TIDMENVS TIDMENV
RNS Number : 3010G
Enova Systems,Inc(S)
06 May 2014
2 May 2014
ENOVA SYSTEMS, INC
("Enova" or "the Company")
Enova Reports 3rd Quarter 2013 Results
Enova Systems, Inc., (NYSE Amex: ENA and AIM: ENV and ENVS), a
leading developer and manufacturer of electric, hybrid and fuel
cell digital power management systems, announces results for the
three and six month period ended 30 September 2013.
Explanatory Note
This Amendment No. 1 on Form 10Q/A (this "Amendment") amends the
Quarterly Report on Form 10-Q of Enova Systems, Inc. (the
"Company") for the quarter ended September 30, 2013, originally
filed with the Securities and Exchange Commission on November 19,
2013 ("Original Filing").
The Original Filing was not reviewed by the Company's Registered
Independent Accounting Firm. This Amendment of the financial
statements and accompanying Management's Discussion for the three
and nine months ended September 30, 2013 was reviewed by the
Company's Registered Independent Public Accounting Firm. In
addition, the Amendment reflects an assessment by the Company's
management to increase the reserve for obsolete inventory by
approximately $1,000,000, which resulted in a decrease in the
stockholders' deficit from approximately minus $3.7 million to
approximately minus $4.7 million.
For further information please contact:
Enova Systems, Inc
John Micek, Chief Executive Officer +1(650) 346-4770
Daniel Stewart & Company Plc
Paul Shackleton +44 (0) 20 7776 6550
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
September December
30, 31,
2012
2013 (audited)
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 57,000
Accounts receivable, net 136,000 208,000
Inventories and supplies, net 871,000 2,203,000
Prepaid expenses and other current assets 87,000 242,000
------------- ------------
Total current assets 1,094,000 2,710,000
Long term accounts receivable 18,000 38,000
Property and equipment, net 95,000 307,000
------------- ------------
Total assets $ 1,207,000 $ 3,055,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 2,000 $ -
Accounts payable 643,000 558,000
Loans from employees 19,000 -
Deferred revenues 213,000 118,000
Accrued payroll and related expenses 162,000 98,000
Accrued loss for litigation settlement 2,014,000 2,014,000
Other accrued liabilities 217,000 255,000
Current portion of notes payable 56,000 66,000
------------- ------------
Total current liabilities 3,326,000 3,109,000
Accrued interest payable 1,380,000 1,318,000
Notes payable, net of current portion 1,241,000 1,262,000
------------- ------------
Total liabilities 5,947,000 5,689,000
------------- ------------
Stockholders' equity:
Series A convertible preferred stock - no par
value, 30,000,000 shares authorized; 0 shares
issued and outstanding; liquidating preference
at $0.60 per share as of September 30, 2013 and
December 31, 2012 - -
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 September 30, 2013 and
December 31, 2012 1,094,000 1,094,000
Common stock to be issued 528,000 528,000
Common Stock - no par value, 750,000,000 shares
authorized; 44,520,000 shares issued and outstanding
as of September 30, 2013 and December 31, 2012 145,512,000 145,512,000
Additional paid-in capital 9,585,000 9,579,000
Accumulated deficit (161,463,000) (159,347,000)
------------- ------------
Total stockholders' equity (4,740,000) (2,634,000)
------------- ------------
Total liabilities and stockholders' equity $ 1,207,000 $ 3,055,000
============= ============
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2013 2012 2013 2012
Revenues $ 140,000 $ 152,000 $ 425,000 $ 1,055,000
Cost of revenues 1,179,000 140,000 1,660,000 1,722,000
Gross loss (1,039,000) 12,000 (1,235,000) (667,000)
Operating expenses
Research and development - 1,000 - 805,000
Selling, general & administrative 216,000 731,000 754,000 3,129,000
Total operating expenses 216,000 732,000 754,000 3,934,000
Operating loss (1,255,000) (720,000) (1,989,000) (4,601,000)
Other income and (expense)
Interest and other income
(expense) (115,000) (29,000) (127,000) (150,000)
Total other income and
(expense) (115,000) (29,000) (127,000) (150,000)
Net loss (1,370,000) (749,000) $ (2,116,000) $ (4,751,000)
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------------------
Cash flows from operating activities: 2013 2012
---------------- -----------------
Net loss $ (2,116,000 ) $ (4,751,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Reserve for doubtful accounts (46,000) 197,000
Inventory reserve 1,207,000 945,000
Depreciation and amortization 114,000 351,000
Loss on disposal of fixed assets 4,000 -
Loss on asset impairment 45,000 68,000
Stock option expense 10,000 169,000
(Increase) decrease in:
Accounts receivable 118,000 240,000
Inventory and supplies 125,000 231,000
Prepaid expenses and other current assets 155,000 94,000
Long term receivables 20,000 6,000
Increase (decrease) in:
Accounts payable 85,000 (121,000)
Loans from employees 19,000 -
Deferred revenues 95,000 (302,000)
Accrued payroll and related expense 64,000 (163,000)
Other accrued liabilities (38,000) (112,000)
Accrued interest payable 62,000 61,000
--------------- ----------------
Net cash used in operating activities (77,000) (3,087,000)
--------------- ----------------
Cash flows from investing activities:
Proceeds from the sale of fixed assets 29,000 -
Purchases of property and equipment - (16,000)
--------------- ----------------
Net cash provided by (used in) investing activities 29,000 (16,000)
--------------- ----------------
Cash flows from financing activities:
Proceeds from bank overdraft 2,000 -
Payment on notes payable (11,000) (17,000)
132,000
--------------- ----------------
Net cash provided by (used in) financing activities (9,000) 115,000
--------------- ----------------
Net decrease in cash and cash equivalents (57,000) (2,988,000)
Cash and cash equivalents, beginning of period 57,000 3,096,000
--------------- ----------------
Cash and cash equivalents, end of period $ - $ 108,000
=============== ================
Supplemental disclosure of cash flow information:
Interest paid $ 1,000 $ 4,000
=============== ================
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Company and its Business
Enova Systems, Inc., ("Enova", "We" or "the Company"), a
California corporation, was incorporated in July 1976, and trades
on the OTCQB under the trading symbol "ENVS" and on the London
Stock Exchange under the symbol "ENV" or "ENVS". The Company
believes it has been a globally recognized leader as a supplier of
efficient, environmentally-friendly digital power components and
systems products, in conjunction with associated engineering
services. The Company's core competencies are focused on the
commercialization of power management and conversion systems for
mobile and stationary applications.
