TIDMENV TIDMENVS
RNS Number : 6149C
Enova Systems, Inc.
17 April 2013
For Immediate release 16th of April 2013
Enova Systems, Inc., (OTCQB: ENVS and AIM: ENV and ENVS), a
developer and manufacturer of electric, hybrid and fuel cell
digital power management systems, announces results for the fiscal
year ended December 31, 2012.
Inquires:
Enova Systems
John Micek, Chief Executive Officer and Chief Financial Officer +1(310) 527-2800
Daniel Stewart & Company Plc
Jamie Barklem +44 (0) 20 7776 6550
HIGHLIGHTS
For and as of the
Year Ended
December 31,
2012 2011
Revenues $ 1,103,000 $ 6,622,000
Cost of revenues 2,407,000 6,364,000
Gross income (1,304,000) 258,000
Operating expenses
Research and development 805,000 2,039,000
Selling, general & administrative 3,915,000 5,075,000
Total operating expenses 4,720,000 7,114,000
Operating loss (6,024,000) (6,856,000)
Other income and (expense)
Loss on litigation (2,014,000) (41,000)
Interest and other income
(expense) (197,000) (87,000)
Total other income and
(expense) (2,211,000) (128,000)
Net loss (8,235,000) (6,984,000)
For the Years Ended December 31, 2012 compared December 31,
2011
Results of Operations
Net Revenues. Net revenues were $1,103,000 for the year ended
December 31, 2012, representing a decrease of $5,519,000 or 83%
from net revenues of $6,622,000 during the same period in 2011.
Revenues in the current year were negatively affected by
uncertainty over battery performance and non-recoverable
engineering costs associated with battery development and
subsequent to our restructuring in June 2012, our reduced capacity
to pursue new business. 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 twelve months ended December 31, 2012 compared to the same
period in 2011 was mainly due to a decrease in deliveries to our
core customer base in the United States. Revenues in 2012 were
mainly attributed to shipments to First Auto Works in China and the
Optare Group in the U.K in the first half of the year. We will have
fluctuations in revenue from quarter to quarter. Although we have
seen indications from our 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 were $2,407,000 for the year
ended December 31, 2012, compared to $6,364,000 for the year ended
December 31, 2011, representing a decrease of $3,957,000, or 62%.
Cost of revenues decreased in 2012 compared to the same period in
the prior year primarily due to the decrease in revenue. We
recorded a charge of approximately $1,436,000 during 2012
increasing our inventory obsolescence reserve after management
updated its estimate of the realizable value of inventory. Cost of
revenues consists of component and material costs, direct labor
costs, integration costs and overhead related to manufacturing our
products as well as warranty accruals and inventory valuation
reserve amounts. Product development costs incurred in the
performance of engineering development contracts for the U.S.
Government and private companies are charged to cost of sales. Our
customers continue to require additional integration and support
services to customize, integrate and evaluate our products. We
believe that a portion of these costs are initial, one-time costs
for these customers and anticipate similar costs to be incurred
with respect to new customers. Typically we do not incur these same
types of costs for customers who have been using our products for
over one year.
Gross Margin. The gross margin for the year ended December 31,
2012 was negative 118.4% compared to a positive 3.9% in the prior
year, a decrease of 122.3 percentage points. The decrease in gross
margin is primarily attributable to lower production volumes and
charges to increase the inventory reserve in 2012 associated with
certain obsolete parts.
Research and Development Expenses.Research and development
expenses consist primarily of personnel, facilities, equipment and
supplies for our research and development activities. Non-funded
development costs are reported as research and development expense.
Research and development expenses during the year ended December
31, 2012 were $805,000 compared to $2,039,000 for the same period
in 2011, a decrease of $1,234,000 or approximately 61%. R&D
costs were lower in 2012 as we reduced engineering staff 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 from the second half
of 2012.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses consist primarily of sales and
marketing costs, including consulting fees and expenses for travel,
promotional activities and personnel and related costs for the
quality and field service functions and general corporate
functions, including finance, strategic and business development,
human resources, IT, accounting reserves and legal costs. Selling,
general and administrative expenses decreased by $1,160,000, or
23%, during the year ended December 31, 2012 to $3,915,000 from
$5,075,000 in the prior year, is attributable the Company's
implementation of staff reductions, the termination of employment
with the Company by approximately 80% of the Company's workforce
and other cost savings measures. We continually monitor S, G &
A in light of our business outlook and are taking proactive steps
to control these costs.
Loss on Litigation. For the year ended December 31, 2012, loss
on litigation was $2,014,000, an increase of $1,973,000 from an
expense of $41,000 in 2011. The primary reason for the increase is
due to our recording a charge of approximately $2 million in 2012
for a judgment entered in the litigation with Arens Controls, as
detailed in Item 3 - Legal Proceedings of this Form 10-K.
Interest and Other Income (Expense). For the year ended December
31, 2012, interest and other expense was $197,000, an increase of
$110,000 or 126%, from an expense of $87,000 in 2011. The primary
reason for the increase is due to our recording a charge of
approximately $2 million in 2012 for a judgment entered in the
litigation with Arens Controls, as detailed in Item 3 - Legal
Proceedings of this Form 10-K.
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
year ended December 31, 2012 were financed by product sales,
working capital reserves and equity offerings in December 2011 and
May 2012 that resulted in net proceeds of $1,245,000 and $132,000,
respectively. As of December 31, 2012, the Company had $57,000 of
cash and cash equivalents.
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 $3,388,000 for the
year ended December 31, 2012, a decrease of $2,914,000 compared to
$6,302,000 for the year ended December 31, 2011. Operating cash
used decreased in 2012 compared to the prior year period primarily
due to decreases in our sales volume in 2012 and the use of our
existing cash resources to fund our current operations. Non-cash
items include expense for stock-based compensation, depreciation
and amortization, inventory reserve and other losses. These
non-cash items increased by $2,632,000 for the year ended December
31, 2012 as compared to the same period in the prior year primarily
due to accrual of the Arens litigation judgment and an increase in
the inventory reserve and reserve for doubtful accounts. The
increase in net loss was primarily due to an accrual of $2,017,000
for the Arens litigation judgment and inventory reserve and
allowance for doubtful accounts charges of $1,436,000 and $296,000,
respectively. As of December 31, 2012, the Company had $57,000 of
cash and cash
equivalents compared to $3,096,000 as of December 31, 2011.
Net cash from investing activities was $237,000 for the year
ended December 31, 2012, compared to net cash used of $275,000 for
the year ended December 31, 2011. In 2012, a certificate of deposit
investment of $200,000 was redeemed in order to fund drawdowns from
an irrevocable letter of credit by Sunshine Distribution L.P. to
pay rent on our corporate headquarters during the fourth quarter of
2012. In 2012 and 2011, investing expenditures for capital
expenditures were expended mainly for the acquisition and
integration of test vehicles and for test equipment utilized in
R&D and production.
Net cash provided from financing activities totaled $112,000 for
the year ended December 31, 2012, a decrease of $1,130,000 compared
to $1,242,000 for the year ended December 31, 2011. Financing
activities in 2012 and 2011 were primarily attributable to private
offerings of common stock. In 2012, we received proceeds of
$132,000 from the issuance of Common Stock during second quarter of
2012 from the Lincoln Park facility, as explained in Note 11 -
Stockholders' Equity to the financial statements included in Item 1
of this Form 10-K.. In 2011, we sold 11,250,000 shares of common
stock at $0.15 per share to certain accredited investors, resulting
in gross proceeds of $1,687,500 and net proceeds of $1,245,000
after costs related to the equity raise.
The Certificate of Deposit decreased to $0 as of December 31,
2012 from $200,000 as of December 31, 2011. As explained above, the
CD was used to secure the revolving credit facility in the amount
of $200,000 with Union Bank which was fully drawn during the fourth
quarter of 2012 to fund draw downs form the irrevocable letter of
credit that were used to pay rent for our facility to Sunshine
Distribution L.P.
Accounts receivable decreased by $551,000, or 73%, to $208,000
as of December 31, 2012 from $759,000 as of December 31, 2011. The
decrease in the receivable balance was primarily due to collections
of receivables and an increase in the Reserve for Doubtful
Accounts. As of December 31, 2012 and December 31, 2011, the
Company maintained a reserve for doubtful accounts receivable of
$313,000 and $18,000, respectively.
Inventory decreased by $1,833,000, or 45%, from $4,036,000 as of
December 31, 2011 to $2,203,000 as of December 31, 2012. The
decrease resulted from net inventory activity including receipts
totaling $545,000, consumption of $942,000 and an inventory reserve
charge of $1,436,000.
Prepaid expenses and other current assets were $242,000 as of
December 31, 2012 and 2011, respectively.
