e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ending June 30, 2009
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file no. 1-33001
ENOVA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
California
|
|
95-3056150 |
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification Number) |
1560 West 190th Street, Torrance, California 90501
(Address of principal executive offices, including zip code)
(310) 527-2800
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company þ |
|
|
|
(Do not check if a smaller reporting company) |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 31, 2009, there were 20,960,908 shares of common stock outstanding.
ENOVA SYSTEMS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
|
|
|
ITEM 1. |
|
FINANCIAL STATEMENTS |
ENOVA SYSTEMS, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,443,000 |
|
|
$ |
5,324,000 |
|
Short term investments |
|
|
200,000 |
|
|
|
2,000,000 |
|
Accounts receivable, net |
|
|
418,000 |
|
|
|
808,000 |
|
Inventories and supplies, net |
|
|
8,015,000 |
|
|
|
7,649,000 |
|
Prepaid expenses and other current assets |
|
|
343,000 |
|
|
|
215,000 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
14,419,000 |
|
|
|
15,996,000 |
|
Property and equipment, net |
|
|
1,647,000 |
|
|
|
1,829,000 |
|
Investment in non-consolidated joint venture |
|
|
|
|
|
|
1,352,000 |
|
Intangible assets, net |
|
|
63,000 |
|
|
|
65,000 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,129,000 |
|
|
$ |
19,242,000 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
849,000 |
|
|
$ |
592,000 |
|
Deferred revenues |
|
|
670,000 |
|
|
|
|
|
Accrued payroll and related expenses |
|
|
226,000 |
|
|
|
295,000 |
|
Other accrued liabilities |
|
|
1,089,000 |
|
|
|
1,859,000 |
|
Current portion of notes payable |
|
|
81,000 |
|
|
|
98,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,915,000 |
|
|
|
2,844,000 |
|
Accrued interest payable |
|
|
1,033,000 |
|
|
|
992,000 |
|
Notes payable, net of current portion |
|
|
1,284,000 |
|
|
|
1,263,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,232,000 |
|
|
|
5,099,000 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Series A convertible preferred stock no par
value, 30,000,000 shares authorized; 2,652,000
issued and outstanding; liquidating preference
at $0.60 per share as of June 30, 2009 and
December 31, 2008 |
|
|
530,000 |
|
|
|
530,000 |
|
Series B convertible preferred stock no par
value, 5,000,000 shares authorized; 546,000
shares issued and outstanding; liquidating
preference at $2 per share as of June 30, 2009
and December 31, 2008 |
|
|
1,094,000 |
|
|
|
1,094,000 |
|
Common Stock no par value, 750,000,000 shares
authorized; 20,961,000 and 20,817,000 shares
issued and outstanding as of June 30, 2009 and
December 31, 2008, respectively |
|
|
134,447,000 |
|
|
|
134,233,000 |
|
Additional paid-in capital |
|
|
8,179,000 |
|
|
|
7,949,000 |
|
Accumulated deficit |
|
|
(133,353,000 |
) |
|
|
(129,663,000 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
10,897,000 |
|
|
|
14,143,000 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
16,129,000 |
|
|
$ |
19,242,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
576,000 |
|
|
$ |
3,370,000 |
|
|
$ |
1,264,000 |
|
|
$ |
5,648,000 |
|
Cost of revenues |
|
|
613,000 |
|
|
|
3,736,000 |
|
|
|
1,192,000 |
|
|
|
6,178,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(37,000 |
) |
|
|
(366,000 |
) |
|
|
72,000 |
|
|
|
(530,000 |
) |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
335,000 |
|
|
|
712,000 |
|
|
|
589,000 |
|
|
|
1,340,000 |
|
Selling, general & administrative |
|
|
1,570,000 |
|
|
|
1,935,000 |
|
|
|
3,065,000 |
|
|
|
3,849,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,905,000 |
|
|
|
2,647,000 |
|
|
|
3,654,000 |
|
|
|
5,189,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross operating loss |
|
|
(1,942,000 |
) |
|
|
(3,013,000 |
) |
|
|
(3,582,000 |
) |
|
|
(5,719,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense) |
|
|
(98,000 |
) |
|
|
69,000 |
|
|
|
(104,000 |
) |
|
|
154,000 |
|
Gain (loss)
from non-consolidated joint venture |
|
|
6,000 |
|
|
|
(6,000 |
) |
|
|
(4,000 |
) |
|
|
(58,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(92,000 |
) |
|
|
63,000 |
|
|
|
(108,000 |
) |
|
|
96,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,034,000 |
) |
|
$ |
(2,950,000 |
) |
|
$ |
(3,690,000 |
) |
|
$ |
(5,623,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.10 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
20,896,000 |
|
|
|
20,054,000 |
|
|
|
20,871,000 |
|
|
|
18,623,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,690,000 |
) |
|
$ |
(5,623,000 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Reserve for doubtful accounts |
|
|
|
|
|
|
70,000 |
|
Inventory reserve |
|
|
240,000 |
|
|
|
|
|
Depreciation and amortization |
|
|
318,000 |
|
|
|
261,000 |
|
Loss (gain) on asset disposal |
|
|
3,000 |
|
|
|
(6,000 |
) |
Equity in losses of non-consolidated joint venture |
|
|
10,000 |
|
|
|
58,000 |
|
Gain from dissolution of non-consolidated joint venture |
|
|
(6,000 |
) |
|
|
|
|
Issuance of common stock for director services |
|
|
90,000 |
|
|
|
84,000 |
|
Issuance of common stock for employee services |
|
|
124,000 |
|
|
|
21,000 |
|
Stock option expense |
|
|
230,000 |
|
|
|
273,000 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
380,000 |
|
|
|
98,000 |
|
Inventory and supplies |
|
|
469,000 |
|
|
|
(3,190,000 |
) |
Prepaid expenses and other current assets |
|
|
(24,000 |
) |
|
|
156,000 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
334,000 |
|
|
|
(228,000 |
) |
Deferred revenues |
|
|
670,000 |
|
|
|
(67,000 |
) |
Accrued payroll and related expense |
|
|
(69,000 |
) |
|
|
(364,000 |
) |
Accrued liabilities |
|
|
(805,000 |
) |
|
|
290,000 |
|
Accrued interest payable |
|
|
41,000 |
|
|
|
59,000 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,685,000 |
) |
|
|
(8,108,000 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(200,000 |
) |
|
|
(2,000,000 |
) |
Maturities of short-term investments |
|
|
2,000,000 |
|
|
|
|
|
Proceeds from dissolution of non-consolidated joint venture |
|
|
137,000 |
|
|
|
|
|
Purchases of property and equipment |
|
|
(100,000 |
) |
|
|
(1,411,000 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
1,837,000 |
|
|
|
(3,411,000 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(33,000 |
) |
|
|
(27,000 |
) |
Net cash proceeds from the sale of common stock |
|
|
|
|
|
|
12,024,000 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(33,000 |
) |
|
|
11,997,000 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
119,000 |
|
|
|
478,000 |
|
Cash and cash equivalents, beginning of period |
|
|
5,324,000 |
|
|
|
10,485,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
5,443,000 |
|
|
$ |
10,963,000 |
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
4,000 |
|
|
$ |
5,000 |
|
|
|
|
|
|
|
|
Assets acquired through financing arrangements |
|
$ |
38,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Net assets acquired in exchange for Enovas interest in joint venture: |
|
|
|
|
|
|
|
|
Inventory |
|
$ |
1,075,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
104,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Reduction of related party payable, net of receivable |
|
$ |
32,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
5
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Three and Six months ended June 30, 2009 and 2008
1. Description of the Company and its Business
Enova Systems, Inc. (Enova or the Company) changed its name in July 2000. The Company was
previously known as U.S. Electricar, Inc., a California corporation, which was incorporated on July
30, 1976. The Company is a globally recognized leader as a supplier of efficient,
environmentally-friendly digital power components and systems products, in conjunction with
associated engineering services. The Companys core competencies are focused on the
commercialization of power management and conversion systems for mobile and stationary
applications.
