
to $16,774 which is included in accrued expenses (See Note 4 and 15).
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
On August
27, 2018, the Company entered into an unsecured promissory note (the “Note”) in the amount of $750,000 (the “Principal
Amount”) with Gemini Special Opportunities Fund, LP (the “Lender”). The Note bears simple interest at an annual
rate of 10% and is subject to a Securities Purchase Agreement, dated August 27, 2018. This Note is due and payable on February
28, 2019 (the “Maturity Date”). Effective February 28, 2019, an oral forbearance agreement was granted by lender for
any defaults, confirmed in writing, and is meant to be in effect until the Lender and the Company complete an amendment extending
the maturity date of the note, or the note is sooner repaid by the Company. If the Company repays the Note after November 28, 2018,
including repayment on the Maturity Date, the Company shall pay 115% of the Principal Amount plus accrued interest. During the
year ending December 31, 2018, the Company recorded an increase in the Note Payable balance of $112,500 with offsetting debt discount
related to this repayment premium which is being amortized to interest expense over the term of the note. Additionally, the Company
paid $5,000 of lender fees which were also recorded as debt discount and are also being amortized to interest expense over the
term of the note.
As additional
consideration for the loan evidenced by the Note, the Company issued to the Lender 18,000 common stock purchase warrants exercisable
for a period of five years from the date of issuance with an exercise price equal to $12.50 per share. These warrants had a fair
value of $115,521 using the Black-Sholes valuation methodology. As a result of this transaction, the Company recorded $100,102
of debt discount consisting of the relative fair value of the warrants which is being amortized to interest expense over the term
of the note.
As of March
31, 2019, this note has a balance amounting to $862,500 with accrued interest amounting to $44,589 which is included in accrued
expenses (See Note 4 and 15).
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, 2019, the
loan has a short-term portion of $10,679 and a long-term portion of $6,535.
|
10.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Matters:
From time
to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As
of March 31, 2019, 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 $48,672 per month currently increasing to $50,619 per month for the final year of the lease.
In February
2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02: “Leases (Topic 842)”
whereby lessees need to recognize almost all leases on their balance sheet as a right of use asset and a corresponding lease liability.
The Company adopted this standard as of January 1, 2019 using the effective date method. We calculated the present value of the
remaining lease payment stream using our incremental effective borrowing rate of 10%. We initially recorded a right to use asset
and corresponding lease liability amounting to $872,897 on January 1, 2019. The right to use asset and the corresponding lease
liability are being equally amortized on a straight-line basis over the remaining term of the lease. The right to use asset has
been further reduced by our deferred rent amounting to $59,901 as of March 31, 2019. As of March 31, 2019, we have a right-of-use
asset amounting to $682,062 recorded in Property Plant and Equipment, and corresponding liability in Accrued Expenses amounting
to $741,963 related to this lease (See Note 4).
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(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.
Director Compensation
During the
three months ended March 31, 2019, the Company released and issued a total of 2,500 vested shares of common stock (related to previous
grants to each of two directors of 15,000 shares each which vest on a pro rata basis over a three year period), with a per share
fair value of $7.50, or $18,750 (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. Additionally, during the three months ended March 31 2019, the Company
released and issued a total of 1,250 vested shares of common stock (related to a previous grant to a director of 15,000 shares
which vest on a pro rata basis over a three year period), with a per share fair value of $10.00, or $12,500 (based on the market
price at the time of the agreement), to a director for his service as defined in his respective Restricted Stock Grant Agreement.
As of March 31, 2019, there were 55,000 unreleased shares of common stock representing $481,250 of unrecognized restricted stock
grant expense related to these Restricted Stock Grant Agreements.
|
|
12.
|
STOCK OPTIONS AND WARRANTS
|
Stock Options
There were
no stock options issued during the three months ended March 31, 2019.
During the
three months ended March 31, 2019, the Company recorded stock option-based compensation of $2,301 related to prior grants. As of
March 31, 2019, there is $4,337 of unrecognized stock option based compensation expense that will be recognized over the next nine
months.
Warrants
There were no warrants issued during the three months ended March 31, 2019, while 2,133 warrants
expired during the three months ended March 31, 2019.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
For each
of the identified periods, revenues can be categorized into the following:
|
|
For the three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Product Sales
|
|
$
|
1,187,465
|
|
|
$
|
2,868,630
|
|
Maintenance Fees
|
|
|
2,130
|
|
|
|
5,448
|
|
Professional Services
|
|
|
–
|
|
|
|
1,894
|
|
Total Revenues
|
|
$
|
1,189,595
|
|
|
$
|
2,875,972
|
|
At March
31, 2019 and December 31, 2018, deferred revenue amounted to $904,107 and $835,785 respectively. At March 31, 2019, the Company
has received an initial deposit to plan and manufacture two Solar Tree® units, a prepayment for the delivery two of our new
DC Fast Charge EVARC units, a prepayment for one standard EVARC unit, in addition to deposits for multi-year maintenance plans
for previously sold products. As of March 31, 2019, deferred revenue associated with product deposits are $862,365 and the delivery
of such products are expected within the following six months, while deferred maintenance fees amounted to $41,742 and pertain
to services to be provided through the second quarter of 2022.
|
|
14.
|
RELATED PARTY TRANSACTIONS
|
During the
three months ended March 31, 2019, the Company released and issued a total of 3,750 shares of vested common stock with a total
value of $31,250, to three directors. These payments were expensed upon release of the shares (See Note 11).