THE DISCUSSION SET FORTH BELOW AND ELSEWHERE IN THIS 10-Q IS
QUALIFIED IN ITS ENTIRETY BY THE FOLLOWING: ENOVA REMAINS INSOLVENT
AND OWES IN EXCESS OF $4.5 MILLION IN THE AGGREGATE TO ITS TWO
PRINCIPAL CREDITORS, THE CREDIT MANAGERS ASSOCIATION AND ARENS
CONTROLS COMPANY, L.L.C. ("ARENS"). WITHOUT IMMEDIATE ADDITIONAL
FINANCING OR COLLECTION OF RECEIVABLES, THE COMPANY WILL NEED TO
CEASE OPERATIONS. THE COMPANY CURRENTLY HAS NO VISIBILITY AS TO
EITHER ADDITIONAL FINANCING OR THE COLLECTION OF RECEIVABLES.
SPECIFICALLY, WITHOUT A MUTUALLY ACCEPTABLE SETTLEMENT OF THE ARENS
JUDGMENT ARISING OUT OF ARENS CONTROLS COMPANY, L.L.C. v. ENOVA
SYSTEMS, INC., CASE NO. 13-1102 (7TH CIRCUIT) IN THE AMOUNT OF $2.0
MILLION, THE COMPANY DOES NOT CURRENTLY BELIEVE IT HAS ANY
ALTERNATIVE OTHER THAN TO CEASE OPERATIONS. THE COMPANY CURRENTLY
EMPLOYS ONLY TWO PERSONNEL, JOHN MICEK, THE COMPANY'S CEO, CFO AND
SECRETARY, AND ONE ADDITIONAL INDIVIDUAL IN THE FINANCE
DEPARTMENT.
ON SEPTEMBER 24, 2013, THE COMPANY ENTERED INTO A SETTLEMENT
AGREEMENT AND MUTUAL RELEASE WITH ARENS PROVIDING A PERIOD OF 120
DAYS TO SETTLE THE JUDGMENT FOR THE AMOUNT OF $300,000. THE COMPANY
WAS NOT ABLE TO MAKE THE PAYMENT BY THE DUE DATE OF JANURY 22,
2014. THEREFORE, THE JUDGMENT AGAINST THE COMPANY CAN BE ENFORCED
WITHOUT FURTHER NOTICE.
2. Summary of Significant Accounting Policies
Basis of Presentation - Interim Financial Statements
The financial information as of and for the three and nine
months ended September 30, 2013 and 2012 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 U.S.
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 year. These interim financial statements should be
read in conjunction with the audited financial statements for the
year ended December 31, 2012, which are included in the Company's
Annual Report on Form 10-K for the year then ended.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
However, historically the Company has experienced significant
recurring net losses and operating cash flow deficits. The
Company's ability to continue as a going concern is dependent on
many factors, including among others, its ability to raise
additional funding, and its ability to successfully restructure
operations to lower manufacturing costs and reduce operating
expenses.
To date, the Company has incurred recurring net losses and
negative cash flows from operations. At September 30, 2013, the
Company had an accumulated deficit of approximately $161.5 million,
cash and cash equivalents of negative $2,000, working capital of
approximately negative $2.2 million and shareholders' deficit of
approximately $4.7 million. Until the Company can generate
significant cash from its operations, the Company expects to
continue to fund its operations with existing cash resources,
proceeds from one or more private placement agreements, as well as
potentially through debt financing or the sale of equity
securities. However, the Company may not be successful in obtaining
additional funding. In addition, the Company cannot be sure that
its existing cash and investment resources will be adequate or that
additional financing will be available when needed or that, if
available, financing will be obtained on terms favorable to the
Company or its stockholders.
Our operations will require us to make necessary investments in
human and production resources, regulatory compliance, as well as
sales and marketing efforts. We do not currently have adequate
internal liquidity to meet these objectives in the long term. On
June 21, 2012, we reported in a Form 8-K filing that, as part of
cost cutting measures in response to our decrease in revenue amid
continued delays in industry adoption of EV technology resulting
from ongoing battery cost and reliability concerns, in excess of
80% of our workforce left our Company, including the resignation of
members of our senior management. We continue to evaluate strategic
partnering opportunities and other external sources of liquidity,
including the public and private financial markets and strategic
partners. As a result of having insufficient funds, the Company has
delayed all of its product development. Failure to obtain adequate
financing also will adversely affect the Company's ability to
continue in business. If the Company raises additional funds by
issuing equity securities, substantial dilution to existing
stockholders would likely result. If the Company raises additional
funds by incurring debt financing, the terms of the debt may
involve significant cash payment obligations, as well as covenants
and specific financial ratios that may restrict its ability to
operate its business.
The Company continues to pursue other options to raise
additional capital to fund its operations; however, there can be no
assurance that we can successfully raise additional funds through
the capital markets.
As of September 30, 2013, the Company had approximately negative
$2,000 in cash and cash equivalents and does not anticipate that
its anticipated receivables collections will be sufficient to meet
its projected operating requirements through December 2013 to
continue operations and market trading.
Significant Accounting Policies
The accounting and reporting policies of the Company conform to
US GAAP. There have been no significant changes in the Company's
significant accounting policies during the three months ended
September 30, 2013 compared to what was previously disclosed in the
Company's Annual Report on Form 10-K for the year ended December
31, 2012.
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 - 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
customer's 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 customer's 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 customer's fee is negotiated at the outset of the arrangement
and is not subject to refund or adjustment during the initial term
of the arrangement.
-- Collectability is Reasonably Assured - The Company determines
that collectability is reasonably assured prior to recognizing
revenue. Collectability 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 customer's financial
position and ultimately its ability to pay. The Company does not
enter into arrangements unless collectability 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 collectability is not
reasonably assured, revenue is recognized on a cash basis. 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.
The Company recognizes revenue from milestone payments over the
remaining minimum period of performance obligations.
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, revenue and 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. 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 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.
Deferred Revenues
The Company recognizes revenues as earned. Amounts billed in
advance of the period in which service is rendered are recorded as
a liability under deferred revenues. When the Company enters into
production and development contracts with customers, an evaluation
is made to ascertain the specific revenue generating activities of
each contract and establishes the units of accounting for each
activity. Revenue on these units of accounting is not recognized
until a) there is persuasive evidence of the existence of a
contract, b) the service has been rendered and delivery has
occurred, c) there is a fixed and determinable price, and d)
collectability is reasonable assured.
Warranty Costs
The Company provides product warranties for specific product
lines and accrues for estimated future warranty costs in the period
in which revenue is recognized. Our products are generally
warranted to be free of defects in materials and workmanship for a
period of 12 to 24 months from the date of installation, subject to
standard limitations for equipment that has been altered by other
than Enova Systems personnel and equipment which has been subject
to negligent use. Warranty provisions are based on past experience
of product returns, number of units repaired and our historical
warranty incidence over the past twenty-four month period. The
warranty liability is evaluated on an ongoing basis for adequacy
and may be adjusted as additional information regarding expected
warranty costs becomes known.