2. Summary of Significant Accounting Policies
Basis of Presentation Interim Financial Statements
The financial information as of and for the six months ended June 30, 2009 and 2008 is
unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the
Company considers necessary for a fair statement of its financial position at such dates and the
operating results and cash flows for those periods. The year-end balance sheet data was derived
from audited financial statements, and certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules or regulations; however, the Company believes
the disclosures made are adequate to make the information presented not misleading.
The preparation of financial statements in conformity with generally accepted accounting
principles 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.
Although management believes these estimates and assumptions are adequate, actual results could
differ from the estimates and assumptions used.
The results of operations for the interim periods presented are not necessarily indicative of
the results of operations to be expected for the fiscal year. These condensed interim financial
statements should be read in conjunction with the audited financial statements for the year ended
December 31, 2008, which are included in the Companys Annual Report on Form 10-K for the year then
ended.
Certain reclassifications have been made to the prior years financial statements to conform
to the current year presentation. These reclassifications had no effect on previously reported
results of operations or stockholders equity.
Fair Value of Financial Instruments
The carrying amount of financial instruments, including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value
due to the short maturity of these instruments. Short-term investments consist of certificates of
deposits. The carrying value of all other financial instruments is representative of their fair
values. The recorded values of notes payable and long-term debt approximate their fair values as
interest rates approximate market rates.
Revenue Recognition
The Company manufactures proprietary products and other products based on design
specifications provided by its customers. The Company recognizes revenue only when all of the
following criteria have been met:
|
|
|
Persuasive evidence of an arrangement exists; |
|
|
|
Delivery has occurred or services have been rendered; |
6
|
|
|
The fee for the arrangement is fixed or determinable; and |
|
|
|
Collectibility is reasonably assured. |
Persuasive Evidence of an Arrangement The Company documents all terms of an arrangement in a
written contract signed by the customer prior to recognizing revenue.
Delivery Has Occurred or Services Have Been Rendered The Company performs all services or
delivers all products prior to recognizing revenue. Professional consulting and engineering
services are considered to be performed when the services are complete. Equipment is considered
delivered upon delivery to a customers designated location. In certain instances, the customer
elects to take title upon shipment.
The Fee for the Arrangement is Fixed or Determinable Prior to recognizing revenue, a
customers fee is either fixed or determinable under the terms of the written contract. Fees for
professional consulting services, engineering services and equipment sales are fixed under the
terms of the written contract. The customers fee is negotiated at the outset of the arrangement
and is not subject to refund or adjustment during the initial term of the arrangement.
Collectibility is Reasonably Assured The Company determines that collectibility is
reasonably assured prior to recognizing revenue. Collectibility is assessed on a
customer-by-customer basis based on criteria outlined by management. New customers are subject to a
credit review process which evaluates the customers financial position and ultimately its ability
to pay. The Company does not enter into arrangements unless collectibility is reasonably assured at
the outset. Existing customers are subject to ongoing credit evaluations based on payment history
and other factors. If it is determined during the arrangement that collectibility is not reasonably
assured, revenue is recognized on a cash basis. Additionally, in accordance with the Securities and
Exchange Commissions Staff Accounting Bulletin No. 104 (SAB 104), amounts received upfront for
engineering or development fees under multiple-element arrangements are deferred and recognized
over the period of committed services or performance, if such arrangements require the Company to
provide on-going services or performance. All amounts received under collaborative research
agreements or research and development contracts are nonrefundable, regardless of the success of
the underlying research.
Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board Issue 00-21
addresses the accounting for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets. Specifically, Issue 00-21 requires the recognition
of revenue from milestone payments over the remaining minimum period of performance obligations. As
required, the Company applies the principles of Issue 00-21 to multiple element agreements.
The Company also recognizes engineering and construction contract revenues using the
percentage-of-completion method, based primarily on contract costs incurred to date compared with
total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain
cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues
when management believes that the company is responsible for the ultimate acceptability of the
project. Contracts are segmented between types of services, such as engineering and construction,
and accordingly, gross margin related to each activity is recognized as those separate services are
rendered.
Changes to total estimated contract costs or losses, if any, are recognized in the period in
which they are determined. Claims against customers are recognized as revenue upon settlement.
Revenues recognized in excess of amounts received are classified as current assets under contract
work-in-progress. Amounts billed to clients in excess of revenues recognized to date are classified
as current liabilities on contracts.
Changes in project performance and conditions, estimated profitability, and final contract
settlements may result in future revisions to engineering and development contract costs and
revenue.
These accounting policies were applied consistently for all periods presented. Our operating
results would be affected if other alternatives were used. Information about the impact on our
operating results is included in the footnotes to our financial statements.
Several other factors related to the Company may have a significant impact on our operating
results from year to year. For example, the accounting rules governing the timing of revenue
recognition related to product contracts are complex and it can be difficult to estimate when we
will recognize revenue generated by a given transaction. Factors such as acceptance of services
7
provided, payment terms, creditworthiness of the customer, and timing of delivery or
acceptance of our products often cause revenues related to sales generated in one period to be
deferred and recognized in later periods. For arrangements in which services revenue is deferred,
related direct and incremental costs may also be deferred.
Stock Based Compensation
The Company calculates stock-based compensation expense in accordance with SFAS No. 123
revised, Share-Based Payment (SFAS 123(R)). This pronouncement requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors, including employee stock options, to be based on estimated fair values. In March 2005,
the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) related to SFAS 123(R). The Company
applied the provisions of SAB 107 in adopting
SFAS 123(R).
See Note 10 Stock Options for further information on stock-based compensation expense.
3. Inventory
Inventory, consisting of materials, labor and manufacturing overhead, is stated at the lower
of cost (first-in, first-out) or market and consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Raw Materials |
|
$ |
7,716,000 |
|
|
$ |
7,114,000 |
|
Work In Progress |
|
|
320,000 |
|
|
|
391,000 |
|
Finished Goods |
|
|
747,000 |
|
|
|
1,047,000 |
|
Reserve for Obsolescence |
|
|
(768,000 |
) |
|
|
(903,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
8,015,000 |
|
|
$ |
7,649,000 |
|
|
|
|
|
|
|
|
4. Property and Equipment
Property and equipment consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
Computers and software |
|
$ |
550,000 |
|
|
$ |
598,000 |
|
Machinery and equipment |
|
|
959,000 |
|
|
|
1,470,000 |
|
Furniture and office equipment |
|
|
98,000 |
|
|
|
107,000 |
|
Demonstration vehicles and buses |
|
|
485,000 |
|
|
|
346,000 |
|
Leasehold improvements |
|
|
1,348,000 |
|
|
|
1,348,000 |
|
|
|
|
|
|
|
|
|
|
|
3,440,000 |
|
|
|
3,869,000 |
|
Less accumulated depreciation |
|
|
(1,793,000 |
) |
|
|
(2,040,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
1,647,000 |
|
|
$ |
1,829,000 |
|
|
|
|
|
|
|
|
Depreciation expense was $316,000 and $259,000 for the six months ended June 30, 2009 and
2008, respectively.