On
October 18, 2016, the Company entered into a five year employment agreement, effective as of January 1, 2016, with Mr.
Desmond Wheatley, the Chief Executive Officer, President, and Chairman of the Company (the “Agreement”). Pursuant
to the Agreement, Mr. Wheatley will receive an annual deferred salary of $50,000 which Mr. Wheatley will defer until such
time as Mr. Wheatley and the Board of Directors agree that payment of the deferred salary and/or cessation of the deferral is
appropriate. Additionally, on March 29, 2017 the board of directors granted Mr. Wheatley a $35,000 bonus for which Mr.
Wheatley agreed to defer such bonus under the same terms of his salary deferral. All deferred amounts are evidenced by an
unsecured convertible promissory note payable by the Company to Mr. Wheatley. The balance of the note as of March 31, 2019,
net $10,483 of discount, is $187,017 with accrued and unpaid interest amounting to $32,910 which is included in accrued
expenses (See Notes 4 and 6).
On April
18, 2019, the Company closed an underwritten public offering with Maxim Group LLC (“Maxim”), as representative for
the several underwriters (the “Underwriters”), pursuant to which the Company agreed to issue and sell to the Underwriters
an aggregate of 2,000,000 units with each unit consisting of one (1) share of the Company’s common stock, par value $0.001
per share (the “Common Stock”), and a warrant to purchase one (1) share of Common Stock at an exercise price equal
to $6.30 per share (the “Warrants”). In addition, the Company granted the Underwriters a 45-day option to purchase
up to 300,000 additional shares of Common Stock, and/or Warrants, or any combination thereof, at the public offering price to
cover over-allotments, if any. The Common Stock and the Warrants were offered and sold to the public (the “Offering”)
pursuant to the Company’s registration statement on Form S-1 (File Nos. 333-226040), filed by the Company with the Securities
and Exchange Commission (the “Commission”) on July 2, 2018, as amended, which became effective on April 15, 2019,
and a related registration statement filed pursuant to Rule 462 promulgated under the Securities Act of 1933, as amended (the
“Securities Act”). The offering price to the public was $6.00 per unit and the Underwriters purchased 2,000,000 units.
In addition, the Underwriters purchased 300,000 Warrants upon the exercise of the Underwriters’ over-allotment option. The
Company received gross proceeds of approximately $12,000,000, before deducting underwriting discounts and commissions and estimated
offering expenses. The total expenses of the offering, including underwriting discounts and commissions, were approximately $1,350,000.
ENVISION SOLAR INTERNATIONAL, INC.
CONDENSED NOTES TO CONDENSED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
On April
16, 2019, in connection with the Offering, the Common Stock and the Warrants of the Company began trading on the Nasdaq Capital
Market under the trading symbols “EVSI” and “EVSIW,” respectively.
In April
2019, pursuant to the Underwriting Agreement, the Company issued to the Underwriters warrants (the “Representative’s
Warrants”) to purchase up to a total of 300,000 shares of common stock (5% of the shares of common stock sold). The warrants
are exercisable at $6.60 per share and have a term of five years. Pursuant to the customary FINRA rules, the representative’s
warrants are subject to a 180-day lock-up pursuant to which the representative will not sell, transfer, assign, pledge, or hypothecate
these warrants or the securities underlying these warrants, nor will it engage in any hedging, short sale, derivative, put, or
call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period
of 180 days from the date of the prospectus relating to the offering.
In addition,
pursuant the Underwriting Agreement, the Company granted Maxim a right of first refusal for a period of twelve months from the
commencement of sales of the offering, to act as sole and exclusive investment banker, book-runner, financial advisor, underwriter
and/or placement agent, at Maxim’s sole and exclusive discretion, for each and every future public and private equity and
debt offering.
In April
2019, the Company effected a one-for-fifty reverse split of its issued and outstanding common stock (the “Reverse Stock Split”),
and reduced the number of authorized shares of common stock from 490,000,000 to 9,800,000. No fractional shares were issued as
a result of the reverse stock split. Fractional shares were rounded up or down to the nearest whole share, after aggregating all
fractional shares held by a stockholder. Any stockholder holding less than 24 shares of Common Stock on a pre-reverse stock basis
were paid in cash for such fractional share of Common Stock which resulted in a buyback of approximately 1,100 shares for $180.
All share and per share data in the accompanying unaudited financial statements and footnotes for all periods presented have been
retroactively adjusted for this reverse stock split.
Further,
subsequent to March 31, 2019, the Company used these funds to pay off the entire balances of all the Convertible Notes Payable,
the Convertible Line of Credit, and the Note Payable along with all accrued and unpaid interest totaling approximately $3,945,800
(See Notes 5,7 and 8).
Additionally,
we paid a $75,000 extension fee to Gemini Special Opportunities Fund, LP (See Note 8) to extend the maturity date of the note to
April 25, 2019.