Stock Based Compensation
We measure the compensation cost for stock-based awards
classified as equity at their fair value on the date of grant and
recognize compensation expense over the service period for awards
expected to vest, net of estimated forfeitures.
Accounting Changes and Recent Accounting Pronouncements
Certain accounting standards that have been issued or proposed
by the FASB or other standards-setting bodies are not expected to
have a material impact on the Company's financial position, results
of operations and cash flows.
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:
September December
30, 31,
2013 2012
----------- -----------
Raw Materials $ 3,144,000 $ 3,988,000
Work In Progress 222,000 2,000
Finished Goods 472,000 587,000
Reserve for Obsolescence (2,967,000) (2,374,000)
---------- ----------
Total $ 871,000 $ 2,203,000
========== ==========
In the nine months ended September 30, 2013, the Company
exchanged excess inventory with an original book value totaling
$830,000 as settlement for vendor payables. Inventory reserve
charged to operations amounted to $1,207,000 and $945,000 for the
nine months ended September 30, 2013 and 2012, respectively.
Inventory valuation adjustments and other inventory write-offs
amounted to $699,000 and $161,000 for the nine months ended
September 30, 2013 and 2012, respectively.
4. Property and Equipment
Property and equipment consisted of the following at:
September December
30, 31,
2013 2012
--------- -----------
Computers and software $ 59,000 $ 580,000
Machinery and equipment 251,000 535,000
Furniture and office equipment 86,000 87,000
Demonstration vehicles and buses 423,000 675,000
Leasehold improvements - 1,327,000
-------- ----------
819,000 3,204,000
Less accumulated depreciation and amortization (724,000) (2,897,000)
-------- ----------
Total $ 95,000 $ 307,000
======== ==========
Depreciation and amortization expense was $114,000 and $351,000
for the nine months ended September 30, 2013 and 2012,
respectively, and within those total expenses, the amortization of
leasehold improvements was $22,000 and $196,000 for the nine months
ended September 30, 2013 and 2012, respectively. Depreciation and
amortization expense was $23,000 and $113,000 for the three months
ended September 30, 2013 and 2012, respectively, and within those
total expenses, the amortization of leasehold improvements was $0
and $65,000 for the three months ended September 30, 2013 and 2012,
respectively.
For the nine months ended September 30, 2013, fixed assets with
an original book value of $272,000 were exchanged in settlement of
vendor payables, two vehicles were sold and one vehicle was
repossessed. In addition, three vehicles were repossessed in
October. For the three months ended September 30, 2013, the Company
recorded a loss on the impairment of fixed assets of $65,000 for
the three vehicles repossessed in October. For the nine months
ended September 30, 2013, the Company recorded proceeds from the
sale of fixed assets of $29,000, a loss on the impairment of fixed
assets of $65,000 and a loss on the disposal of fixed assets of
$4,000, and an impairment loss of $68,000 for the three and nine
months ended September 30, 2012. In addition, the Company's
headquarters lease expired on January 31, 2013, which resulted in a
decrease in gross leasehold improvements in the amount of
$1,327,000 and a net book value of zero.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at:
September December
30, 31,
2013 2012
----------- --------
Accrued inventory received $ 10,000 $ 14,000
Accrued professional services 86,000 45,000
Accrued warranty 96,000 117,000
Other 25,000 79,000
------- -------
Total $ 217,000 $255,000
======= =======
Accrued warranty consisted of the following activities during
the six months ended September 30:
2013 2012
--------- ---------
Balance at beginning of quarter $ 117,000 $ 227,000
Accruals for warranties issued during the period 96,000 94,000
Warranty claims (117,000) (216,000)
-------- --------
Balance at end of quarter $ 96,000 $ 105,000
======== ========
Accrued warranty consisted of the following activities during
the three months ended September 30:
2013 2012
-------- --------
Balance at beginning of quarter $111,000 $140,000
Accruals for warranties issued during the period 39,000 14,000
Warranty claims (54,000) (49,000)
------- -------
Balance at end of quarter $ 96,000 $105,000
======= =======
6. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
September December
30, 31,
2013 2012
---------- ----------
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus 3%
(6.25% as of September 30, 2013), 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 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 $38,000, bearing interest
at 8.25% per annum, payable in 60 equal monthly
installments of principal and interest through February
19, 2014 5,000 11,000
Secured note payable to a financial institution
in the original amount of $19,000, bearing interest
at 10.50% per annum, payable in 60 equal monthly
installments of principal and interest through August
25, 2014 5,000 8,000
Secured note payable to a financial institution
in the original amount of $26,000, bearing interest
at 7.91% per annum, payable in 60 equal monthly
installments of principal and interest through April
9, 2015 9,000 14,000
Secured note payable to a financial institution
in the original amount of $25,000, bearing interest
at 7.24% per annum, payable in 60 equal monthly
installments of principal and interest through March
10, 2016 - 17,000
--------- ---------
1,297,000 1,328,000
Less current portion of notes payable (56,000 ) (66,000)
--------- ---------
Notes payable, net of current portion $1,241,000 $1,262,000
========= =========
As of September 30, 2013 and December 31, 2012, the balance of
long term interest payable amounted to $1,380,000 and $1,318,000,
respectively, of which the Credit Managers Association of
California note amounted to $1,344,000 and $1,286,000,
respectively. Interest expense on notes payable amounted to $64,000
and $65,000 during the nine months ended September 30, 2013 and
2012, respectively. Interest expense on notes payable amounted to
$21,000 and $24,000 during the three months ended September 30,
2013 and 20112, respectively. In June 2013, the vehicle that
secured the note payable due March 10, 2016 was repossessed by the
secured lender. The Company was invoiced by the lender for $8,000
for final settlement.
7. Deferred Revenues
The Company had deferred $213,000 and $118,000 in revenue
related to production and development contracts at September 30,
2013 and December 31, 2012, respectively. The Company's management
is attempting to obtain funding to complete the orders in the
second quarter of 2014.
8. Stockholders' Equity
On April 23, 2012, the Company entered into a $6,600,000
purchase agreement with Lincoln Park Capital Fund pursuant to which
the Company has the right to sell to Lincoln Park up to $6,600,000
in shares of the Company's common stock, and on April 24, 2012, the
Company entered into another purchase agreement with Lincoln Park
Capital Fund pursuant to which the Company has the right to sell to
Lincoln Park up to $3,400,000 in shares of the Company's common
stock, subject to certain limitations. We received proceeds of
$132,000, net of financing costs of $152,000, under the $3,400,000
Purchase Agreement and issued a total of 1,754,974 shares of common
stock in the second quarter of 2012. As consideration for its
commitment to purchase common stock under the $3,400,000 Purchase
Agreement, the Company issued to Lincoln Park 281,030 shares of
common stock. Access to funding under the facility is dependent
upon our shares being listed on a national exchange, and as our
shares were delisted from the NYSE Amex exchange on October 31,
2012, the Company can no longer raise funds from the facility.