During the first half of this year, the Company made an evaluation of fixed asset records that
resulted in the disposal of obsolete production equipment, computers and furniture totaling
approximately $566,000 with accumulated depreciation of approximately $563,000 that were no longer
being utilized in our operations.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Accrued Inventory Received |
|
$ |
389,000 |
|
|
$ |
743,000 |
|
Accrued Professional Services |
|
|
170,000 |
|
|
|
571,000 |
|
Accrued Warranty |
|
|
530,000 |
|
|
|
545,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,089,000 |
|
|
$ |
1,859,000 |
|
|
|
|
|
|
|
|
8
6. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Secured note payable to Credit
Managers Association of California,
bearing interest at prime plus 3%
(6.25% as of June 30, 2009), and is
adjusted annually in April through
maturity. Principal and unpaid
interest due in April 2016. A
sinking fund escrow may be funded
with 10% of future equity financing,
as defined in the Agreement |
|
$ |
1,238,000 |
|
|
$ |
1,238,000 |
|
Secured note payable to a financial
institution in the original amount
of $95,000, bearing interest at
6.21%, payable in 36 equal monthly
installments of principal and
interest through October 1, 2009 |
|
|
10,000 |
|
|
|
27,000 |
|
Secured note payable to a financial
institution in the original amount
of $35,000, bearing interest at
10.45%, payable in 30 equal monthly
installments of principal and
interest through November 1, 2009 |
|
|
7,000 |
|
|
|
14,000 |
|
Secured note payable to a financial
institution in the original amount
of $23,000, bearing interest at
11.70%, payable in 36 equal monthly
installments of principal and
interest through October 1, 2010 |
|
|
12,000 |
|
|
|
15,000 |
|
Secured note payable to a Coca Cola
Enterprises in the original amount
of $40,000, bearing interest at 10%
per annum. Principal and unpaid
interest due on demand |
|
|
40,000 |
|
|
|
40,000 |
|
Secured note payable to a financial
institution in the original amount
of $39,000, bearing interest at
4.99% per annum, payable in 48 equal
monthly installments of principal
and interest through September 1,
2011 |
|
|
23,000 |
|
|
|
27,000 |
|
Secured note payable to a financial
institution in the original amount
of $38,000, bearing interest at
8.25% per annum, payable in 60 equal
monthly installments of principal
and interest through February 19,
2014 |
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,365,000 |
|
|
|
1,361,000 |
|
Less current portion |
|
|
(81,000 |
) |
|
|
(98,000 |
) |
|
|
|
|
|
|
|
Long-term portion |
|
$ |
1,284,000 |
|
|
$ |
1,263,000 |
|
|
|
|
|
|
|
|
As of June 30, 2009 and December 31, 2008, the balance of long term interest payable with
respect to the Credit Managers Association of California note amounted to $1,015,000 and $976,000,
respectively.
7. Revolving Credit Agreement
In October 2007, the Company entered into a secured revolving credit facility with a financial
institution (the Credit Agreement) for $2,000,000, which was secured by a $2,000,000 certificate
of deposit. The facility expired on June 30, 2009.
In June 2009, the Company renewed the Credit Agreement at a reduced principal amount of
$200,000 for a one-year term maturing on June 30, 2010. The agreement is secured by a $200,000
certificate of deposit. The interest rate on a drawdown from the facility is the certificate of
deposit rate plus 1.25% with interest payable monthly and the principal due at maturity. The
financial institution also renewed the $200,000 irrevocable letter of credit for the full amount of
the credit facility in favor of Sunshine Distribution LP (Landlord), with respect to the lease of
the Companys corporate headquarters at 1560 West 190th Street, Torrance, California.
8. Shareholders Equity
Changes in shareholders equity were as follows for the six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
14,143,000 |
|
|
$ |
14,177,000 |
|
Increase in additional paid-in-capital for stock-based compensation |
|
|
230,000 |
|
|
|
273,000 |
|
Increase in common stock for issuances of common shares to directors |
|
|
90,000 |
|
|
|
84,000 |
|
Increase in common stock for issuances of common shares to employees |
|
|
124,000 |
|
|
|
21,000 |
|
Net proceeds from the sale of common stock |
|
|
|
|
|
|
12,024,000 |
|
Net loss |
|
|
(3,690,000 |
) |
|
|
(5,623,000 |
) |
|
|
|
|
|
|
|
End balance |
|
$ |
10,897,000 |
|
|
$ |
20,956,000 |
|
|
|
|
|
|
|
|
9
9. Related Party Transactions
During the six months ended June 30, 2009 and June 30, 2008, the Company purchased $1,075,000
and $1,063,000, respectively, in components materials or services from Hyundai Heavy Industries
(HHI), a related party. As of June 30, 2009, the Company has a remaining outstanding deposit
balance with HHI of approximately $104,000 from the ITC joint venture dissolution for which
inventory is expected be delivered in the third quarter. The Company had a payables balance to HHI
of approximately zero and $467,000 as of June 30, 2009 and 2008, respectively.
10. Subsequent Events
None.
11. Stock Options
Stock Option Program Description
As of June 30, 2009, the Company had one equity compensation plan, the 2006 Equity
Compensation Plan (the 2006 Plan). The 1996 Stock Option Plan (the 1996 Plan) has expired for
the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards
previously granted under that plan. The 2006 Plan has been approved by the Companys Shareholders.
Equity compensation grants are designed to reward employees and executives for their long term
contributions to the Company and to provide incentives for them to remain with the Company. The
number and frequency of equity compensation grants are based on competitive practices, operating
results of the company, and government regulations.
The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which 2,040,000 shares
were available for grant as of June 30, 2009. All stock options have terms of between five and ten
years and generally vest and become fully exercisable from two to three years from the date of
grant. As of June 30, 2009, the Company had 1,056,000 options outstanding which were comprised of
issuances under the 1996 Plan and the 2006 Plan of 97,000 and 959,000, respectively.
In
conjunction with the adoption of SFAS 123(R), the Company attributed the value of
share-based compensation to expense using the straight-line method. Share-based compensation
expense related to stock options was $126,000 for the three months ended June 30, 2009.
Share-based compensation expense reduced the Companys results of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the six months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Income from continuing operations before income taxes |
|
$ |
126,000 |
|
|
$ |
184,000 |
|
|
$ |
230,000 |
|
|
$ |
273,000 |
|
Income from continuing operations after income taxes |
|
$ |
126,000 |
|
|
$ |
184,000 |
|
|
$ |
230,000 |
|
|
$ |
273,000 |
|
Cash flows from operations |
|
$ |
126,000 |
|
|
$ |
184,000 |
|
|
$ |
230,000 |
|
|
$ |
273,000 |
|
Cash flows from financing activities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Basic and Diluted EPS |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
As of June 30, 2009, the total compensation cost related to non-vested awards not yet
recognized is $972,000. The weighted average period over which the future compensation cost is
expected to be recognized is 24 months. The aggregate intrinsic value represents the total pretax
intrinsic value, which is the difference between the Companys closing stock price on the last
trading day of the second quarter of fiscal 2009 of $0.70 and the exercise price times the number
of shares that would have been received by the option holders if they had exercised their options
on June 30, 2009. This amount will change based on the fair market value of the Companys stock.
10
The following table summarizes information about stock options outstanding and exercisable at
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Number of Share |
|
|
Weighted Average |
|
|
Contractual Term |
|
|
Aggregate |
|
|
|
Options |
|
|
Exercise Price |
|
|
in Years |
|
|
Intrinsic Value |
|
Outstanding at December 31, 2008 |
|
|
623,000 |
|
|
$ |
4.02 |
|
|
|
7.09 |
|
|
$ |
|
|
Granted |
|
|
515,000 |
|
|
$ |
0.63 |
|
|
|
8.10 |
|
|
$ |
74,000 |
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Forfeited |
|
|
(82,000 |
) |
|
$ |
3.82 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
1,056,000 |
|
|
$ |
2.38 |
|
|
|
7.33 |
|
|
$ |
74,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
409,000 |
|
|
$ |
3.64 |
|
|
|
6.02 |
|
|
$ |
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual life of the options outstanding at June 30, 2009
was 7.33 years. The exercise prices of the options outstanding at June 30, 2009 ranged from $0.21
to $4.95. Options exercisable were 409,000 and 387,000 at June 30, 2009 and December 31, 2008,
respectively. The weighted average grant-date fair value of options granted during the three and
six months ended June 30, 2009 was $0.76 and $0.59, respectively, and was $3.21 and $2.87 for
options granted during the three and six months ended June 30, 2008, respectively. The Companys
policy is to issue shares from its authorized shares upon the exercise of stock options.