Long term accounts receivable decreased by $41,000, or 52%, to
$38,000 as of December 31, 2012 compared to $79,000 at December 31,
2011. 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 accounts receivable as
requested by a customer for the term of the Company's warranty
period. The Company has remedied all past and current warranty
claims and anticipates full collection of the receivable.
Property and equipment decreased by $621,000 or approximately
67%, net of accumulated depreciation, to $307,000 as of December
31, 2012 from a balance of $928,000 as of December 31, 2011. The
decrease is primarily due to depreciation expense of $466,000, an
asset impairment charge of $90,000, proceeds from assets sales of
$53,000 and a loss on asset sales of $28,000, which was partially
offset by additions to fixed assets totaling $16,000 in 2012.
Accounts payable increased by $204,000, or approximately 58%, to
$558,000 at December 31, 2012 from $354,000 at December 31, 2011.
The increase was primarily due to unpaid legal and administrative
costs and inventory purchases during 2012.
Deferred revenue decreased by $202,000, or approximately 63%, to
$118,000 as of December 31, 2012 from $320,000 as of December 31,
2011. The balance at December 31, 2012 is anticipated to be
realized into revenue in the first half of 2013, and is associated
with prepayments on purchases orders from certain customers.
Accrued payroll and related expenses decreased by $168,000, or
63%, to $98,000 as of December 31, 2012 from $266,000 at December
31, 2011. The decrease was primarily due to the reduction in our
workforce by over 80% in June 2012 which resulted in a pay out of
accrued vacation of approximately $143,000 in the second
quarter.
Accrued judgment As previously disclosed in Item 3. 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.
Other accrued liabilities decreased by $262,000, or 51%, to
$255,000 at December 31, 2012 compared to a balance of $517,000 at
December 31, 2011. The decrease was primarily due to a decrease in
the accrued warranty balance as costs for warranty claims were
greater than warranty accruals during 2012 and a decrease in
accruals for professional services in 2012.
Accrued interest increased by $81,000, or 7%, to $1,318,000 at
December 31, 2012 from $1,237,000 at December 31, 2011. The
majority of the increase is associated with the interest accrued on
the $1.2 million note due the Credit Managers Association of
California.
Going concern
To date, the Company has incurred recurring net losses and
negative cash flows from operations. At December 31, 2012, the
Company had an accumulated deficit of approximately $159.3 million,
working capital of approximately negative $0.4 million and
shareholders' equity deficit of approximately $2.6 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 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, 2102, 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 may require the Company to
delay or eliminate some or all of its product develop, relinquish
some or even all 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 may
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 December 31, 2012, the Company had approximately $57,000
in cash and cash equivalents and we do not anticipate that our
existing cash and anticipated receivables collections will be
sufficient to meet projected operating requirements through the end
of 2013 to continue operations and market trading.
We have also accessed the capital markets to obtain additional
operating funds. In December 2011, we raised approximately
$1,245,000, net of financing costs of $442,500 through an equity
issuance to certain accredited investors, which was disclosed in
our Form 10-K filed on March 29, 2012. Additionally, we entered
into two Purchase Agreements (the facility) with Lincoln Park
Capital Fund in April to issue up $10,000,000 in shares of our
common stock and received proceeds of $132,000, net of financing
costs of $152,000, from the initial purchase of shares of Common
Stock from Lincoln Park in the second quarter. 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.
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.
The Company filed a notice of appeal in January 11, 2013. The
Company believes the court committed errors leading to the verdict
and judgment, and the Company is evaluating its options on appeal.
However, there can be no assurance that the appeal will be
successful or a negotiated settlement can be attained or that Arens
will assert its claim in the state of California, and thereby cause
the Company to go into bankruptcy.
Off-Balance Sheet Arrangements
Other than contractual obligations incurred in the normal course
of business, we do not have any off-balance sheet financing
arrangements or liabilities.
ITEM 1. BUSINESS
General
In July 2000, we changed our name to Enova Systems, Inc.
("Enova" or "the Company"). Our company, previously known as U.S.
Electricar, Inc., a California corporation, was incorporated on
July 30, 1976.
THE FOLLOWING BUSINESS DISCUSSION SET FORTH BELOW AND ELSEWHERE
IN THIS 10-K 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.
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.
During 2012, we continued to produce electric and hybrid
electric drive systems and components for First Auto Works of China
("FAW"), Smith Electric Vehicles ("Smith"), Optare Bus ("Optare")
and the US Military as well as 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.
In 2012, the Company delivered a total of 58 full systems units
of Enova drive systems to its customers.
For the year ended December 31, 2012, the following customers
each accounted for more than ten percent (10%) of our total
revenues:
Customer Percent
----------------------------------- --------
First Auto Works Group Corporation 63%
Optare Group Ltd. 20%
Please refer to the Management's Discussion and Analysis of
Financial Condition and Results of Operations and our financial
statements for further analysis of our results.
Climate Change Initiatives and Environmental Legislation
Because vehicles powered by internal combustion engines cause
pollution (greenhouse gasses), there has been significant public
pressure in throughout the world to reduce these emissions. Thus,
the US (federal and state levels) and countries in Europe and Asia
have enacted legislation to promote the use of zero or low emission
vehicles. We believe legislation requiring or promoting zero or low
emission vehicles is necessary to create a significant market for
both hybrid electric ("HEV") and electric vehicles ("EV").
As our products reduce emissions and dependence on foreign
energy, they are subject to federal, state, local and foreign laws
and regulations, governing, among other things, emissions as well
as laws relating to occupational health and safety. Regulatory
agencies may impose special requirements for implementation and
operation of our products or may significantly impact or even
eliminate some of our target markets. We may incur material costs
or liabilities in complying with government regulations. In
addition, potentially significant expenditures could be required in
order to comply with evolving environmental and health and safety
laws, regulations and requirements that may be adopted or imposed
in the future.
Strategic Alliances, Partnering and Technology Developments
Our strategy is to adapt ourselves to the ever-changing
environment of alternative fuel markets for mobile applications.
Originally focusing on pure electric drive systems, we have the
potential to be positioned as a global supplier of drive systems
for electric, hybrid and fuel cell applications.
We continue to seek and establish alliances with major players
in the automotive and fuel cell fields. In 2012, Enova continued
marketing efforts to world markets. We believe the medium and
heavy-duty hybrid market's best chances of significant growth lie
in identifying and pooling the largest possible numbers of early
adopters in high-volume applications. We seek to utilize our
competitive advantages, including customer alliances, to gain
greater market share. By aligning ourselves with key customers in
our target market(s), we believe that the alliance will result in
the latest technology being implemented and customer requirements
being met, with a minimal level of additional time or expense.
-- 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. The Enova drive system is integrated and branded under the name of Jiefang
CA6120URH hybrid. The Jiefang 40 ft. long hybrid city bus can carry up to 103 passengers and
travel at a speeds of over 50 miles per hour. With the Enova hybrid system components, the
Jiefang bus meets Euro III emission standards, consumes only 7.84 miles per gallon and achieves
a reduction of 20 percent in harmful emissions.
-- Smith Electric Vehicles N.A. Inc. ("Smith") - Enova continues to supply Smith with electric
drive systems. Smith has deployed several hundred vehicles utilizing Enova's electric drive
system. Smith develops, produces and sells zero-emission commercial electric vehicles that
are designed to be an alternative to traditional diesel trucks, providing higher efficiency
and lower total cost of ownership. Smith has manufacturing facilities in Kansas City, Missouri,
and outside of Newcastle, UK. Smith's vehicle designs leverage more than 80 years of market
knowledge from selling and servicing electric vehicles in the United Kingdom. Smith produces
the Newton and the Edison.
-- Optare plc ("Optare") - Enova received a second contract in 2012 as a production drive system
supplier for their all electric buses. Optare designs, manufactures and sells single deck
and double deck buses and mini coaches. Its buses operate in the UK, Continental Europe, and
North America.
Through the first half of 2012, we continued the development of
our next generation Omni-series 200kVA-capable power inverter for
hybrid-electric and all-electric vehicles power management and
drive system component. The inverter has undergone a series of
rigorous tests, based on specifications from FCCC, Navistar, Ford
and Enova's own internal requirements. We are also progressed in
the design of a next generation on-board 10kW charger, which is
designed to be compatible with a wide range of vehicle drive
systems and motors, and can be configured for HEV, PHEV and EV
applications. Our various electric and hybrid-electric drive
systems, power management and power conversion systems continue to
be used in applications including Class 3-6 trucks, transit buses
and heavy industrial vehicles.
Research and development programs included our advanced power
management systems for fuel cells and upgrades and improvements to
our current power conversion and management components. We also
continued evaluation of new technologies for electric motors, gear
drive units and peripheral mechanical components to improve product
performance and manufacturing efficiency. Provided we can obtain
additional resources, we intend to continue to research and develop
new technologies and products, both internally and in conjunction
with our alliance partners and other manufacturers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read this Management's Discussion and Analysis of
Financial Condition and Results of Operations in conjunction with
our 2012 Financial Statements and accompanying Notes. The matters
addressed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain certain
forward-looking statements involving risks and uncertainties.