9. Stock Options
Stock Option Program Description
As of September 30, 2013, the Company had two equity
compensation plans, the 1996 Stock Option Plan (the "1996 Plan")
and the 2006 equity compensation plan (the "2006 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 Company's
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 maximum number of shares issuable over the term of the 1996
Plan was limited to 65 million shares (without giving effect to
subsequent stock splits). Options granted under the 1996 Plan
typically have an exercise price of 100% of the fair market value
of the underlying stock on the grant date and expire no later than
ten years from the grant date. On August 27, 2013, the Board of
Directors of Enova Systems approved amendments to Enova's 2006
Equity Compensation Plan (a) to increase the number of shares
authorized for issuance from 3,000,000 shares to 9,000,000 shares
and (b) to increase the number of shares of common stock that may
be issued to an individual in any calendar year from 500,000 shares
to 5,000,000 shares. Of the 9,000,000 shares reserved for issuance
under the amended 2006 Plan, of which 4,400,000 and 270,000 were
granted in the nine months ended September 30, 2013 and 2012,
respectively, and 3,711,000 shares were available for grant as of
September 30, 2013. Options granted under the 2006 Plan have terms
of between three and ten years and generally vest and become fully
exercisable from one to three years from the date of grant or vest
according to the price performance of our shares.
Stock-based compensation expense related to stock options was
$6,000 and $166,000 for the nine months ended September 30, 2013
and 2012, respectively. As of September 30, 2013, the total
compensation cost related to non-vested awards not yet recognized
is $48,000. The remaining period over which the future compensation
cost is expected to be recognized is 32 months.
The following table summarizes information about stock options
outstanding and exercisable at September 30, 2013:
Weighted
Average
Weighted Remaining
Number of Average Contractual Aggregate
Share Exercise Term in Intrinsic
Options Price Years Value(1)
----------- ----------- ------------ ------------
Outstanding at December 31,
2012 810,000 $ 0.64 4.06 $ -
Granted 4,400,000 $ 0.02 2.91 $ -
Exercised - $ - - $ -
Forfeited or Cancelled - $ - - $ -
---------- ------- ------------ -----------
Outstanding at September 30,
2013 5,210,000 $ 0.12 2.97 $ -
========== ======= ============ ===========
Exercisable at September 30,
2013 650,000 $ 0.78 3.54 $ -
========== ======= ============ ===========
Vested and expected to vest
(2) 5,210,000 $ 0.12 2.97 $ -
========== ======= ============ ===========
(1) Aggregate intrinsic value represents the value of the closing price
per share of our common stock on the last trading day of the fiscal
period in excess of the exercise price multiplied by the number
of options outstanding or exercisable, except for the "Exercised"
line, which uses the closing price on the date exercised.
(2) Number of shares includes options vested and those expected to
vest net of estimated forfeitures.
The exercise prices of the options outstanding at September 30,
2013 ranged from $0.07 to $4.35. The weighted average grant-date
fair value of options granted during the nine months ended
September 30, 2013 and 2012 was $0.02 and $0.05, respectively. The
Company's policy is to issue shares from its authorized shares upon
the exercise of stock options.
Unvested share activity for the nine months ended September 30,
2013 is summarized below:
Weighted
Average
Unvested Grant Date
Number of Fair
Options Value
----------- -------------
Unvested balance at December 31, 2012 236,000 $ 0.04
Granted 4,400,000 $ 0.02
Vested (76,000) $ 0.11
Forfeited - $ -
---------- --- --------
Unvested balance at September 30, 2013 4,560,000 $ 0.02
========== === ========
The fair values of all stock options granted during the six
months ended September 30, 2013 and 2012 were estimated on the date
of grant using the Black-Scholes option-pricing model with the
following range of assumptions:
For the nine months
ended
--------------------------
September September
30, 30,
2013 2012
------------ ------------
Expected life (in years) 2 6.5
%
Average risk-free interest rate 1.66 1.66 %
Expected volatility 111 % 108 %
%
Expected dividend yield 0 0 %
%
Forfeiture rate 3 3 %
The estimated fair value of grants of stock options to
nonemployees of the Company is charged to expense 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.
10. Warrants
In December 2011, the Company completed a private equity
placement of 11,250,000 shares of common stock for $1,245,000
together with warrants to purchase up to 11,250,000 shares of
common stock to a group of 17 shareholders (the "Low-Beer Managed
Accounts"). The warrants are exercisable for a period of five years
and exercisable at a price of $0.22 per share. The warrants further
provide that if, for a twenty consecutive trading day period, the
average of the closing price quoted on the OTCQB market is greater
than or equal to $0.44 per share, with at least an average of
10,000 shares traded per day, then, on the 10th calendar day
following written notice from the Company, any outstanding warrants
will be deemed automatically exercised pursuant to the cashless/net
exercise provisions under the warrants.
The following is a summary of changes to outstanding warrants
for the nine months ended September 30, 2013:
Weighted
Number Weighted Average
of Average Remaining
Share Exercise Contractual
Options Price Life
----------- ------------ ---------------
Outstanding at December 31, 2012 11,250,000 $ 0.22 4.00
Granted - $ - -
Exercised - $ - -
Forfeited or Cancelled - $ - -
---------- -------- ---------------
Outstanding at September 30, 2013 11,250,000 $ 0.22 3.25
========== ======== ===============
Exercisable at September 30, 2013 11,250,000 $ 0.22 3.25
========== ======== ===============
11. Concentrations
The Company's trade receivables are concentrated with a few
customers. The Company performs credit evaluations on its
customers' financial condition and generally requires no collateral
from its customers. Concentrations of credit risk, with respect to
accounts receivable, exist to the extent of amounts presented in
the financial statements. Two customers represented 62% and 38%,
respectively, of gross accounts receivable at September 30, 2013,
and two customers represented 61% and 39%, respectively, of gross
accounts receivable at December 31, 2012.
The Company's revenues are concentrated with few customers. For
the three and nine months ended September 30, 2013, two customers
represented 63% and 32% of gross revenues and two customers
represented 76% and 19% of gross revenues, respectively. For the
three and nine months ended September 30, 2012, two customers
represented 65% and 31% of gross revenues and two customers
represented 66% and 21% of gross revenues, respectively.
12. Subsequent Events
The Company has evaluated subsequent events and has determined
that other than noted below, there were no subsequent events to
recognize or disclose in these financial statements.