The fair values of all stock options granted during the three and six months ended June 30,
2009 and 2008 were estimated on the date of grant using the Black-Scholes option-pricing model with
the following range of assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the six months ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Expected life (in years) |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Average risk-free interest rate |
|
|
2 |
% |
|
|
3 |
% |
|
|
2 |
% |
|
|
3 |
% |
Expected volatility |
|
|
194 |
% |
|
|
113 |
% |
|
|
194 |
% |
|
111% to 113% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Forfeiture rate |
|
|
3 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
3 |
% |
The estimated fair value of grants of stock options and warrants to nonemployees of the
Company is charged to expense, if applicable, in the financial statements. These options vest in
the same manner as the employee options granted under each of the option plans as described above.
12. Recent Accounting Pronouncements
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly (FSP 157-4), and FSP FASB 107-1 and Accounting Principles Board (APB) 28-1,
Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1), which amends SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the
fair value of financial instruments that are not currently reflected on a companys balance sheet
for interim reporting periods as well as annual reporting periods. These two staff positions
relate to fair value measurements and related disclosures. The FASB also issued a third FSP
relating to the accounting for impaired debt securities titled FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2). These standards are
effective for interim and annual periods ending after June 15, 2009. The Company has determined
that FSP 157-4 and FSP 115-2 do not currently apply to its activities and has adopted the
disclosure requirements of FSP 107-1.
In May 2009, the FASB issued Statement No. 165, Subsequent Events (SFAS 165), which
establishes general standards of accounting for, and requires disclosure of, events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. The Company adopted the provisions of SFAS 165 for the quarter ended June 30, 2009. The
adoption of this provision did not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an
amendment to SFAS No. 140 (SFAS 166). SFAS 166 eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial assets, and requires
additional disclosures in order to enhance information reported to users of financial statements by
11
providing greater transparency about transfers of financial assets, including securitization
transactions, and an entitys continuing involvement in and exposure to the risks related to
transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. The Company is evaluating the impact of this standard and currently does not expect it to
have a significant impact on its financial position, results of operations or cash flows. The
Company will adopt SFAS 166 in fiscal 2010.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS
167). The amendments include: (1) the elimination of the exemption for qualifying special purpose
entities, (2) a new approach for determining who should consolidate a variable-interest entity, and
(3) changes to when it is necessary to reassess who should consolidate a variable-interest entity.
SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and
for interim periods within that first annual reporting period. The Company is evaluating the impact
of this standard and currently does not expect it to have a significant impact on its financial
position, results of operations or cash flows. The Company will adopt SFAS 166 in fiscal 2010.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 replaces FASB Statement
No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB
Accounting Standards Codification (the Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with generally accepted accounting principles (GAAP). SFAS 168
is effective for interim and annual periods ending after September 15, 2009. The Company will begin
to use the new Codification when referring to GAAP in its quarterly report on Form 10-Q for the
quarter ending September 30, 2009. The implementation of this standard will not have an impact on
the consolidated results of the Company.
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q contains statements indicating expectations about future
performance and other forward-looking statements that involve risks and uncertainties. We usually
use words such as may, will, should, expect, plan, anticipate, believe, estimate,
predict, future, intend, potential, or continue or the negative of these terms or similar
expressions to identify forward-looking statements. These statements appear throughout this
Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or
expectation, primarily with respect to our operations and related industry developments. Examples
of these statements include, but are not limited to, statements regarding the following: our future
operating expenses, our future losses, our future expenditures for research and development and the
sufficiency of our cash resources. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual
results could differ materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us and described in our Annual Report on Form 10-K for the
year ended December 31, 2008.
The following discussion and analysis should be read in conjunction with the unaudited interim
financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form
10-Q and with the financial statements and notes thereto and Managements Discussion and Analysis
of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for
the year ended December 31, 2008.
Overview
Enova believes it is a leader in the development and production of proprietary, commercial
digital power management systems for transportation vehicles and stationary power generation
systems. Power management systems control and monitor electric power in an automotive or commercial
application such as an automobile or a stand-alone power generator. Electric drive systems are
comprised of an electric motor, an electronics control unit, a gear unit and batteries which power
an electric vehicle. Hybrid systems, which are similar to pure electric drive systems, contain an
internal combustion engine in addition to the electric motor, eliminating external recharging of
the battery system. Our hybrid systems can alternatively utilize a hydrogen fuel cell or a
microturbine as a power source to recharge the battery system. Stationary power systems utilize
similar components to those which are in a mobile drive system in addition to other elements.
12
A fundamental element of Enovas strategy is to develop and produce advanced proprietary
software, firmware and hardware for applications in these alternative power markets. Our focus is
digital power conversion, power management, and system integration, focusing chiefly on vehicle
power generation.
Specifically, we develop, design and produce drive systems and related components for
electric, hybrid-electric, fuel cell and microturbine-powered vehicles. We also develop, design and
produce power management and power conversion components for stationary distributed power
generation systems. Additionally, we perform research and development (R&D) to augment and
support others and our own related product development efforts.
Our product development strategy is to design and introduce to market successively advanced
products, each based on our core technical competencies. In each of our product/market segments, we
provide products and services to leverage our core competencies in digital power management, power
conversion and system integration. We believe that the underlying technical requirements shared
among the market segments will allow us to more quickly transition from one emerging market to the
next, with the goal of capturing early market share.
Enovas primary market focus centers on both electric series and parallel hybrid medium and
heavy-duty drive systems for multiple vehicle and marine applications. A series hybrid system is
one where only the electric motor connects to the drive shaft; a parallel hybrid system is one
where both the internal combustion engine and the electric motor are connected to the drive shaft.
We believe series-hybrid and parallel hybrid medium and heavy-duty drive system sales offer Enova
the greatest return on investment in both the short and long term. We believe the medium and
heavy-duty hybrid markets best chances of significant growth lie in identifying and pooling the
largest possible numbers of early adopters in high-volume applications. By aligning ourselves with
key customers in our target markets, we believe that alliances will result in the latest technology
being implemented and customer requirements being met, with an optimized level of additional time
or expense. As we penetrate more market areas, we are continually refining both our market strategy
and our product line to maintain our leading edge in power management and conversion systems for
mobile applications.
Our website, www.enovasystems.com, contains up-to-date information on our company, our
products, programs and current events. Our website is a prime focal point for current and
prospective customers, investors and other affiliated parties seeking data on our business.
Recent Developments
In April 2009, our customer Navistar (International Truck and Engine, IC Corporation) was
selected to receive a cost-shared award of up to $10 million under the Department of Energy Plug-in
Hybrid Electric Vehicle (PHEV) Technology Acceleration and Deployment Activity program to develop
and deploy 60 plug-in electric hybrid school buses, including engine-off all-electric drive
capability. We believe that these awards will result in a greatly improved value proposition for
customers. Navistar has also finalized several sales incentive programs, including a universal
extended warranty of up to 12 years in certain targeted markets and dedicated funding specialists
to pursue product funding and tax incentives for dealers and customers. Enova is working closely
with Navistar in support of these initiatives.