Overview
Enova Systems has been a leading innovator of proprietary hybrid
and electric drive systems propelling the alternative energy
industry. Our core competencies are focused on the development and
commercialization of power management and conversion systems for
mobile applications. Enova applies unique 'enabling technologies'
in the areas of alternative energy propulsion systems for medium
and heavy-duty vehicles as well as power conditioning and
management systems for distributed generation systems. Our products
can be found in a variety of OEM vehicles including those from
Freightliner Customer Chassis Corporation, Navistar Corporation,
First Auto Works, trucks and buses for Smith Electric Vehicles,
Wright Bus, Optare Plc. and the U.S. Military, as well as digital
power systems for EDO and other major manufacturers.
Some notable highlights of Enova's accomplishments in 2012, as
noted earlier are:
-- 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 nearly
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. The Enova drive system is integrated and branded under the name of Jiefang
CA6120URH hybrid. The Jiefang 40 ft. long hybrid city bus can carry up to 103 passengers and
travel at a speeds of over 50 miles per hour. With the Enova hybrid system components, the
Jiefang bus meets Euro III emission standards, consumes only 7.84 miles per gallon and achieves
a reduction of 20 percent in harmful emissions.
-- Smith Electric Vehicles N.A. Inc. ("Smith") - Enova continues to supply Smith with electric
drive systems. Smith has deployed several hundred vehicles utilizing Enova's electric drive
system. Smith develops, produces and sells zero-emission commercial electric vehicles that
are designed to be an alternative to traditional diesel trucks, providing higher efficiency
and lower total cost of ownership. Smith has manufacturing facilities in Kansas City, Missouri,
and outside of Newcastle, UK. Smith's vehicle designs leverage more than 80 years of market
knowledge from selling and servicing electric vehicles in the United Kingdom. Smith produces
the Newton and the Edison.
-- Optare plc. ("Optare") awarded Enova a contract as the production
drive system supplier for their all electric buses. Enova has
shipped systems to Optare that are currently being integrated
into buses. Optare designs, manufactures and sells single deck
and double deck buses and mini coaches. Its buses operate in
the UK, Continental Europe, and North America.
-- The Company delivered a total of 58 full systems to its customers, including 50 pre-transmission
hybrid drive systems to FAW for their Jiefang 112 passenger hybrid bus during the year.
Enova's product focus has been on digital power management and
power conversion systems. Its software and hardware manage and
control the power that drives a vehicle, converting the power into
the appropriate forms required by the vehicle or device and manage
the flow of this energy to optimize efficiency and provide
protection for both the system and its users. Our products and
systems are the enabling technologies for power systems.
The latest state-of-the-art technologies in hybrid and electric
vehicles and fuel cell systems all require some type of power
management and conversion mechanism. Enova Systems supplies these
essential components. Enova drive systems are 'fuel-neutral,'
meaning that they have the ability to utilize any type of fuel,
including diesel, liquid natural gas or bio-diesel fuels. Enova has
performed significant research and development to augment and
support others' and our internal product development efforts.
Our products are "production-engineered." This means they are
designed so they can be commercially produced (i.e., all formats
and files are designed with manufacturability in mind, from the
start). For the automotive market, Enova designs its products to
ISO 9001 manufacturing and quality standards. We believe Enova's
redundancy of systems and rigorous quality standards result in high
performance and reduced risk. For every component and piece of
hardware, there are detailed performance specifications. Each piece
is tested and evaluated against these specifications, which
enhances and confirms the value of the systems to OEM
customers.
The Company continues to acknowledge the principal barrier to
commercialization of our drive systems is cost. The cost of
engineering proprietary software and hardware for our drive systems
is high because economies of production in specialized hybrid drive
system component parts, batteries, and vehicle integration have not
been achieved. Therefore, the cost of our products and engineering
services are currently higher than our gasoline and diesel
competitor counterparts. We also believe maturation into
commercialization of our drive systems will result in decreases to
our long run average costs of materials and services as volume
increases over time.
Critical Accounting Policies
The preparation of financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate
our estimates, including those related to product returns, bad
debts, inventories, intangible assets, income taxes, stock-based
compensation, warranty obligations, contingencies, and litigation.
We base our estimates on historical experience and on various other
assumptions believed to be reasonable under the circumstances,
including current and anticipated worldwide economic conditions,
both in general and specifically in relation to the hybrid and
electric vehicle markets, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies are described in Note 2 to
the financial statements included in Item 8 of this Form 10-K. We
believe the following critical accounting policies necessitated
that significant judgments and estimates be used in the preparation
of its financial statements. We have reviewed these policies with
our Audit Committee.
Revenue Recognition - We generally recognizes 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.
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 billed 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.
Warranty - 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.
Allowance for doubtful accounts - The allowance for doubtful
accounts is the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable;
however, changes in circumstances relating to accounts receivable
may result in a requirement for additional allowances in the
future. Past due balances over 90 days and other higher risk
amounts are reviewed individually for collectibility. If the
financial condition of the Company's customers were to deteriorate
resulting in an impairment of their ability to make payment,
additional allowances may be required. In addition, the Company
maintains a general reserve for all invoices by applying a
percentage based on the age category. Account balances are charged
against the allowance after all collection efforts have been
exhausted and the potential for recovery is considered remote.
Inventory - Inventories include material, labor, and
manufacturing overhead are priced at the lower of cost or market
utilizing the 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 (i.e., cycle counts).
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.
Property and Equipment - Property and equipment are stated at
cost and depreciated over the estimated useful lives of the related
assets, which range from three to seven years using the
straight-line method for financial statement purposes. The Company
uses other depreciation methods (generally, accelerated
depreciation methods) for tax purposes where appropriate.
Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term
or the estimated useful lives of the improvements.
Repairs and maintenance are expensed as incurred. Expenditures
that increase the value or productive capacity of assets are
capitalized. When property and equipment are retired, sold, or
otherwise disposed of, the asset's cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
included in operations.
Impairment of Long-Lived Assets - The Company reviews the
carrying value of property and equipment for impairment whenever
events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the
carrying value, an impairment loss is recognized equal to an amount
by which the carrying value exceeds the fair value of assets. The
factors considered by management in performing this assessment
include current operating results, trends, and prospects, as well
as the effects of obsolescence, demand, competition, and other
economic factors. Long-lived assets that management commits to sell
or abandon are reported at the lower of carrying amount or fair
value less cost to sell.
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.
The Company's determination of estimated fair value of
share-based awards utilizes the Black-Scholes option-pricing model.
The Black-Scholes model is affected by the Company's stock price as
well as assumptions regarding certain highly complex and subjective
variables. These variables include, but are not limited to; the
Company's expected stock price volatility over the term of the
awards as well as actual and projected employee stock option
exercise behaviors.
Deferred Income Taxes - We evaluate the need for a valuation
allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. We have considered future
taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. We
determined that we may not be able to realize all or part of its
net deferred tax asset in the future, thus a full valuation
allowance was recorded against our deferred tax assets.
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.
Research and Development - Research, development, and
engineering costs are expensed in the period incurred. Costs of
significantly altering existing technology are expensed as
incurred.
2. Summary of Significant Accounting Policies
Basis of Presentation
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
Reclassifications
Certain amounts in the prior year have been reclassified to
conform to the current year presentation. This change in
classification does not affect previously reported cash flows from
operating or financing activities in the Company's previously
reported Statements of Cash Flows, or the Company's previously
reported Statements of Operations for any period.
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;
-- 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. Receipt of a customer
purchase order is the primary method of determining that persuasive
evidence of an arrangement exists.
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
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.
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 customer's
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. 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.
Since some customer orders contain multiple items such as
equipment and services which are delivered at varying times, the
Company determines whether the delivered items can be considered
separate units of accounting. Delivered items are considered
separate units of accounting if delivered items have value to the
customer on a standalone basis, there is objective and reliable
evidence of the fair value of undelivered items, and if delivery of
undelivered items is probable and substantially in the Company's
control. The recognition of revenue from milestone payments is over
the remaining minimum period of performance obligation. As
required, the Company evaluates its sales contract to ascertain
whether multiple element agreements are present.
The Company 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 billed
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 under advance billings 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.
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. The Company has entered into
several production and development contracts with customers. The
Company has evaluated these contracts, ascertained the specific
revenue generating activities of each contract, and established 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.
Shipping and Handling Costs
The Company includes shipping and handling costs associated with
inbound and outbound freight in costs of goods sold.
Cash and Cash Equivalents
Short-term, highly liquid investments with an original maturity
of three months or less are considered cash equivalents.