On February 23, 2014, Enova Systems, Inc, entered into
Subscription Agreements with various offshore investors to sell
approximately GBP 150,000 in gross proceeds by a private
subscription of 19,999,998 common shares to be newly issued on the
Alternative Investment Market of the London Stock Exchange (the
"AIM Exchange"). The common shares were issued at a price of 0.0075
pence (approximately US$0.01per share) to certain eligible offshore
investors (the "Subscription"). In connection with the
Subscription, Enova entered into an Agreement for the Provision of
Receiving Agent Services (the "Agreement") with Daniel Stewart
& Company PLC (UK) for receiving agent services. Daniel Stewart
presently serves as the Nominated Adviser for the listing of
Enova's common shares on the AIM Exchange. The newly issued common
shares for the Subscription were issued in three tranches of
approximately GBP 50,000 each.
Daniel Stewart received an introducing agent's fee of 10% of the
aggregate funds raised pursuant to the subscription in addition to
reimbursement of expenses. Factoring in the commission, legal and
other expenses of the offering, Enova received approximately
US$223,000 in net proceeds.
The offer and sale of the shares were made pursuant to
Regulation S under the Securities Act of 1933, as amended (the
"Securities Act"). Among other things, each investor purchasing
shares of Enova's common stock in the offering represented that the
investor is not a United States person as defined in Regulation S.
In addition, neither Enova nor the receiving agent conducted any
selling efforts directed at the United States in connection with
the offering. All shares of common stock issued in the offering
included a restrictive legend indicating that the shares were
issued pursuant to Regulation S under the Securities Act and are
deemed to be "restricted securities." As a result, the purchasers
of such shares will not be able to resell the shares unless in
accordance with Regulation S, pursuant to a registration statement,
or upon reliance of an applicable exemption from registration under
the Securities Act. The shares to be sold pursuant to the
Subscription Agreements were not registered under the Securities
Act, and there is no obligation on the part of Enova to so register
such shares.
ITEM 2. MANAGEMENT'S 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, 2012, as
updated by the disclosure contained in Item 1A of Part II of this
Form 10-Q.
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 Management's 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, 2012.
Overview
Enova believes it has been a leader in the development, design
and production of proprietary, power train systems and related
components for electric and hybrid electric buses and medium and
heavy duty commercial vehicles. Electric drive systems are
comprised of an electric motor, electronics control unit and a gear
unit which power a vehicle. Hybrid electric systems, which are
similar to pure electric drive systems, contain an internal
combustion engine in addition to the electric motor, and may
eliminate external recharging of the battery system. A hydrogen
fuel cell based system is similar to a hybrid system, except that
instead of an internal combustion engine, a fuel cell is utilized
as the power source. A fuel cell is a system which combines
hydrogen and oxygen in a chemical process to produce
electricity.
A fundamental element of Enova's strategy has been to develop
and produce advanced proprietary software and hardware for
applications in these alternative power markets. Our focus has been
on powertrain systems including digital power conversion, power
management and system integration, focusing chiefly on vehicle
power generation. Specifically, we have developed, designed and
produce drive systems and related components for electric, hybrid
electric and fuel cell powered vehicles in both the new and
retrofit markets. We also perform internal research and development
("R&D") and funded third party R&D to augment our product
development and support our customers.
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.
Enova's primary market focus has been centered on aligning
ourselves with key customers and integrating with original
equipment manufacturers ("OEMs") 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 and expense. Provided we generate
necessary resources, we will continue to work refining both our
market strategy and our product line to maintain our edge in power
management and conversion systems for vehicle 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 additional information on our business.
Enova has incurred significant operating losses in the past. As
of September 30, 2013, we had an accumulated deficit of
approximately $161.5 million, working capital of approximately
negative $2.2 million and shareholders' deficit of approximately
$4.7 million. As reported in our Form 8-K filing on June 21, 2012,
due to continued delays in industry adoption of EV technology, the
Company's revenues continue to significantly decrease. As part of
cost cutting measures, we implemented a reduction in our workforce
whereby in excess of 80% of our employees left the Company. We
continue to evaluate strategic opportunities to leverage resources
and assist with operations. We expect to incur additional operating
losses until we re-position the company in order to achieve a level
of product sales sufficient to cover our operating and other
expenses. As of September 30, 2013, the Company had approximately
negative $2,000 in cash and cash equivalents and we do not
anticipate that our anticipated receivables collections will be
sufficient to meet projected operating requirements through the end
of 2013 to continue operations and market trading.
Customer Highlights
FIRST AUTO WORKS (FAW) - Enova continues to supply FAW drive
systems for their hybrid buses. Since the 2008 Olympics in Beijing,
Enova Systems and First Auto Works have deployed over 500 vehicles,
all utilizing Enova's pre-transmission hybrid drive system
components. First Auto Works is one of China's largest vehicle
producers, manufacturing in excess of 1,000,000 vehicles
annually.
SMITH ELECTRIC VEHICLES (SEV) - Enova continues to be SEV's
supplier of drive systems. SEV is a leader in the all EV market in
North America and Europe.
Technology Highlights
OMNI INVERTER. Power-source and motor design agnostic, Enova's
new Omni-series inverter/vehicle controller offers increased
flexibility and ease-of-integration. With plug-and-play
connectivity, it is compatible with a wide range of vehicle drive
systems and motors, and can be configured for HEV, PHEV and EV
applications. The inverter is fully production validated.
OMNI CHARGER. Our Omni-series 10kW on-board battery charger for
plug-in hybrid-electric and all-electric vehicles is a CAN control
based unit that offers increased flexibility, ease-of-integration
and compatibility with a wide range of vehicle platforms.
Enova has delayed further introduction of the Omni Inverter and
Charger with customers due to the reduction in our workforce and
current financial resource constraints. Provided additional
resources are obtained, we anticipate continuing development and
marketing of these two products, which we believe can gain broad
market acceptance.
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, 2012.
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 management's 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
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 Company's customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional
allowances may be required.
Stock-based Compensation - The Company measures and recognizes
compensation expense for all share-based payment awards made to
employees and directors, including employee stock options based on
the estimated fair values at the date of grant. The compensation
expense is recognized over the requisite service period.
Revenue recognition - Effective January 1, 2011, we adopted the
provisions of Accounting Standards Update, or ASU, 2009-13,
Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, which is
included within the Codification as Revenue Recognition-Multiple
Element Arrangements, on a prospective basis. Under the provisions
of ASU 2009-13, we no longer rely on objective and reliable
evidence of the fair value of the elements in a revenue arrangement
in order to separate a deliverable into a separate unit of
accounting, and the use of the residual method has been eliminated.