After successfully implementing twenty of our pre-transmission parallel hybrid systems at last years
Beijing Olympics, First Auto Works (FAW) of China has placed orders for 220 units of our hybrid
systems for deliveries concentrated in the second half of the year, which represents the start of sustained
volume production for this OEM. Furthermore, we have executed a supply agreement with FAW to supply
an additional 800 units in 2010. In addition, the government of China issued a three-year development plan
in February of this year to produce 500,000 electric and hybrid vehicles per year, or 5% of the Chinese
vehicle market. As part of this initiative, the government is offering subsidies of up to 600,000 yuan that
will cover about half of the cost of each bus in thirteen trial cities, including Beijing, Shanghai, Changchun,
Dalian and Shenzhen. The municipal government of Dalian has confirmed that at least fifty hybrid buses
will be running in the city of Changchun during the World Economic Forums Summer event to be held in
September 2009, all of which will feature Enovas drive systems.
In the second quarter of 2009, we completed the commercialization of our all electric zero
emission (Ze) drive train. The Enova Ze step van further demonstrates our advanced drive systems
capabilities and allows both vehicle original equipment manufacturers (OEMs) and operators the
opportunity to evaluate our capabilities firsthand. In the second quarter of 2009, Enova completed
a Department of Energy Electrification grant application for Enova to convert and place Ze step
vans to further enable the market acceptance of this technology. Additionally, in the second
quarter of 2009, the Enova Ze drive train was demonstrated to several world leading early adopter
OEMs. Additional OEM and fleet visits are scheduled. In the third and fourth quarter of 2009,
Enova will engage in a sustained visibility campaign with the objective of bringing the Enova Ze
drive train into production.
Throughout the second quarter of 2009, we continued to host and visit potential as well as
existing customers from the Pick Up and Delivery, Medium Duty and Heavy Duty markets. We continue
to mature these relationships, as we believe they will eventually
13
lead to viable business relationships. Additionally, Enova has explored several retrofit
strategies and consulted with our fleet partners to place evaluation vehicles in the field. We
believe that the non-invasive and versatile nature of Enovas post transmission hybrid designs
position our company as a highly viable production alternative in the market today. Economic
factors, including lengthened vehicle service lives, government funding opportunities, and more
affordable energy storage, indicate that a positive vehicle payback point is achievable in a
retrofit application.
In April 2009, Enova
submitted a loan and grant application to the U.S. Department of Energy
Advanced Technology Vehicles Manufacturing (ATVM) Loan Program under Section 136 of the Energy
Independence and Security Act of 2007. Enova applied for the funding of $13.6 million for a light
duty drive system with the goal of commercialization of the associated components. In July 2009, we received
notice from the DOE that our loan application was substantially complete. The ATVM Loan
Program provides loans to automobile and automobile part manufacturers for the cost of equipping,
expanding, or establishing manufacturing facilities in the United States to produce light-duty
vehicles and components for such vehicles which provide targeted improvements in fuel economy
performance beyond certain specified levels. Section 136 also provides that grants and loans may
cover engineering integration costs associated with such projects.
As part of the American Recovery
and Reinvestment Act of 2009, the U.S. Department of Energy
also announced funding opportunities in the form of cost-share grants for supporting the
construction of U.S. based manufacturing plants to produce batteries, electric drive components,
and to establish development, demonstration, evaluation, and education projects to accelerate the
market introduction and penetration of advanced electric drive
vehicles. In August 2009, we received notice from the Department of Energy that grant money is not available
for Enova at this time. However, Smith Electric Vehicles U.S. subsidiary received a grant of $10 million
under this program to accelerate the production plans at their new U.S. manufacturing facility. As production
is ramped up, we anticipate the opportunity to continue supply of our all-electric vehicle drive systems that
are used to power Smiths Newton trucks. Additionally, Navistar Truck also received a grant of $39M to build
an electric truck manufacturing facility and develop associated technologies. Enova will attempt to supply Navistar
Truck with EV drive systems to support this manufacturing line.
The California Air Resources Board (CARB) through AB 118, highlighted in a meeting notice
that a $25 million voucher incentive program would be implemented to accelerate the deployment of
about 1,000 hybrid trucks and buses in California. CARB also announced an advanced technology
demonstration project of $3 million for transit and school buses. Enova believes these programs
will lower the acquisition cost of a hybrid school bus for our California customers and create
another funding opportunity for our current initiatives in the hybrid school bus market.
Enova has incurred significant operating losses in the past. As of June 30, 2009, we had an
accumulated deficit of approximately $133.4 million. We expect to incur additional operating losses
until we achieve a level of product sales sufficient to cover our operating and other expenses.
However, the Company believes that its business outlook will improve, especially in light of
government policies being implemented in the United States, China and the United Kingdom regarding
the curbing of green house gas emissions in the future as well as intentions to provide government
incentives that may induce consumption of our products and services.
We continue to receive greater recognition from both governmental and private industry with
regards to both commercial and military application of our hybrid drive systems and fuel cell power
management technologies. Although we believe that current negotiations with various parties may
result in production contracts during 2009 and beyond, there are no assurances that such additional
agreements will be realized.
During the second quarter of 2009, we also continued to develop and produce electric and
hybrid electric drive systems and components for other major customers as well, including HCATT and
United Kingdom bus manufacturers including Tanfield Engineering Systems and Optare UK Limited, as
well as several other domestic and international vehicle and bus manufacturers. Our various
electric and hybrid-electric drive systems, power management and power conversion systems are being
used in applications including several light, medium and heavy duty trucks, train locomotives,
transit buses and industrial vehicles.
Dissolution of Joint Venture Hyundai-Enova Innovative Technology Center
On April 6, 2009, Enova Systems Inc. and Hyundai Heavy Industries of Korea (HHI) agreed to
dissolve their 60/40 joint venture, Hyundai-Enova Innovative Technology Center, Inc. (ITC), by
mutual agreement based on their evaluation of the joint venture and its business relationship to
each of Enova and HHI. ITC was originally established in 2003 as a technical center for specified
products with Enova as the commercial manager, ITC as the engineering and development venture and
HHI as the primary components supplier.
In connection with the dissolution of ITC, Enova, HHI and ITC entered into a Joint Venture
Dissolution and Termination Agreement, effective as of April 6, 2009 (the Dissolution Agreement),
pursuant to which, among other things, the parties terminated
14
each of: (a) the Joint Venture Agreement between Enova and HHI, (b) the License and Technology
Transfer Agreement between HHI and ITC (and all amendments and modifications thereto), (c) the
License Transfer Agreement between Enova and ITC (and all amendments and modifications thereto),
(d) the Manufacturing and Sales Agreement between Enova, HHI and ITC (and all amendments and
modifications thereto), (e) the Manufacturing and Sales Agreement between HHI and ITC (and all
amendments and modifications thereto) and (f) the License Agreement among U.S. Electricar, Inc.,
Hyundai Motor Company, and Hyundai Electronics Co., Ltd. (and all amendments and modifications
thereto).
The Dissolution Agreement required Enova and ITC to enter into a Stock Purchase Agreement,
dated as of April 6, 2009. Pursuant to the Stock Purchase Agreement, ITC re-purchased the 2,000,000
shares of common stock of ITC owned by Enova, which represented 40% of the issued shares of ITC,
for a purchase price of $1,334,097 with HHI becoming the sole shareholder of ITC immediately
subsequent to this transaction. Enova received from ITC a cash payment of $137,218 and, as was
agreed under the Dissolution Agreement, the amount of $1,196,879 was paid to HHI to settle open
purchase orders that Enova had placed with HHI for electrical component inventory which are
expected to become part of salable systems; and settled other payables and receivables between
Enova and HHI and ITC. As of June 30, 2009, Enova received approximately $1,075,000 in inventory
from HHI as part of the ITC settlement and had unfulfilled open purchase orders with HHI in the
amount of approximately $104,000.