Certificates of deposits that have a penalty for early withdrawal
are excluded from cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable credit losses
in the Company's existing accounts receivable; however, changes in
circumstances relating to accounts receivable may result in a
requirement for additional allowances in the future. Past due
balances over 90 days and other higher risk amounts are reviewed
individually for collectability. If the financial condition of the
Company's customers were to deteriorate resulting in an impairment
of their ability to make payment, additional allowances may be
required. In addition, the Company maintains a general reserve for
all invoices by applying a percentage based on the age category.
Account balances are charged against the allowance after all
collection efforts have been exhausted and the potential for
recovery is considered remote. As of December 31, 2012 and 2011,
the Company maintained a reserve of $313,000 and $18,000 for
doubtful accounts receivable. There was bad debt expense recorded
of $296,000 in 2012 and $71,000 in 2011, respectively.
Inventory
Inventories and supplies are comprised of materials used in the
design and development of electric, hybrid electric, and fuel cell
drive systems, and other power and ongoing management and control
components for production and ongoing development contracts,
finished goods and work-in-progress, and is stated at the lower of
cost or market utilizing the first-in, first-out (FIFO) cost flow
assumption. The Company maintains a perpetual inventory system and
continuously record the quantity on-hand and standard cost for each
product, including purchased components, subassemblies and finished
goods. The Company maintains 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
The Company maintains 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.
Property and Equipment
Property and equipment are stated at cost and depreciated over
the estimated useful lives of the related assets, which range from
three to seven years using the straight-line method for financial
statement purposes. The Company uses other depreciation methods
(generally, accelerated depreciation methods) for tax purposes
where appropriate. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the
remaining lease term or the estimated useful lives of the
improvements.
Repairs and maintenance are expensed as incurred. Expenditures
that increase the value or productive capacity of assets are
capitalized. When property and equipment are retired, sold, or
otherwise disposed of, the asset's cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
included in operations.
Impairment of Long-Lived Assets
The Company reviews the carrying value of property and equipment
for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds
the fair value of assets. The factors considered by management in
performing this assessment include current operating results,
trends, and prospects, as well as the effects of obsolescence,
demand, competition, and other economic factors. Long-lived assets
that management commits to sell or abandon are reported at the
lower of carrying amount or fair value less cost to sell.
Fair Value of Financial Instruments
The carrying amount of financial instruments, including cash and
cash equivalents, certificates of deposit, accounts receivable,
accounts payable and other accrued liabilities, approximate fair
value due to the short maturity of these instruments. The recorded
values of notes payable and long-term debt approximate their fair
values, as interest approximates market rates.
The Company defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants
on the measurement date. At December 31, 2012 and 2011, the Company
had no financial assets or liabilities periodically re-measured at
fair value.
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.
The Company's determination of estimated fair value of
share-based awards utilizes the Black-Scholes option-pricing model.
The Black-Scholes model is affected by the Company's stock price as
well as assumptions regarding certain highly complex and subjective
variables. These variables include, but are not limited to the
Company's expected stock price volatility over the term of the
awards as well as actual and projected employee stock options
exercise behaviors.
The cash flows from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those
options are to be classified as financing cash flows. Due to the
Company's loss position, there were no such tax benefits for the
years ended December 31, 2012 and 2011.
The Company determines the fair value of the restricted stock
awards utilizing the quoted market prices of the Company's shares
on the date they were granted.
Research and Development
Research development, and engineering costs are expensed in the
period incurred. Costs of significantly altering existing
technology are expensed as incurred.
Income Taxes
The Company accounts for income taxes under an asset and
liability approach. This process involves calculating the temporary
and permanent differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The temporary differences can
result in deferred tax assets and liabilities, which would be
recorded on the Company's balance sheets. The Company must assess
the likelihood that its deferred tax assets will be recovered from
future taxable income and, to the extent the Company believes that
recovery is not likely, the Company must establish a valuation
allowance. Changes in the Company's valuation allowance in a period
are recorded through the income tax provision on the statements of
operations.
Uncertainty in income taxes are recognized in the Company's
financial statements based on the recognition threshold and
measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. The impact
of an uncertain income tax position on the income tax return must
be recognized at the largest amount that is more-likely-than-not to
be sustained upon audit by the relevant taxing authority. An
uncertain income tax position will not be recognized if it has less
than a 50% likelihood of being sustained. During 2012 and 2011, the
Company did not recognize any liability for unrecognized income tax
benefits.
Loss Per Share
Basic loss per share is computed by dividing loss available to
common stockholders by the weighted-average number of common shares
outstanding. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include
the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if
the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is
anti-dilutive. The Company's common share equivalents consist of
stock options, warrants and preferred stock
The potential shares, which are excluded from the determination
of basic and diluted net loss per share as their effect is
anti-dilutive, are as follows:
Fiscal Years Ended December 31,
2012 2011
Options to purchase common
stock.............................................................................
............................ 810,000 2,259,000
Warrants to purchase common
stock.............................................................................
.......................... 11,250,000 11,250.000
Series A and B preferred shares
conversion........................................................................
................... 83,000 83,000
Potential equivalent shares
excluded..........................................................................
............................. 12,143,000 13,592,000
Commitments and Contingencies
Certain conditions may exist as of the date the financial
statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events
occur or fail to occur. The Company's management and its legal
counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against
the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought therein. If the assessment of a contingency indicates that
it is probable that a material loss has been incurred and the
amount of the liability can be estimated, then the estimated
liability would be accrued in the Company's financial statements.
If the assessment indicates that a potentially material loss
contingency is not probable, but is reasonably possible, or is
probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss
if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed
unless they involve guarantees, in which case the nature of the
guarantee would be disclosed.
Estimates
The preparation of financial statements in accordance 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents
and accounts receivable. The Company places its cash and cash
equivalents with high credit, quality financial institutions. The
Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash
and cash equivalents. With respect to accounts receivable, the
Company routinely assesses the financial strength of its customers
and, as a consequence, believes that the receivable credit risk
exposure is limited.
Recent Accounting Pronouncements
Effective January 1, 2012, the Company adopted revised guidance
related to the presentation of comprehensive income that increases
comparability between U.S. GAAP and International Financial
Reporting Standards. This guidance eliminates the current option to
report other comprehensive income (OCI) and its components in the
statement of changes in stockholders' equity. The Company adopted
this guidance during the first quarter of 2012, which had no impact
on the Company's financial position, operations, or cash flows. The
Company currently does not have any components of other
comprehensive income or loss.
In May 2011, the Financial Accounting Standards Board ("FASB")
issued new guidance to achieve common fair value measurement and
disclosure requirements between GAAP and International Financial
Reporting Standards. This new guidance amends current fair value
measurement and disclosure guidance to include increased
disclosures regarding valuation inputs and investment
categorization. The adoption of this new accounting guidance in
2012 did not have a material impact on the Company's financial
position, operations or cash flows.
Other accounting standards that have been issued or proposed by
the FASB or other standards-setting bodies did not or are not
expected to have a material impact on the Company's financial
positions, results of operations and cash flows.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Given the nature of our business, we are subject from time to
time to 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. Other than the Arens matter outlined below, we are
not aware of any other pending legal matters. 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.
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.
The Company reported in a 8-K filed January 20, 2011 that we
entered into a Partial Settlement Agreement, as amended on January
14, 2011, with Arens Controls Company, L.L.C. ("Arens") to resolve
certain claims made by Arens in connection with its action
captioned Arens Controls Company, L.L.C. v. Enova Systems, Inc.,
filed in 2008 with the Northern District of Illinois of the U.S.
District Court (the "Legal Action"). In the Legal Action, Arens
asserted eight counts against Enova, including certain claims
regarding inventory asserted by Arens to be valued at $1,671,000
(the "Inventory Claim"), a claim for payment under certain
invoices, and claims for certain other monetary obligations of
Enova to Arens.
Under the terms of the Settlement Agreement, we paid $327,000
directly to Arens and Arens dismissed with prejudice all but two of
the counts under the Legal Action. Additionally, under the
Settlement Agreement (as amended), on January 14, 2011, we acquired
the inventory that was the subject of the Inventory Claim (the
"Inventory") for payment of $1,498,000, net of an agreed upon
reduction of $173,000 for the acquisition price of such Inventory.
In return, Arens was deemed to have released us from any further
liability on the Inventory Claim. However, per the terms of the
Settlement Agreement (as amended), Arens preserved it claims under
two of the counts in the Legal Action.
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.
ITEM 1A. Risk Factors
The statements in this Section describe the major risks to our
business and should be considered carefully. In addition, these
statements constitute our cautionary statements under the Private
Securities Litigation Reform Act of 1995 and apply to all sections
of this Form 10-K.
We may be forced into bankruptcy if we cannot reach a settlement
with our two major creditors
Enova owes in excess of $4.5 million in aggregate to its two
principal creditors, Arens Controls Company, L.L.C. ("Arens") and
the Credit Managers Association. 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
$2,014,169, the company does not currently believe it has any
alternative other than to cease operations.