We instead use a selling price hierarchy for determining the
selling price of a deliverable, which is used to determine the
allocation of consideration to each unit of accounting under an
arrangement. The selling price used for each deliverable will be
based on vendor-specific objective evidence, if available,
third-party evidence if vendor-specific objective evidence is not
available or estimated selling price if neither vendor-specific
objective evidence nor third-party evidence is available. As of
September 30, 2012, we had not applied the provisions of ASU
2009-13 to any of our revenue arrangements as we had not entered
into any new, or materially modified any of our existing, revenue
arrangements since our adoption of ASU 2009-13. Therefore, there
was no material impact on our financial position or results of
operations from adopting ASU 2009-13. However, the provisions of
ASU 2009-13 could have a material impact on the revenue recognized
from any collaboration agreements that we enter into in future
periods.
We generally recognize revenue at the time of shipment when
title and risk of loss have passed to the customer, persuasive
evidence of an arrangement exists, performance of our obligation is
complete, our price to the buyer is fixed or determinable, and we
are reasonably assured of collection. If a loss is anticipated on
any contract, a provision for the entire loss is made immediately.
Determination of these criteria, in some cases, requires
management's judgment. Should changes in conditions cause
management to determine that these criteria are not met for certain
future transactions, revenue for any reporting period could be
adversely affected.
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.
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.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2013 compared to Three
and Nine Months Ended September 30, 2012
Third Quarter of Fiscal 2013 vs. Third Quarter of Fiscal
2012
Three Months Ended As a % of Revenues
September 30, September 30,
-------------------------------------- -------------------------
2013 2012 % Change 2013 2012
------------ --------- ----------- ------------ -------
Revenues $ 140,000 $ 152,000 -8% 100% 100%
Cost of revenues 1,179,000 140,000 742% 842% 92%
----------- -------- ------- ------------ -------
Gross loss (1,039,000) 12,000 -8758% -742% 8%
Operating expenses
Research and development - 1,000 -100% 0% 1%
Selling, general &
administrative 216,000 731,000 -70% 154% 481%
----------- -------- ------- ------------ -------
Total operating expenses 216,000 732,000 -70% 154% 482%
----------- -------- ------- ------------ -------
Operating loss (1,255,000) (720,000) -74% -896% -474%
----------- -------- ------- ------------ -------
Other income (expense)
Interest and other
income (expense) (115,000) (29,000) 297% -82% -19%
----------- -------- ------- ------------ -------
Total other income
(expense) (115,000) (29,000) 297% -82% -19%
----------- -------- ------- ------------ -------
Net loss $ (1,370,000) $(749,000) -83% -979% -493%
=========== ======== ======= ============ =======
First Nine Months of Fiscal 2013 vs. First Nine Months of Fiscal
2012
Nine Months Ended As a % of Revenues
September 30, September 30,
--------------------------------------- ----------------------
2013 2012 % Change 2013 2012
------------ ----------- ---------- ------------ ----
Revenues $ 425,000 $ 1,055,000 -60% 100% 100%
Cost of revenues 1,660,000 1,722,000 -4% 391% 163%
----------- ---------- ------ ------------ ----
Gross loss (1,235,000) (667,000) -85% -291% -63%
Operating expenses
Research and development - 805,000 -100% 0% 76%
Selling, general &
administrative 754,000 3,129,000 -76% 177% 297%
----------- ---------- ------ ------------ ----
Total operating expenses 754,000 3,934,000 -81% 177% 373%
----------- ---------- ------ ------------ ----
Operating loss (1,989,000) (4,601,000) -57% -468% -436%
----------- ---------- ------ ------------ ----
Other income (expense)
Interest and other
income (expense) (127,000) (150,000) -15% -30% -14%
----------- ---------- ------ ------------ ----
Total other income
(expense) (127,000) (150,000) -15% -30% -14%
----------- ---------- ------ ------------ ----
Net loss $ (2,116,000) $(4,751,000) -55% -498% -450%
=========== ========== ====== ============ ====
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.
Revenues. Revenues in the current year were negatively affected
by capacity constraints to pursue new business due to our
restructuring in June 2012. We believe the industry is affected by
continued uncertainty over battery performance and non-recoverable
engineering costs associated with battery development. As a result,
OEM and other customers have delayed major all-electric vehicle
marketing initiatives, resulting in decreased demand for our
systems. The decrease in revenue for the three and nine months
ended September 30, 2013 compared to the same period in 2012 was
mainly due to a decrease in deliveries to our core customer base in
Asia. Revenues in the first three and nine months of 2013 were
mainly attributed to continued shipments to First Auto Works in
China and the Smith Electric Vehicles in the U.S. We will have
fluctuations in revenue from quarter to quarter. Although we have
seen some indications from customers to support future revenue,
there can be no assurance there will be continuing demand for our
products and services.
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 three months
ended September 30, 2013 increased primarily due to an increase in
the inventory reserve. Cost of revenues for the nine months ended
September 30, 2013 decreased primarily due to the decrease in
revenue compared to the same period in the prior year and, in
addition, we recorded a charge of approximately $1,207,000 and
$945,000 during the first nine months of 2013 and 2012,
respectively, to increase our inventory obsolescence reserve after
management updated its estimate of the realizable value of
inventory as of those dates.
Gross Loss. The decrease in gross loss for the three months
ended September 30, 2013 compared to the same period in the prior
year is primarily attributable to the recording of an increase in
the inventory obsolescence reserve in the three months ending
September 30, 2013. The decrease in gross loss for the nine months
ending September 30, 2013 is primarily due to reduced revenue in
that period.
Research and Development ("R&D"). R&D costs decreased
for the three and nine months ended September 30, 2013 compared to
the same periods in the prior year as our engineering staff was
reduced in June 2012 due to the Company's lack of financial
resources. As a result, the Company's development of its next
generation Omni-series motor control unit and 10kW charger was put
on hold at the end of the second quarter of 2012.
Selling, General, and Administrative Expenses ("S, G & A").
S, G & A is comprised of activities in the executive, finance,
marketing, field service and quality departments' compensation as
well as related payroll benefits, and non-cash charges for
depreciation and options expense. The decrease in S, G & A for
the three and nine months ended September 30, 2013 compared to the
same period in the prior year is attributable to the resignation of
approximately 80% of the Company's workforce from June 2012 and
other cost savings measures. We continually monitor S, G & A in
light of our business outlook and are taking steps to control these
costs.
Interest and Other Income (Expense). The interest and other
income (expense) for the three months ended September 30, 2013
increased and for the nine months ended September 30, 2013
decreased compared to the same period in the prior year primarily
due to the timing of recording fixed asset impairment charges.
Net Loss. The decrease in the net loss for the three and nine
months ended September 30, 2013 compared to the same period in the
prior year was mainly due to the reduction in our workforce in the
second quarter of 2012 which resulted in lower operating costs.