The summary of the ITC dissolution is as follows:
|
|
|
|
|
|
|
Amount |
|
Cash received at settlement |
|
$ |
137,000 |
|
Inventory received during the second quarter in settlement of
purchase orders with HHI for Enovas share in joint venture |
|
|
1,075,000 |
|
Open purchase orders with HHI to be received in the third quarter |
|
|
104,000 |
|
Related party receivables and payables settled for Enovas share
in joint venture |
|
|
32,000 |
|
|
|
|
|
Settlement amount |
|
|
1,348,000 |
|
Less: Joint venture investment balance as of April 6, 2009 |
|
|
(1,342,000 |
) |
|
|
|
|
Net gain resulting from dissolution of the joint venture |
|
$ |
6,000 |
|
|
|
|
|
HHI continues to be a key strategic supplier of components for Enova, including electric drive
motors and control electronic units that are manufactured using Enova specifications.
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of estimates and assumptions
relating to the reporting of results of operations and financial condition in the preparation of
its financial statements in conformity with accounting principles generally accepted in the United
States of America. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Estimates and assumptions include, but are not
limited to, customer receivables, inventories, equity investments, fixed asset lives, contingencies
and litigation. There have been no material changes in estimates or assumptions compared to our
most recent Annual Report for the fiscal year ended December 31, 2008.
The following represents a summary of our critical accounting policies, defined as those
policies that we believe: (a) are the most important to the portrayal of our financial condition
and results of operations and (b) involve inherently uncertain issues which require managements
most difficult, subjective or complex judgments.
Cash and cash equivalents Cash consists of currency held at reputable financial institutions.
Inventory Inventories are priced at the lower of cost or market utilizing first-in, first-out
(FIFO) cost flow assumption. We maintain a perpetual inventory system and continuously record the
quantity on-hand and standard cost for each product, including purchased components,
subassemblies and finished goods. We maintain the integrity of perpetual inventory records
through periodic physical counts of quantities on hand. Finished goods are reported as
inventories until the point of transfer to the customer. Generally, title transfer is documented
in the terms of sale.
Inventory reserve We maintain an allowance against inventory for the potential future
obsolescence or excess inventory. A substantial decrease in expected demand for our products, or
decreases in our selling prices could lead to excess or overvalued inventories and could require
us to substantially increase our allowance for excess inventory. If future customer demand or
market
15
conditions are less favorable than our projections, additional inventory write-downs may be
required, and would be reflected in cost of revenues in the period the revision is made.
Allowance for doubtful accounts We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments. The assessment of
the ultimate realization of accounts receivable including the current credit-worthiness of each
customer is subject to a considerable degree to the judgment of our management. If the financial
condition of the Companys customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Stock-based Compensation The Company calculates stock-based compensation expense in accordance
with SFAS No. 123 revised, Share-Based Payment (SFAS 123 (R)). This pronouncement requires
the measurement and recognition of compensation expense for all share-based payment awards made
to employees and directors, including employee stock options to be based on estimated fair
values. The Company adopted SFAS 123 (R) using the modified prospective method, which requires
the application of the accounting standard as of January 1, 2006, the beginning of the Companys
2006 fiscal year. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107)
related to SFAS 123 (R). The Company applied the provisions of SAB 107 in adopting SFAS 123 (R).
Revenue recognition The Company is required to make judgments based on historical experience
and future expectations, as to the reliability of shipments made to its customers. These
judgments are required to assess the propriety of the recognition of revenue based on Staff
Accounting Bulletin (SAB) No. 101 and 104, Revenue Recognition, and related guidance. The
Company makes these assessments based on the following factors: i) customer-specific information,
ii) return policies, and iii) historical experience for issues not yet identified. Under FAS
Concepts No. 5, revenues are not recognized until earned.
The Company manufactures proprietary products and other products based on design specifications
provided by its customers. Revenue from sales of products are generally recognized at the time
title to the goods and the benefits and risks of ownership passes to the customer which is
typically when products are shipped based on the terms of the customer purchase agreement.
Revenue relating to long-term fixed price contracts is recognized using the percentage of
completion method. Under the percentage of completion method, contract revenues and related costs
are recognized based on the percentage that costs incurred to date bear to total estimated costs.
Changes in job performance, estimated profitability and final contract settlements may result in
revisions to cost and revenue, and are recognized in the period in which the revisions are
determined. Contract costs include all direct materials, subcontract and labor costs and other
indirect costs. General and administrative costs are charged to expense as incurred. At the time
a loss on a contract becomes known, the entire amount of the estimated loss is accrued. The
aggregate of costs incurred and estimated earnings recognized on uncompleted contracts in excess
of related billings is shown as a current asset, and billings on uncompleted contracts in excess
of costs incurred and estimated earnings is shown as a current liability.
These accounting policies were applied consistently for all periods presented. Our operating
results would be affected if other alternatives were used. Information about the impact on our
operating results is included in the footnotes to our financial statements.
Several other factors related to the Company may have a significant impact on our operating
results from year to year. For example, the accounting rules governing the timing of revenue
recognition related to product contracts are complex and it can be difficult to estimate when we
will recognize revenue generated by a given transaction. Factors such as acceptance of services
provided, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of
our products often cause revenues related to sales generated in one period to be deferred and
recognized in later periods. For arrangements in which services revenue is deferred, related direct
and incremental costs may also be deferred.
16
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2009 compared to Three and Six Months Ended June 30, 2008
Second Quarter of Fiscal 2009 vs. Second Quarter of Fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
As a % of Revenues |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
576,000 |
|
|
$ |
3,370,000 |
|
|
|
-83 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
613,000 |
|
|
|
3,736,000 |
|
|
|
-84 |
% |
|
|
106 |
% |
|
|
111 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(37,000 |
) |
|
|
(366,000 |
) |
|
|
90 |
% |
|
|
-6 |
% |
|
|
-11 |
% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
335,000 |
|
|
|
712,000 |
|
|
|
-53 |
% |
|
|
58 |
% |
|
|
21 |
% |
Selling, general & administrative |
|
|
1,570,000 |
|
|
|
1,935,000 |
|
|
|
-19 |
% |
|
|
273 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,905,000 |
|
|
|
2,647,000 |
|
|
|
-28 |
% |
|
|
331 |
% |
|
|
79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross operating loss |
|
|
(1,942,000 |
) |
|
|
(3,013,000 |
) |
|
|
36 |
% |
|
|
-337 |
% |
|
|
-89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense) |
|
|
(98,000 |
) |
|
|
69,000 |
|
|
|
-242 |
% |
|
|
-17 |
% |
|
|
2 |
% |
Gain (loss)
from non-consolidated joint venture |
|
|
6,000 |
|
|
|
(6,000 |
) |
|
|
-200 |
% |
|
|
1 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(92,000 |
) |
|
|
63,000 |
|
|
|
-246 |
% |
|
|
-16 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,034,000 |
) |
|
$ |
(2,950,000 |
) |
|
|
31 |
% |
|
|
-353 |
% |
|
|
-88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Six Months of Fiscal 2009 vs. First Six Months of Fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
As a % of Revenues |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
1,264,000 |
|
|
$ |
5,648,000 |
|
|
|
-78 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
1,192,000 |
|
|
|
6,178,000 |
|
|
|
-81 |
% |
|
|
94 |
% |
|
|
109 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
72,000 |
|
|
|
(530,000 |
) |
|
|
114 |
% |
|
|
6 |
% |
|
|
-9 |
% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
589,000 |
|
|
|
1,340,000 |
|
|
|
-56 |
% |
|
|
47 |
% |
|
|
24 |
% |
Selling, general & administrative |
|
|
3,065,000 |
|
|
|
3,849,000 |
|
|
|
-20 |
% |
|
|
242 |
% |
|
|
68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,654,000 |
|
|
|
5,189,000 |
|
|
|
-30 |
% |
|
|
289 |
% |
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross operating loss |
|
|
(3,582,000 |
) |
|
|
(5,719,000 |
) |
|
|
37 |
% |
|
|
-283 |
% |
|
|
-101 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense) |
|
|
(104,000 |
) |
|
|
154,000 |
|
|
|
-168 |
% |
|
|
-8 |
% |
|
|
3 |
% |
Gain (loss)
from non-consolidated joint venture |
|
|
(4,000 |
) |
|
|
(58,000 |
) |
|
|
-93 |
% |
|
|
0 |
% |
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(108,000 |
) |
|
|
96,000 |
|
|
|
-213 |
% |
|
|
-9 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,690,000 |
) |
|
$ |
(5,623,000 |
) |
|
|
34 |
% |
|
|
-292 |
% |
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sum of the amounts and percentages may not equal the totals for the period due to the effects
of rounding.