Our common stock has been delisted from the NYSE MKT
On October 24, 2012, the Company received notification from the
NYSE MKT (the "Exchange") stating that, because the Company was not
in compliance with certain of the Exchange's continued listing
standards, the Exchange intended to strike the common stock of the
Company from the Exchange by filing a delisting application with
the Securities and Exchange Commission (the "SEC"). The Company
previously disclosed in Current Reports on Form 8-K filed with the
SEC on April 20, 2012, May 29, 2012, July 6, 2012, and October 24,
2012 the provisions of the Exchange's continued listing standards
with which the Company was not in compliance. The Company did not
request an appeal of the Exchange's delisting determination.
Effective October 31, 2012, the Company's common shares were
delisted from the Exchange and, on the same date, trading of the
Company's shares commenced on the OTCQB Marketplace under the
trading symbol "ENVS". The OTCQB is a market tier operated by the
OTC Market Group Inc. for over-the-counter traded companies. The
delisting and transition to the OTCQB does not change the Company's
obligations to file periodic and other reports with the SEC under
applicable federal securities laws.
As a result of the delisting of our common stock from the NYSE
MKT, we believe that the price and liquidity of our common stock,
and our ability to raise funds from the sale of equity in the
future, will be materially affected.
Raising additional funds by issuing securities, engaging in debt
financings or through licensing arrangements may cause substantial
dilution to existing stockholders, restrict our operations or
require us to relinquish proprietary rights.
To the extent that we raise additional capital by issuing equity
securities as we did in 2011, April 2012 and May 2012, our existing
stockholders' ownership may be substantially diluted. Any debt
financing we enter into may involve covenants that restrict our
operations or our ability to enter into other funding arrangements.
These restrictive covenants may include limitations on additional
borrowing and specific restrictions on the use of our assets, as
well as prohibitions on our ability to create liens, pay dividends,
redeem our stock or make investments. In addition, if we raise
additional funds through licensing arrangements, it may be
necessary to relinquish potentially valuable rights to our
potential products or proprietary technologies, or grant licenses
on terms that are not favorable to us.
One group of our shareholders holds a large percentage of our
outstanding common stock, and, should they choose to do so, may
have significant influence over the outcome of corporate actions
requiring stockholder approval.
Approximately 22% of our outstanding common stock is held by a
group of 17 shareholders (the "Low-Beer Managed Accounts") who
invested in our December 2011 placement of 11,250,000 shares of
common stock together with warrants to purchase up to 11,250,000
shares of common stock. 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. Accordingly, the Low-Beer Managed Accounts, should they
choose to do so, may be able to significantly influence the outcome
of any corporate transaction or other matter submitted to our
stockholders for approval, including the election of directors, any
merger, consolidation or sale of all or substantially all of our
assets or any other significant corporate transaction, and such
group of investors could delay or prevent a change of control of
our company, even if such a change of control would benefit our
other stockholders. The interests of the Low-Beer Managed Accounts
may differ from the interests of our other stockholders.
Funding from our equity lines of credit may be limited or be
insufficient to fund our operations or to implement our
strategy.
Under our purchase agreements with Lincoln Park, we may direct
Lincoln Park to purchase up to $3,400,000 of shares of common stock
over a 36 month period, and, upon effectiveness of a registration
statement for resale of the shares and subject to other conditions,
we also may direct Lincoln Park to purchase up to $6,600,000 of our
shares of common stock over a 36 month period. The amounts
available for purchase is limited under each purchase agreement.
The extent to which we rely on Lincoln Park as a source of funding
will depend on a number of factors including, the amount, if any,
of additional working capital needed, the prevailing market price
of our common stock and the extent to which we are able to secure
working capital from other sources. If we are unable to sell enough
of our products to finance our working capital requirements and if
sufficient funding from Lincoln Park were to prove unavailable or
prohibitively dilutive, we would need to secure another source of
funding. Even if we sell all $10,000,000 under the aggregate
purchase agreements to Lincoln Park, there can be no assurance this
would be sufficient to support our operations or implement our
growth plans in all cases.
Our history of operating losses and our expectation of
continuing losses may hurt our ability to reach profitability or
continue operations.
We have experienced significant operating losses since our
inception. Our net loss was $8,235,000 for the year ended December
31, 2012 and our accumulated deficit was $159,347,000 as of
December 31, 2012. It is likely that we will continue to incur
substantial net operating losses for the foreseeable future, which
may adversely affect our ability to continue operations. To achieve
profitable operations, we must successfully develop and market our
products at higher margins. We may not be able to generate
sufficient product revenue to become profitable. Even if we do
achieve profitability, we may not be able to sustain or increase
our profitability on a quarterly or yearly basis.
We are dependent on access to capital markets in order to fund
continued operations of the Company.
We do not currently have adequate internal liquidity to fund the
Company's operations on an ongoing basis. We will need to continue
to look for partnering opportunities and other external sources of
liquidity, including the public and private financial markets and
strategic partners. 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, and without substantial reductions in development programs
and strategic initiatives, we do not expect that our cash and cash
equivalents and short-term investments will be sufficient to fund
our operating and capital needs for the twelve months following
December 31, 2012.
Because we depend upon sales to a limited number of customers,
our revenues will be reduced if we lose a major customer
Our revenue is dependent on significant orders from a limited
number of customers. In the fiscal year ended December 31, 2012,
our two largest customers comprised 83% of revenues. We believe
that revenues from major customers will continue to represent a
significant portion of our revenues. This customer concentration
increases the risk of quarterly fluctuations in our revenues and
operating results. The loss or reduction of business from one or a
combination of our significant customers could adversely affect our
revenues, financial condition and results of operations. Moreover,
our success will depend in part upon our ability to obtain orders
from new customers, as well as the financial condition and success
of our customers and general economic conditions.
Our future growth depends on consumers' willingness to accept
hybrid and electric vehicles
Our growth is highly dependent upon the acceptance by consumers
of, and we are subject to an elevated risk of any reduced demand
for, alternative fuel vehicles in general and electric vehicles in
particular. If the market for electric vehicles does not develop as
we expect or develops more slowly than we expect, our business,
prospects, financial condition and operating results will be
materially and adversely affected. The market for alternative fuel
vehicles is relatively new, rapidly evolving, characterized by
rapidly evolving and changing technologies, price competition,
additional competitors and changing consumer demands or behaviors.
Factors that may influence the acceptance of alternative fuel
vehicles include:
-- perceptions about alternative fuel vehicles safety (in particular
with respect to lithium-ion battery packs), design, performance
and cost, especially if adverse events or accidents occur that
are linked to the quality or safety of alternative fuel vehicles;
-- volatility in the cost of oil and gasoline;
-- consumer's perceptions of the dependency of the United States
on oil from unstable or hostile countries;
-- improvements in fuel of the internal combustion engine;
-- the environmental consciousness of consumers;
-- government regulation
-- macroeconomics
We extend credit to our customers, which exposes us to credit
risk
Most of our outstanding accounts receivable are from a limited
number of large customers. At December 31, 2012, the two highest
outstanding accounts receivable balances totaled approximately
$560,000 which represents 100% of our gross accounts receivable. If
we fail to monitor and manage effectively the resulting credit risk
and a material portion of our accounts receivable is not paid in a
timely manner or becomes uncollectible, our business would be
significantly harmed, and we could incur a significant loss
associated with any outstanding accounts receivable.
Our business is affected by current economic and financial
market conditions in the markets we serve
Current global economic and financial markets conditions,
including severe disruptions in the credit markets and the
significant and potentially prolonged global economic recession,
may materially and adversely affect our results of operations and
financial condition. We are particularly impacted by any global
automotive slowdown and its effects on OEM inventory levels,
production schedules, support for our products and decreased
ability to accurately forecast future product demand.
The nature of our industry is dependent on technological
advancement and is highly competitive
The mobile power market, including electric vehicle and hybrid
electric vehicles, continue to be subject to rapid technological
changes. Most of the major domestic and foreign automobile
manufacturers: (1) have already produced electric and hybrid
vehicles, (2) have developed improved electric storage, propulsion
and control systems, and/or (3) are now entering or have entered
into production, while continuing to improve technology or
incorporate newer technology. Various companies are also developing
improved electric storage, propulsion and control systems.
Our industry is affected by political and legislative
changes
In recent years there has been significant legislation enacted
in the United States and abroad to reduce or eliminate automobile
pollution, promote or mandate the use of vehicles with no tailpipe
emissions ("zero emission vehicles") or reduced tailpipe emissions
("low emission vehicles"). Although states such as California have
enacted such legislation, we cannot assure you that there will not
be further legislation enacted changing current requirements or
that current legislation or state mandates will not be repealed or
amended, or that a different form of zero emission or low emission
vehicle will not be invented, developed and produced, and achieve
greater market acceptance than electric or hybrid electric
vehicles.