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 10-K for 2012, as updated by the disclosure
contained in Item 1A of Part II of this Form 10-Q. 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.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced losses primarily attributable to research,
development, marketing and other costs associated with our
strategic plan as an international developer and supplier of
electric drive and power management systems and components.
Historically cash flows from operations have not been sufficient to
meet our obligations and we have had to raise funds through several
financing transactions. At least until we reach breakeven volume in
sales and develop and/or acquire the capability to manufacture and
sell our products profitably, we will need to continue to rely on
cash from external financing sources. Our operations during the
three months ended September 30, 2013 were financed from working
capital reserves.
On June 30, 2010, the Company entered into a secured a revolving
credit facility with a financial institution for $200,000 which was
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, with respect to the
lease of the Company's corporate headquarters at 1560 West 190th
Street, Torrance, California. During the fourth quarter of 2012,
the irrevocable letter of credit was fully drawn down by Sunshine
Distribution L.P. in order to pay rent on our corporate
headquarters, and the certificate of deposit was fully utilized to
fund draws on the secured facility. Therefore, the facility was
fully drawn and expired on December 31, 2012.
Net cash used in operating activities was $77,000 for the nine
months ended September 30, 2013, a decrease of $3,010,000 compared
to $3,087,000 for the nine months ended September 30, 2012.
Operating cash used in the first nine months of 2013 decreased
compared to the prior year period primarily due to over 80% of our
workforce leaving the Company in June 2012 that decreased our
ongoing operational costs in the current year. Non-cash items
include expense for stock-based compensation, depreciation and
amortization and other losses. These non-cash items decreased by
$1,320,000 for the nine months ended September 30, 2013 as compared
to the same period in the prior year primarily a decrease in the
inventory reserve charges and in the current year period and lower
depreciation expense in 2013 due to the end of the lease at our
former headquarters in January 2013. The decrease in net loss was
primarily due to a decrease in administrative and R&D expenses
related to over 80% of our workforce leaving the Company in June
2012 and our restricting other administrative expenditures to
conserve cash resources. As of September 30, 2013, the Company had
negative $2,000 of cash and cash equivalents compared to $57,000 as
of December 31, 2012.
Net cash provided by investing activities was $29,000 for the
nine months ended September 30, 2013 compared to net cash used of
$16,000 for the nine months ended September 30, 2012. The Company
recorded net proceeds of $29,000 from the sale of vehicles in 2013
and, subsequent to the reduction in our work force in the second
quarter of 2012, halted further capital expenditures.
Net cash used in financing activities was $9,000 for the nine
months ended September 30, 2013, a decrease of $124,000 compared to
net cash from financing activities of $115,000 for the nine months
ended September 30, 2012. The decrease was primarily attributable
to proceeds of $132,000 from the issuance of Common Stock during
second quarter of 2012 from the Lincoln Park facility, as explained
in Note 8 - Stockholders' Equity to the financial statements
included in Item 1 of this Form 10-Q.
Net accounts receivable decreased by $72,000, or 35%, to
$136,000 at September 30, 2013 compared to a balance of $208,000 at
December 31, 2012. The decrease in the receivable balance was
primarily due to collections of receivables due. As of September
30, 2013 and December 31, 2012, the Company maintained a reserve
for doubtful accounts receivable of $268,000 and 313,000,
respectively, primarily related to financial instability at a major
customer.
Net inventory and supplies decreased by $1,332,000, or 14%, to
$871,000 at September 30, 2013 compared to a balance of $2,203,000
at December 31, 2012. The decrease resulted from net inventory
activity including receipts totaling $305,000, consumption of
$430,000 and an inventory reserve charge of $1,207,000.
Prepaid expenses and other current assets decreased by $155,000,
or 64%, to $95,000 at September 30, 2013 compared to a balance of
$242,000 at December 31, 2012. The decrease was primarily due to a
decrease in deposits to vendors in support of a customer purchase
orders and decreases in prepaid rent and insurance in the first
half of 2013.
Long term accounts receivable decreased by $2,000, or 53%, to
$18,000 at September 30, 2013 compared to a balance of $38,000 at
December 31, 2012. The decrease is primarily due to
reclassification of amounts that will be due within one year to
current accounts receivable. The Company agreed to defer collection
of certain accounts receivable as requested by a customer for the
term of the Company's warranty guarantee. Due to its financial
condition, the Company is not servicing warranty claims with the
customer, which could delay collection of the receivable.
Therefore, management has determined to reserve the short-tem
portion recorded in accounts receivables.
Property and equipment, net of depreciation, decreased by
$212,000, or 69%, to $95,000 at September 30, 2013 compared to a
balance of $307,000 at December 31, 2012. The decrease is primarily
due to depreciation expense of $114,000 and a loss on disposed and
impaired assets of $69,000.
Accounts payable increased by $85,000, or 15%, to $643,000 at
September 30, 2013 compared to a balance of $558,000 at December
31, 2012. The increase was primarily due to inventory purchases
made in the second quarter of 2013 in support of a customer order
and payment deferrals due to the financial condition of the
Company.
Loans from employees increased by $19,000, or 100%, to $19,000
at September 30, 2013 compared to a balance of $0 at December 31,
2012. Due the financial condition of the company, employees loaned
funds to the Company to pay for certain necessary administrative
costs.
Deferred revenues increased by $95,000, or 81%, to $213,000 at
September 30, 2013 compared to a balance of $118,000 at December
31, 2012. The Company's management is attempting to obtain funding
to complete the orders in the second quarter of 2014.
Accrued payroll and related expenses increased by $64,000, or
65%, to $162,000 at September 30, 2013 compared to a balance of
$98,000 at December 31, 2012. The increase was primarily due to an
increase in unpaid compensation in the second and third quarters of
2013 resulting from the financial condition of the Company.
Accrued loss for litigation settlement was unchanged at
September 30, 2013 compared to the balance at December 31, 2012. As
disclosed in Item 1. Legal Proceedings, on December 12, 2012, a
judgment was entered in favor of Arens Controls Company, L.L.C. by
the United States District Court Northern District of Illinois in
the amount of $2,014,169 in the case of Arens Controls Company,
L.L.C. v. Enova Systems, Inc. See Item 1 of Part II of this report
on Form 10-Q.
Other accrued liabilities decreased by $35,000, or 14%, to
$220,000 at September 30, 2013 compared to a balance of $255,000 at
December 31, 2012. The decrease was primarily due to a decrease in
the accrual for professional services incurred in the first nine
months of 2013.
Accrued interest payable increased by $62,000, or 5%, to
$1,380,000 at September 30, 2013 compared to a balance of
$1,318,000 at December 31, 2012. The increase was due to interest
related to our debt instruments, primarily the interest on the
secured note payable in the amount of $1,344,000 to the Credit
Managers Association of California.