Computations of percentage change period over period are based upon our results, as rounded
and presented herein.
Revenue. Net revenues decreased by $4,384,000 or 78% for the six months ended June 30, 2009 to
$1,264,000 as compared to $5,648,000 for the corresponding period in 2008. Revenues for the three
months ended June 30, 2009 decreased by 83% to $576,000 from $3,370,000 in the corresponding period
in 2008. Revenues in the current year were derived primarily from fulfillment of orders from First
Auto Works of China (FAW), Navistar Corporation, the Hawaii Center for Advanced Transportation
Technologies (HCATT) and the Tanfield Group Plc (Tanfield). The decline in revenue in the
first half of 2009 compared to the prior year is due to the fulfillment of large volume sales of
our hybrid systems to Tanfield, which accounted for nearly 40% of sales, as well as the completion
of several small low volume contracts for other customers. In addition, domestic revenues in the
current year were impacted by the effect of the economic slowdown on capital expenditures. We
continue to improve the awareness of our product and service offerings with customers based on our
robust research and product development initiatives as well as our production capacity. Although we
have seen indications for future production growth, as discussed in the Overview above, there can
be no assurance there will be continuing demand for our products and services.
17
Cost of Revenues. Cost of revenues consists of component and material costs, direct labor costs, integration costs and overhead related to manufacturing our products as well as inventory valuation reserve amounts. Cost of revenues for the six and three months ended June 30, 2009 decreased to $1,192,000, or -81%, and $613,000, or -84%,
respectively from $6,178,000 and $3,736,000, respectively for the same periods
in 2008 primarily due to the decrease in revenue. Excluding net inventory reserve adjustments,
the cost of revenues would have been 84% of revenues in the first half of 2009 and would have been 105% of
revenue in the same period of the prior year. The improvement in the cost of revenue percentage is primarily
attributable to our continuing focus on manufacturing and inventory processes that resulted in tighter control
over production costs.
Gross Margin.
Gross margin improved for the six months ended June 30, 2009 to a profit of $72,000 (6% of revenue) from a
loss of $530,000 (-9% of revenue) in the same period in 2008. Gross margin also improved for the three months
ended June 30, 2009 to a negative 6% from a negative 11% in the same period in 2008. Excluding the effect of
inventory adjustments, as discussed above, gross margin for the six months ended June 30, 2009 would have
been 16% and would have been, negative 5% in the corresponding period in 2008. The improvement in gross margin
is primarily attributable to our focus on key customer production contracts, maturity of our supply chain, and
efficiencies gained through focus on manufacturing and inventory processes that resulted in tighter controls
over production costs. As we complete delivery of major production contracts in the second half of this year,
we expect to achieve continued benefit from these initiatives, although we may continue to experience
variability in our gross margin.
Research and Development (R&D). Internal research, development and engineering expenses
decreased $751,000 or 56% in the six months ended June 30, 2009 to $589,000 from $1,340,000 for the
same period in 2008. In the three months ended June 30, 2009, R&D costs decreased $377,000, or 53%,
to $335,000 from $712,000 in the prior year period. R&D costs were higher in the first six months
of 2008 due to expenditures to complete the development of our wireless tracking module, a one-time
cost incurred for a dynamometer testing of our hybrid system and a higher level of resources
expended for development projects. In the first six months of 2009, R&D efforts were focused on
development of our new Ze all electric vehicle, an upgraded motor control unit, engine off
capability for our post transmission parallel hybrid drive system as well as testing of new battery
technologies, and development resources utilized in support of non core development projects were
reduced due to the current operating environment. We also continued to allocate necessary
resources to the development of upgraded proprietary control software, enhanced DC-DC converters
and digital inverters as well as other power management firmware.
Selling, General, and Administrative Expenses (S, G & A). Selling, general and
administrative expenses decreased $784,000 or 20% for the six months ended June 30, 2009 to
$3,065,000 from $3,849,000 for the same period in 2008. These expenses also decreased $365,000, or
19%, to $1,570,000 for the three months ended June 30, 2009 from $1,935,000 for the same period in
2008. The Company implemented a series of cost savings measures in response to the severe sales
environment, including reducing employee headcount by over 50% from the 2008 peak, eliminating
outside IT and marketing consultants and placing restrictions on travel and purchasing. In
addition, the Company incurred approximately $300,000 of expenses for internal labor and other
costs in the first three months of 2008 due to the move to our new manufacturing facility.
Interest and Other Income (Expense). Interest and Other Income (Expense) decreased by $167,000
and $258,000 to a net expense of $98,000 and $104,000 in the three and six months ended June 30,
2009, respectively, from a net income of $69,000 and $154,000 for the same periods in 2008. A loss
of $88,000 was recorded in settlement of a vendor dispute in the second quarter of 2009. In
addition, interest income decreased as a result of the Company having a smaller average cash
balance and lower interest rates on cash balances between the respective periods in 2009 and 2008.
Net Loss. Net loss decreased by $1,933,000 or 34% for the six months ended June 30, 2009 to
$3,690,000 from $5,623,000 for the same period in 2008. Net loss for the three months ended June
30, 2009 was $2,034,000, a decrease of $916,000 or 31% from $2,950,000 for the same period in 2008.
The decrease in the net loss was due to improved profitability on sales and reduction in both S, G
& A and internal research and development expenses in response to the current severe operating
environment.
Comparability of Quarterly Results. Our quarterly results have fluctuated in the past and we
believe they will continue to do so in the future. Certain factors that could affect our quarterly
operating results are described in Part I, Item 1A-Risk Factors contained in our Form 10K for 2008.
Due to these and other factors, we believe that quarter-to-quarter comparisons of our results of
operations are not meaningful indicators of future performance.
18
LIQUIDITY AND CAPITAL RESOURCES
We have experienced cash flow shortages due to operating losses primarily attributable to
research and development, marketing and other general and administrative costs associated with our
strategic plan as an international developer and supplier of electric propulsion and power
management systems and components. Cash flows from operations have not been sufficient to meet our
obligations. Therefore, we have had to raise funds through several financing transactions. The
extent of our capital needs will phase out once we reach a breakeven volume in sales or develop
and/or acquire the capability to manufacture and sell our products profitably. Our operations
during the year ended December 31, 2008 and six months ended June 30, 2009 were financed by product
sales and equity issuances as well as from working capital reserves.