We may be unable to effectively compete with other companies who
have significantly greater resources than we have
Many of our competitors, in the automotive, electronic, and
other industries, have substantially greater financial, personnel,
and other resources than we do. Because of their greater resources,
some of our competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sales of their
products than we can.
We may be exposed to product liability or tort claims if our
products fail, which could adversely impact our results of
operations
A malfunction or the inadequate design of our products could
result in product liability or other tort claims. Any liability for
damages resulting from malfunctions could be substantial and could
materially adversely affect our business and results of operations.
In addition, a well-publicized actual or perceived problem could
adversely affect the market's perception of our products.
We are highly dependent on a few key personnel and will need to
retain and attract such personnel in a labor competitive market
Our ability to continue in business is dependent on the
performance of key management and technical personnel, the loss of
whom could severely affect our business. Additionally, in order to
successfully implement any future growth, we will be dependent on
our ability to generate resources necessary to hire qualified
personnel. There can be no assurance that we will be able to retain
or hire necessary personnel. We do not maintain key man life
insurance on any of our key personnel. We believe that our future
success will depend in part upon our ability to attract, retain,
and motivate highly skilled personnel in an increasingly
competitive market.
We are highly dependent on a few vendors for key system
components made to our engineering specifications and disruption of
vendor supply could adversely impact our results of operations.
Our product specifications often involve upfront investment in
tooling and machinery, which result in our commitment to a limited
number of high quality vendors that can meet our manufacturing
standards. Any disruption to our supply of key components from the
suppliers would have an adverse impact on our business and results
of operations.
There are minimal barriers to entry in our market
We presently license or own only certain proprietary technology,
and therefore have created little or no barrier to entry for
competitors other than the time and significant expense required to
assemble and develop similar production and design
capabilities.
Our competitors may enter into exclusive arrangements with our
current or potential suppliers, thereby giving them a competitive
edge which we may not be able to overcome, and which may exclude us
from similar relationships.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate offices are located at a manufacturing and
warehouse facility at 2945 Columbia Street, Torrance, California
which we are sub-leasing on a month-to-month basis. The lease on
our former corporate offices ended on January 31, 2013.
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December December
31, 31,
2012 2011
ASSETS
Current assets:
Cash and cash equivalents $ 57,000 $ 3,096,000
Certificate of deposit,
restricted - 200,000
Accounts receivable, net 208,000 759,000
Inventories and
supplies, net 2,203,000 4,036,000
Prepaid expenses and other current assets 242,000 242,000
Total current
assets 2,710,000 8,333,000
Long term accounts
receivable 38,000 79,000
Property and equipment,
net 307,000 928,000
Total assets $ 3,055,000 $ 9,340,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 558,000 $ 354,000
Deferred revenues 118,000 320,000
Accrued payroll and related expenses 98,000 266,000
Accrued loss for
litigation settlement 2,014,000 -
Other accrued liabilities 255,000 517,000
Current portion
of notes payable 66,000 62,000
Total current
liabilities 3,109,000 1,519,000
Accrued interest
payable 1,318,000 1,237,000
Notes payable, net of current portion 1,262,000 1,286,000
Total liabilities 5,689,000 4,042,000
Stockholders'
equity:
Series A convertible preferred stock
- no par value, 30,000,000 shares authorized;
2,642,000 shares issued and outstanding;
liquidating preference at $0.60 per
share as of December 31, 2012 and December
31, 2011, respectively 528,000 528,000
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 December 31, 2012 and December
31, 2011 1,094,000 1,094,000
Common Stock - no par value, 750,000,000
shares authorized; 44,520,000 and 42,765,000
shares issued and outstanding as of
December 31, 2012 and December 31, 2011,
respectively 145,512,000 145,380,000
Additional paid-in
capital 9,579,000 9,408,000
Accumulated
deficit (159,347,000) (151,112,000)
Total stockholders'
equity (2,634,000) 5,298,000
Total liabilities and stockholders'
equity $ 3,055,000 $ 9,340,000
See accompanying notes to these financial statements.
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Twelve Months
Ended
December 31,
2012 2011
Revenues $ 1,103,000 $ 6,622,000
Cost of revenues 2,407,000 6,364,000
Gross income (1,304,000) 258,000
Operating expenses
Research and development 805,000 2,039,000
Selling, general & administrative 3,915,000 5,075,000
Total operating expenses 4,720,000 7,114,000
Operating loss (6,024,000) (6,856,000)
Other income and (expense)
Loss on litigation (2,014,000) (41,000)
Interest and other income
(expense) (197,000) (87,000)
Total other income and
(expense) (2,211,000) (128,000)
Net loss $ (8,235,000) $ (6,984,000)
Basic and diluted loss
per share $ (0.19) $ (0.22)
Weighted average number
of common shares outstanding 43,952,000 31,537,000
See accompanying notes to these financial statements
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
Cash flows from operating
activities: 2012 2011
------------- -------------
Net loss $(8,235,000) $(6,984,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Reserve for doubtful
accounts 296,000 71,000
Inventory reserve 1,436,000 845,000
Depreciation and
amortization 466,000 495,000
Loss on asset disposal 28,000 49,000
Loss on asset impairment 90,000 -
Loss on litigation
settlement 2,014,000 41,000
Stock option expense 171,000 368,000
(Increase) decrease
in:
Accounts receivable 255,000 2,020,000
Inventory and supplies 397,000 (426,000)
Prepaid expenses
and other current
assets - 240,000
Long term accounts
receivable 41,000 21,000
Increase (decrease)
in:
Accounts payable 204,000 (1,493,000)
Deferred revenues (202,000) 289,000
Accrued payroll and
related expense (168,000) (656,000)
Other accrued liabilities (262,000) (1,263,000)
Accrued interest
payable 81,000 81,000
-------------
Net cash used in
operating activities (3,388,000) (6,302,000)
------------- -------------
Cash flows from investing
activities:
Sale of certificate
of deposit, restricted 200,000 -
Proceeds from the
sale of fixed assets 53,000 -
Purchases of property
and equipment (16,000) (275,000)
------------- -------------
Net cash provide
by (used in) investing
activities 237,000 (275,000)
------------- -------------
Cash flows from financing
activities:
Payment on notes
payable (20,000) (26,000)
Net proceeds from
the exercise of stock
options - 23,000
Net proceeds from
the issuance of common
stock 132,000 1,245,000
------------- -------------
Net cash provided
by financing activities 112,000 1,242,000
------------- -------------
Net decrease in cash
and cash equivalents (3,039,000) (5,335,000)
Cash and cash equivalents,
beginning of period 3,096,000 8,431,000
------------- -------------
Cash and cash equivalents,
end of period $ 57,000 $ 3,096,000
============= =============
Supplemental disclosure
of cash flow information:
Interest paid 5,000 $ 6,000
============= =============
Assets acquired through
financing arrangements $ - $ 25,000
============= =============
Conversion of preferred
stock series A to
common stock $ - $ 2,000
============= =============
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Preferred Additional Total
Stock
Series A Series B Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
Balance, December 31,
2010.................................................... 2,652,000 $ 530,000 546,000 $1,094,000 31,479,000 $144,110,000 $9,040,000 $(144,128,000) $ 10,646,000
Issuance of common stock
upon exercise of stock
options...............................................
........................................ 36,000 23,000 23,000
Issuance of common stock
for cash......................................... 11,250,000 1,245,000 1,245,000
Issuance of common stock
upon conversion of preferred
stock...................................................
............................................ (10,000) (2,000) - 2,000 -
Stock option
expense.................................................
................ 368,000 368,000
Net
loss....................................................
...................................... (6,984,000) (6,984,000)
Balance, December 31,
2011.................................................... 2,642,000 $ 528,000 546,000 $1,094,000 42,765,000 $145,380,000 $9,408,000 $(151,112,000) $ 5,298,000
Issuance of common stock
for cash 1,755,000 $ 132,000 $ 132,000
Stock option
expense.................................................
................ 171,000 171,000
Net
loss....................................................
...................................... (8,235,000) (8,235,000)
Balance, December 31,
2012.................................................... 2,642,000 $ 528,000 546,000 $1,094,000 44,520,000 $145,512,000 $9,579,000 $(159,347,000) $(2,634,000)
The accompanying notes are an integral part of these financial
statements.
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Twelve months ended December 31, 2012 and 2011
General
Enova Systems, Inc., (the "Company"), is a California
corporation that develops, designs and produces drive systems and
related components for electric, hybrid electric, and fuel cell
systems for mobile applications. The Company retains development
and manufacturing rights to many of the technologies created,
whether such research and development is internally or externally
funded. The Company sells drive systems and related components in
the United States, Asia and Europe.