Going concern
To date, the Company has incurred recurring net losses and
negative cash flows from operations. At September 30, 2013, the
Company had an accumulated deficit of approximately $161.5 million,
working capital of approximately negative $2.2 million and
shareholders' deficit of approximately $4.7 million. Until the
Company can generate significant cash from its operations, the
Company expects to continue to fund its operations with existing
working capital, proceeds from one or more private placement
agreements, as well as potentially through debt financing or the
sale of equity securities. However, the Company may not be
successful in obtaining additional funding. In addition, the
Company cannot be sure that its existing cash and investment
resources will be adequate or that additional financing will be
available when needed or that, if available, financing will be
obtained on terms favorable to the Company or its shareholders.
Our operations will require us to make necessary investments in
human and production resources, regulatory compliance, as well as
sales and marketing efforts. We do not currently have adequate
internal liquidity to meet these objectives in the long term. On
June 21, 2012, we reported in a Form 8-K filing that, as part of
cost cutting measures in response to our decrease in revenue amid
continued delays in industry adoption of EV technology resulting
from ongoing battery cost and reliability concerns, in excess of
80% of our workforce left our Company, including the resignation of
members of our senior management. We continue to evaluate strategic
partnering opportunities and other external sources of liquidity,
including the public and private financial markets and strategic
partners. Having insufficient funds has required the Company to
eliminate its product development, and may result in relinquishing
rights to product candidates at an earlier stage of development or
negotiate less favorable terms than it would otherwise choose.
Failure to obtain adequate financing also will adversely affect the
Company's ability to continue in business. If the Company raises
additional funds by issuing equity securities, substantial dilution
to existing stockholders would likely result. If the Company raises
additional funds by incurring debt financing, the terms of the debt
may involve significant cash payment obligations, as well as
covenants and specific financial ratios that may restrict its
ability to operate its business.
As of September 30, 2013, the Company had approximately negative
$2,000 in cash and cash equivalents and we do not anticipate that
our existing anticipated receivables collections will be sufficient
to meet projected operating requirements through the end of 2013 to
continue operations and market trading.
Judgment entered in Arens Controls Litigation
On December 12, 2012, a judgment was entered by the United
States District Court Northern District of Illinois in favor of
Arens Controls Company, L.L.C. in the amount of $2,014,169
regarding claims for two counts. In 2008, Arens Controls Company,
L.L.C. ("Arens") filed claims against Enova with the United States
District Court Northern District of Illinois. A Partial Settlement
Agreement, as amended on January 14, 2011, resolved certain claims
made by Arens. However, the claims were preserved under two
remaining counts concerning i) anticipatory breach of contract by
Enova for certain purchase orders that resulted in lost profit to
Arens and ii) reimbursement for engineering and capital equipment
costs incurred by Arens exclusively for the fulfillment of certain
purchase orders received from Enova.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages
whatsoever that occurred prior to the date of the Settlement
Agreement. The Company was not able to comply with the due date for
such payment by January 22, 2014. Therefore, the judgment against
the Company can be enforced without further notice.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
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 Company's periodic Securities and
Exchange Commission ("SEC") reports is recorded, processed,
summarized and reported within the time periods specified in the
SEC's 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 SEC Rule 13a-15(b) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Company carried
out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange
Act) as of September 30, 2013. Based on that evaluation, our
management, including the Chief Executive Officer and Chief
Financial Officer, concluded that as of Sepember 30, 2013, our
disclosure controls and procedures were not effective to ensure the
information required to be disclosed by an issuer in the reports it
files or submits under the Securities Exchange Act of 1934, is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms relating to us, and was accumulated and communicated to
our management, including our Chief Executive Officer and Chief
Financial Officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of
achieving their control objectives.
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 Company's
management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures for
the period covered by this report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer has
concluded that the Company's internal control over disclosure
controls and procedures was not effective as of September 30,
2013.
Changes in 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) and 15d-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.
In June 2012, all but two of the Company's employees resigned,
and such staff reduction resulted in our inability to complete
documentation of proper accounting procedures and management
review. Not all fully implemented fundamental elements of an
effective control were present as of September 30, 2013, including
formalized monitoring procedures. Based on this evaluation,
management has concluded that the aforementioned factors
constituted a material weakness in the Company's internal control
over financial reporting as of September 30, 2013.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As reported in our Form 10-K for the fiscal year 2012, six of
the eight counts in the litigation between Enova and Arens Controls
Company, L.L.C. were settled. The two counts that were not settled
remained outstanding. The two remaining counts concerned i)
anticipatory breach of contract by Enova for certain purchase
orders that resulted in lost profit to Arens and ii) reimbursement
for engineering and capital equipment costs incurred by Arens
exclusively for the fulfillment of certain purchase orders received
from Enova.
On December 12, 2012, a judgment was entered under the two
remaining counts by the United States District Court Northern
District of Illinois in favor of Arens Controls Company, L.L.C. in
the amount of $2,014,169. The Company filed an appeal of the
judgment in the 7th Circuit Court of Appeals on January 15, 2013.
The Company believes the court committed errors leading to the
verdict and judgment. However, there can be no assurance that the
appeal will be successful, a negotiated settlement can be attained,
or that Arens will enforce its claim in the state of California and
thereby cause the Company to go into bankruptcy.
On September 24, 2013, Enova and Arens entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") to
resolve the remaining issues between them. Under the terms of the
Settlement Agreement, Enova filed on September 27, 2013 a motion to
dismiss the pending appeal with prejudice and Arens agreed that,
for a period of 120 calendar days from the date of the Settlement
Agreement, Arens would not take any action to enforce the Judgment.
Thereafter, Arens is entitled, without further notice, to enforce
the Judgment against Enova or otherwise exercise all available
procedures and remedies for collection of the full amount of the
Judgment and Enova has agreed not to contest the validity of the
Judgment. However, if Enova had paid to Arens $300,000 at any time
during the 120 day period, then within 3 business days after Arens
received confirmation of such payment, Arens agreed to file a
satisfaction of judgment stating that the Judgment has been
satisfied and completely release and forever discharge Enova from
any and all claims for damages whatsoever that occurred prior to
the date of the Settlement Agreement. In exchange for Arens's
release, Enova agreed to completely release and forever discharge
Arens from any and all claims for damages whatsoever that occurred
prior to the date of the Settlement Agreement. The Company was not
able to comply with the due date for such payment by January 22,
2014. Therefore, the judgment against the Company can be enforced
without further notice
From time to time, we are subject to legal proceedings 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 for these matters. Considering our past experience,
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
Our Annual Report on Form 10-K for the fiscal year ended
December 31, 2012 lists risk factors for the Company. There have
been no material changes from the risk factors as previously
disclosed in such Annual Report on Form 10-K.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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