The Company has a secured revolving credit facility with a financial institution (the Credit
Agreement) for $2,000,000 which expired on June 30, 2009. The Credit Agreement is secured by a
$2,000,000 certificate of deposit (CD). In June 2009, the Company renewed the Credit Agreement
at a reduced principal amount of $200,000, secured by a CD in the same amount, for a period of one
year expiring on June 30, 2010. As a result, the amount of $1,800,000 in the CD was rolled over at
maturity into cash. The interest rate is the certificate of deposit rate plus 1.25% with interest
payable monthly and the principal due at maturity. As of June 30, 2009, the renewed Credit
Agreement was fully drawn as the financial institution has issued a $200,000 irrevocable letter of
credit in favor of Sunshine Distribution LP (Landlord), with respect to the lease of the
Companys new corporate headquarters at 1560 West 190th Street, Torrance, California. We anticipate
that the credit facility will be renewed with similar terms as the existing facility.
Net cash used in operating activities was $1,685,000 for the six months ended June 30, 2009
compared to $8,108,000 for the six months ended June 30, 2008. Cash used in operations for the
first six months of 2009 decreased compared to 2008 due to lower purchases of inventory in line
with current operational activity and lower personnel, operations and administrative expenditures.
Cash used in operations in the first six months of 2008 was affected by the operating loss of
$5,623,000 and purchases of inventory of $3,190,000 for anticipated sales to Tanfield. Non-cash
items include expense for stock-based compensation, depreciation and amortization, and issuance of
common stock for director and employee services. We continued to conserve cash resources through
reductions in employee headcount and restrictions on administration and operating expenditures. As
of June 30, 2009, the Company had $5,443,000 of cash and cash equivalents.
Net cash provided by investing activities was $1,837,000 for the first six months of 2009
compared to net cash used of $3,411,000 in the first six months of 2008. In 2009, in conjunction
with the reduction of our credit facility, as explained above, we redeemed the certificate of
deposit for $1,800,000 for use in operating activities. Cash used in investing activities in the
first six months of 2008 was attributed to leasehold improvements and fixed asset purchases
associated with our move into a new facility and the purchase of a $2 million CD for the credit
facility.
Net cash used in financing activities totaled $33,000 for the first six months of 2009,
compared to net cash provided by financing activities of $11,997,000 for the first six months of
2008. In the first six months of 2008, we completed two equity issuances raising approximately $12
million in net proceeds.
As of June 30, 2009, accounts receivable was $418,000, a 48% decrease from the balance at
December 31, 2008 (net of write-offs) of $808,000. The decrease reflects normal collections of
sales from the fourth quarter of 2008 and outstanding balances from sales in the first quarter of
2009.
Inventory increased by $366,000 when comparing the balances at June 30, 2009 and December 31,
2008, which represents a 5% increase in the inventory balance between the two periods. The increase
resulted from net inventory activity including receipts totaling approximately $1,200,000, offset
by a net inventory reserve decrease of approximately $135,000 and normal consumption due to sales
and research activities of approximately $700,000 during the first six months of the year.
Prepaid expenses and other current assets increased by net $128,000, or 60%, to $343,000 at
June 30, 2009 from the December 31, 2008 balance of $215,000. A deposit balance of $104,000 from
Hyundai Heavy Industries is still outstanding from the dissolution of the Hyundai-Enova ITC joint
venture for components to be delivered to Enova in the third quarter of 2009.
Property and equipment decreased by $182,000, net of depreciation and write-offs, at June 30,
2009, when compared to the December 31, 2008 balance of $1,829,000. In the first half of 2009, the
Company recognized depreciation expense of $316,000 and recorded additions to fixed assets totaling
$100,000, which included the purchase and retrofit of one test vehicle.
19
Investment in our non-consolidated joint venture, Hyundai-Enova Innovative Technology Center
(ITC) decreased to a zero balance as of June 30, 2009 from a balance of $1,352,000 at December
31, 2008. Hyundai Heavy Industries, Enova and ITC mutually agreed to the dissolution of ITC, which
was completed on April 6, 2009.
Accounts payable increased in the first six months of 2009 by $257,000 to $849,000 from
$592,000 at December 31, 2008. The balance included $400,000 reclassed from accrued liabilities and
represents the remaining amount payable to one vendor for settlement of a dispute.
Deferred revenues increased at June 30, 2009 to $670,000 from a zero balance at the December
31, 2008. This balance is expected to be realized into revenue in the third quarter of 2009 and is
predominantly associated with a prepayment on a purchase order from FAW.
Accrued payroll and related expenses decreased by $69,000, or 23%, to $226,000 at June 30,
2009 compared to a balance of $295,000 at December 31, 2008. The change between periods was due to
lower headcounts.
Other accrued liabilities decreased by $770,000, or 41%, to $1,089,000 at June 30, 2009 from
the balance of $1,859,000 at December 31, 2008, primarily due to payments for accrued professional
and vendor services and a reclassification of approximately $400,000 to accounts payable in
settlement of a vendor dispute.
Accrued interest payable was $1,033,000 at June 30, 2009, an increase of 4% from a balance of
$992,000 at December 31, 2008. The increase is due to interest related to our debt instruments,
primarily the secured note payable in the amount of $1,238,000 to the Credit Managers Association
of California.
Our ongoing operations and anticipated growth will require us to make necessary investments in
human and production resources, regulatory compliance, as well as sales and marketing efforts. We
anticipate that our current cash will be adequate to meet our working capital and capital
expenditure needs for at least the next 12 months. If we require additional capital resources to
grow our Company, we may seek to sell more equity securities. The sale of equity securities could
result in dilution to our stockholders. We may not be able to obtain financing arrangements in
amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional
financing when needed, we may be compelled to delay or curtail our plans to develop our business,
which could have a material adverse effect on our operations, market position and competitiveness.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures which are designed to provide
reasonable assurance that information required to be disclosed in the Companys periodic Securities
and Exchange Commission (SEC) reports is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to its principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended, the
Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures for the period covered by this report. Based on that evaluation, the Companys Chief
Executive Officer and Chief
20
Financial Officer have concluded that the Companys internal control over disclosure controls
and procedures was effective as of June 30, 2009.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. We maintain
internal control over financial reporting designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
During the period covered by this report, there have been no changes in the Companys internal
control over financial reporting identified in connection with the evaluation required by paragraph
(d) of Rule 13a-15 or 15d-15 under the Securities Exchange Act of 1934 that have materially
affected or are reasonably likely to materially affect the Companys internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to a number of lawsuits, investigations and disputes (some of which involve
substantial amounts claimed) arising out of the conduct of our business, including matters relating
to commercial transactions. We recognize a liability for any contingency that is probable of
occurrence and reasonably estimable. We continually assess the likelihood of adverse outcomes in
these matters, as well as potential ranges of probable losses (taking into consideration any
insurance recoveries), based on a careful analysis of each matter with the assistance of outside
legal counsel and, if applicable, other experts.
Given the uncertainty inherent in litigation, we do not believe it is possible to develop
estimates of the range of reasonably possible loss in excess of current accruals for these matters.
Considering our past experience and existing accruals, we do not expect the outcome of these
matters, either individually or in the aggregate, to have a material adverse effect on our
consolidated financial position. Because most contingencies are resolved over long periods of time,
potential liabilities are subject to change due to new developments, changes in settlement strategy
or the impact of evidentiary requirements, which could cause us to pay damage awards or settlements
(or become subject to equitable remedies) that could have a material adverse effect on our results
of operations or operating cash flows in the periods recognized or paid.
Item 1A. Risk Factors
There have been no other material changes from the risk factors as previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Item 2. Unregistered Sales of Equity and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
21
Item 6. Exhibits
a) Exhibits
31.1 |
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.* |
|
31.2 |
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 14, 2009
ENOVA SYSTEMS, INC. (Registrant)
/s/ Jarett Fenton
By: Jarett Fenton, Chief Financial Officer
23