Liquidity
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company has sustained recurring losses and negative cash flows from
operations. Management believes that the Company's losses in recent
years have primarily resulted from a combination of insufficient
product and service revenue to support the Company's skilled and
diverse technical staff believed to be necessary to support
exploitation of the Company's technologies. Historically, the
Company's growth and working capital needs have been funded
th-rough a combination of private and public equity offerings, and
debt financing. During 2012, the Company's growth and working
capital needs have been funded primarily through a combination of
product sales, existing cash reserves and equity financing. As of
December 31, 2012, the Company had approximately $57,000 of cash
and cash equivalents. At December 31, 2012, the Company had net
working capital of negative $399,000 compared to $6.8 million at
December 31, 2011, representing a decrease of approximately $7.2
million.
Management manages costs in line with estimated total revenue.
However, there can be no assurance that anticipated revenue will be
realized or that the Company will successfully implement its plans.
Management implemented measures to conserve cash, including the
reduction of over 80% of employee headcount in the second quarter
of 2012, and stringent controls over inventory purchases and
administrative expenses. The Company will continue to conserve
available cash by closely scrutinizing expenditures and extensively
utilizing current inventory for sales during 2013. The Company will
need to raise additional capital to accomplish continue in business
over the next year. The Company can make no assurance with respect
to either the availability or terms of such financing and capital
when it may be required.
Going Concern
The Company has experienced and continues to experience
operating losses and negative cash flows from operations, as well
as an ongoing requirement for substantial additional capital
investment. At December 31, 2012, the Company had an accumulated
deficit of approximately $159.3 million, working capital of
approximately negative $399,000 and shareholders' equity deficit of
approximately $2.6 million. Over the past years, the Company has
been funded through a combination of debt financing and private
equity offerings. As of December 31, 2012, the Company had
approximately $57,000 in cash and cash equivalents.
The Company expects that it will need to raise additional
capital to pursue recovery of its business over the long term and
is currently pursuing a variety of funding options. There can be no
assurance as to the availability or terms upon which such financing
and capital might be available. If the Company is not successful in
its efforts to raise additional funds, the Company may be required
to cease its business operations.
In December 2011, we raised approximately $1,245,000, net of
financing costs of $442,500, through an equity issuance to certain
accredited investors. And in the second quarter of 2012, through
the Lincoln Park facility, we were able to raise $132,000, net of
financing costs of $152,000. See Note 11 - Stockholders' Equity for
further analysis of the equity issuance in 2012. The Company
continues to pursue other options to raise additional capital fund
continuing operations; however, there can be no assurance that we
can successfully raise additional funds through the capital
markets.
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. The accompanying financial statements do not include any
adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
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 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.
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.
3. Inventory
Inventories, consisting of materials, labor, and manufacturing
overhead, are stated at the lower of cost (first-in, first-out) or
market and consist of the following at December 31:
2012 2011
Raw
materials......................................................................
................................................................ $ 3,988,000 $ 4,431,000
Work-in-process................................................................
................................................................. 2,000 144,000
Finished
goods..........................................................................
......................................................... 587,000 644,000
Reserve for
obsolescence...................................................................
.............................................. (2,374,000) (1,183,000)
$ 2,203,000 $ 4,036,000
Inventory reserve charged to operations amounted to $1,436,000
and $845,000 during 2012 and 2011, respectively. Inventory
valuation adjustments and other inventory write-offs in 2012 and
2011 amounted to $245,000 and $291,000, respectively.
4. Property and Equipment
Property and equipment consisted of the following at December
31:
2012 2011
Computers and
software.......................................................................
......................................................... $ 580,000 $ 618,000
Machinery and
equipment......................................................................
....................................................... 535,000 892,000
Furniture and office
equipment......................................................................
............................................... 87,000 98,000
Demonstration vehicles and
buses..........................................................................
.................................... 675,000 774,000
Leasehold
improvements...................................................................
............................................................ 1,327,000 1,348,000
Construction in
progress.......................................................................
........................................................ - 39,000
3,204,000 3,769,000
Less accumulated depreciation and
amortization...................................................................
.................... (2,897,000) (2,841,000)
Total.........................................................................
..............................................................................
.......... $ 307,000 $ 928,000
Fixed assets totaling $482,000 and $187,000 were retired or
disposed of in the years ended December 31, 2012 and 2011,
respectively. Depreciation and amortization expense was $466,000
and $495,000 for the years ended December 31, 2012 and 2011,
respectively, which included amortization expense of leasehold
improvements of $262,000 for the years ended December 31, 2012 and
2011, respectively.
5. Litigation judgment
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.
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.
6. Other Accrued Liabilities
Other accrued liabilities consisted of the following at December
31:
2012 2011
Accrued inventory
received.............................................................
................................................................... $ 14,000 $ 2,000 ,000
Accrued professional
services.............................................................
............................................................... 45,000 150,000 525,000
Accrued
warranty.............................................................
.....................................................................
................ 117,000 227,000 510,000
Other................................................................
.....................................................................
................................... 79,000 138,000 125,000
Total...............................................................
....................................................................
..................................... $ 255,000 $ 517,000 ,739,000
Accrued warranty consisted of the following activities for the
years ended December 31:
2012 2011
Balance at beginning of
year...............................................................................
............................ $ 227,000 $ 510,000
Accruals for warranties issued during
the period........................................................................ 141,000 470,000
Warranty
claims.............................................................................
.................................................... (251,000) (753,000)
Balance at end of
year...............................................................................
........................................ $ 117,000 $ 227,000
7. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
December December
31, 2012 31, 2011
Secured note payable to Credit Managers Association
of California, bearing interest at prime plus 3%
(6.25% as of December 31, 2012), 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................................................................................................... 11,000 18,000
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..................................................................................................... 8,000 12,000
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............................................................................................................ 14,000 18,000
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 22,000
1,328,000 1,348,000
Less current portion of notes
payable............................................................................................... (66,000) (62,000)
Notes payable, net of current
portion............................................................................................... $ 1,262,000 $ 1,286,000
As of December 31, 2012 and 2011, the balance of long term
interest payable amounted to $1,318,000 and $1,237,000,
respectively, of which the Credit Managers Association of
California note amounted to $1,286,000 and $1,209,000,
respectively. Interest expense on notes payable amounted to
approximately $88,000 during each of the years ended December 31,
2012 and 2011, respectively.
Future minimum principal payments of notes payable at December
31, 2012 consisted of the following:
Year Ending Principal
December 31 Amounts
2013................................................................................................................................................................................................... 66,000
2014................................................................................................................................................................................................... 16,000
2015................................................................................................................................................................................................... 8,000
2016................................................................................................................................................................................................... 1,238,000
Thereafter......................................................................................................................................................................................... -
Total................................................................................................................................................................................................. $ 1,328,000
8. Revolving Credit Agreement
On June 30, 2010, the Company entered into a secured revolving
credit facility with a financial institution for $200,000 which was
secured by a $200,000 certificate of deposit. The facility is for a
period of 3 years and 6 months from July 1, 2010 to December 31,
2013. 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 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.
9. Deferred Revenues
The Company had deferred $118,000 and $320,000 in revenue
related to production and development contracts at December 31,
2012 and 2011, respectively. The Company anticipates that the
December 31, 2012 deferred revenue balance will be recognized in
the first half of 2013.
10. Commitments and Contingencies
Leases
In October 2007, the Company entered into a lease agreement with
Sunshine Distribution LP ("Landlord"), with respect to the lease of
an approximately 43,000 square foot facility located at 1560 West
190th Street, Torrance, California (the "Lease"). The lease term
commenced on November 1, 2007, and expired January 31, 2013. Our
corporate offices are currently located at a manufacturing and
warehouse facility at 2945 Columbia Street, Torrance, California
which we are sub-leasing on a month-to-month basis.
The total base monthly rent is approximately $39,000. Under the
Lease, Enova pays the Landlord certain commercially reasonable and
customary common area maintenance costs of approximately $5,000 per
month, increasing ratably as these costs are increased to the
Landlord. The Lease is secured by an irrevocable standby letter of
credit in the amount of $200,000 and naming the Landlord as the
beneficiary. Enova also had an office in Hawaii rented on a
month-to-month basis at $3,400 per month, which was closed in
November 2011. Rent expense was approximately $537,000 and $611,000
for the years ended December 31, 2012, and 2011, respectively.
Future minimum lease payments under non-cancelable operating
lease obligations at December 31, 2012 were as follows:
Year Ending Operating
December 31 Leases
2013....................................................................................................................................................................................................... $ 44,000
Total..................................................................................................................................................................................................... $ 44,000
11. Stockholders' Equity
Common Stock
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 additional shares of the Company's
common stock, subject to certain limitations. We issued a total of
1,754,974 shares of common stock in the second quarter of 2012, of
which 1,450,000 shares were issued for cash proceeds of $132,000,
net of financing costs of $152,000, as consideration for its
commitment to purchase common stock under the $3,400,000 Purchase
Agreement and commissions on each drawdown, the Company issued to
Lincoln Park a total of 304,974 shares of common stock. The
purchase agreement stipulates that our shares be listed on a
national exchange in order to access the facility. As the company's
shares were delisted from the NYSE Amex Exchange on October 31,
2012, the Company is no longer able to sell shares to Lincoln Park
under the facility.
During the twelve months ended December 31, 2012 and 2011, the
Company did not issue any shares of common stock to directors or
employees as compensation. During the twelve months ended December
31, 2011, 10,000 shares of the Company's Series A Preferred Stock
were converted into 222 shares of its common stock. There were no
conversions of the Company's Series A Preferred Stock for the
comparable period in 2012.
Series A Preferred Stock
Series A preferred stock is currently unregistered. Each share
is convertible into 1/45 of a share of common stock at the election
of the holder or automatically upon the occurrence of certain
events including: sale of stock in an underwritten public offering;
registration of the underlying conversion stock; or the merger,
consolidation, or sale of more than 50% of the Company. Holders of
Series A preferred stock have the same voting rights as common
stockholders. The stock has a liquidation preference of $0.60 per
share plus any accrued and unpaid dividends in the event of
voluntary or involuntary liquidation of the Company. Dividends are
non-cumulative and payable at the annual rate of $0.036 per share
if, when, and as declared by, the Board of Directors. No dividends
have been declared on the Series A preferred stock.
Series B Preferred Stock
Series B preferred stock is currently unregistered. Each share
is convertible into 2/45 of a share of common stock at the election
of the holder or automatically upon the occurrence of certain
events including: sale of stock in an underwritten public offering,
if the offering results in net proceeds of $10,000,000, and the per
share price of common stock is at least $2.00; and the merger,
consolidation, or sale of common stock or sale of substantially all
of the Company's assets in which gross proceeds received are at
least $10,000,000. The Series B preferred stock has certain
liquidation and dividend rights prior and in preference to the
rights of the common stock and Series A preferred stock. The stock
has a liquidation preference of $2.00 per share together with an
amount equal to, generally, $0.14 per share compounded annually at
7% per year from the filing date, less any dividends paid.
Dividends on the Series B preferred stock are non-cumulative and
payable at the annual rate of $0.14 per share if, when, and as
declared by, the Board of Directors. No dividends have been
declared on the Series B preferred stock.
12. Stock Options
Stock Option Program Description
For the year ended December 31, 2012 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. The 2006 Plan has a total of
3,000,000 shares reserved for issuance, of which 270,000 and
1,405,000 were granted in 2012 and 2011, respectively.
Stock-based compensation expense related to stock options was
$171,000 and $368,000 for the years ended December 31, 2012 and
2011, respectively. As of December 31, 2012, the total compensation
cost related to non-vested awards not yet recognized is $21,000.
The remaining period over which the future compensation cost is
expected to be recognized is 29 months.
Stock-based compensation expense recognized in the Statement of
Operations for the years ended December 31, 2012 and 2011 has been
based on awards ultimately expected to vest. Forfeitures are
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. If the actual number of forfeitures differs from that
estimated by management, additional adjustments to compensation
expense may be required in future periods.
The following is a summary of changes to outstanding stock
options during the fiscal year ended December 31, 2012 and
2011:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Share Price Life Value(1)
Options
Outstanding at December 31,
2010................................................................................. 1,393,000 $ 2.06 6.92 $ 267,000
Granted................................................................................
.............................................. 1,405,000 $ 0.30 6.13 $ -
Exercised..............................................................................
.............................................. (36,000) $ 0.63 - $ -
Forfeited or
Cancelled..............................................................................
....................... (233,000) $ 2.36 - $ -
Outstanding at December 31,
2011................................................................................. 2,529,000 $ 1.07 6.09 $ -
Granted................................................................................
.............................................. 270,000 $ 0.08 3.96 $ -
Exercised...............................................................................
............................................. - $ - - $ -
Forfeited or
Cancelled..............................................................................
....................... (1.989,000) $ 1.11 - $ -
Outstanding at December 31,
2012................................................................................. 810,000 $ 0.64 4.06 $ -
==========
Exercisable at December 31,
2012.................................................................................... 574,000 $ 0.86 4.36 $ -
==========
Vested and expected to
vest(2).................................................................................
...... 810,000 $ 0.64 4.06 $ -
==========
____________
(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.
During 2011, the Company issued 36,000 shares of common stock
for $23,000 in cash related to 36,000 options exercised. During
2012 and 2011, the Company granted 270,000 and 1,405,000 options
for fair value of $13,500 and $329,000, respectively. During 2012
and 2011, 1,989,000 and 233,000 options were forfeited.
At December 31, 2012, there were 2,111,000 shares available for
grant under the 2006 plan. The exercise prices of the options
outstanding at December 31, 2012 ranged from $0.07 to $4.35. The
weighted-average grant date fair value of the options granted
during the years ended December 31, 2012 and 2011 was $0.05 and
$0.23, respectively.
Unvested share activity for the year ended December 31, 2012 is
summarized below:
Unvested Weighted-Average
Number Grant Date Fair
of Value
Options
Unvested balance at December 31,
2011....................................................................................................... 1,403,000 $ 0.26
Granted...................................................................................................
........................................................... 270,000 $ 0.05
Vested....................................................................................................
............................................................ (917,000) $ 0.19
Forfeited.................................................................................................
........................................................... (519,000) $ 0.29
Unvested balance at December 31,
2012....................................................................................................... 236,000 $ 0.04
The Company settles employee stock option exercises with newly
issued common shares. The table below presents information related
to stock option activity for the fiscal years ended December 31,
2012 and 2011:
Years Ended
December 31,
2012 2011
Total intrinsic value of stock options
exercised.......................................... $ - $ 25,000
Cash received from stock option exercises.................................................. $ - $ 23,000
Gross income tax benefit from the exercise
of stock options.................... $ - $ -
Valuation and Expense Information
The fair value of stock-based awards to officers and employees
is calculated using the Black-Scholes option pricing model. The
Black-Scholes model requires subjective assumptions, including
future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options
granted is calculated by using the SAB 107 "simplified method" of
estimating the expected term which is derived by taking the average
of the time to vesting and the full term of the option. The
risk-free rate selected to value any particular grant is based on
the bond equivalent yields that corresponds to the pricing term of
the grant effective as of the date of the grant. The expected
volatility is based on the historical volatility of the Company's
stock price. These factors could change in the future, affecting
the determination of stock-based compensation expense in future
periods.
The fair values of all stock options granted during the fiscal
years ended December 31, 2012 and 2011 were estimated on the date
of grant using the following range of assumptions:
Years Ended
December 31,
2012 2011
Expected life (in
years)................................................................................
................................................... 1.5- 6.5 2.5- 6.5
Average risk-free interest
rate.................................................................................
..................................... 1.66% 1.63%
Expected
volatility........................................................................... 108% - 107% -
............................................................... 135% 132%
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, 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.
13. 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
during the fiscal year ended December 31, 2012 and 2011:
Weighted
Number Weighted Average
of Average Remaining
Share Exercise Contractual
Options Price Life
----------- ------------ ---------------
Outstanding at December 31, 2010 - $ - -
Granted 11,250,000 $ 0.22 5.00
Exercised - $ - -
Forfeited or Cancelled - $ - -
---------- -------- ---------------
Outstanding at December 31, 2011 11,250,000 $ 0.22 5.00
========== ======== ===============
Granted - $ - -
Exercised - $ - -
Forfeited or Cancelled - $ - -
---------- -------- ---------------
Outstanding at December 31, 2012 11,250,000 $ 0.22 4.00
========== ======== ===============
Exercisable at December 31, 2012 - $ - -.
========== ======== ===============
14. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31,
consisted of the following:
2012 2011
Deferred tax assets
Net operating loss
carry-forwards........................................................
........................................... $ 25,079,000 $ 25,701,000
Stock based
compensation..........................................................
..................................................... 845,000 772,000
Other,
net..................................................................
.....................................................................
..... (406,000) (743,000)
27,518,000 25,730,000
Less valuation
allowance..............................................................
..................................................... (27,518,000) (25,730,000)
Net deferred tax
assets...............................................................
..................................................... $ - $ -
The Tax Reform Act of 1986 limits the use of net operating loss
carryforwards in certain situations where changed occur in the
stock ownership of a company. In the event the Company has had a
change in ownership, utilization of the carryforwards could be
restricted.
Deferred taxes arise from temporary differences in the
recognition of certain expenses for tax and financial reporting
purposes. The deferred tax assets have been offset by a valuation
allowance since management does not believe the recoverability of
these in future years is more likely than not to occur. The
valuation allowance increased by $1,788,000 in 2012 compared to a
decrease of $2,346,000 in 2011. As of December 31, 2012, the
Company had net operating loss carry forwards for federal and state
income tax purposes of approximately $66,515,000 and $50,493,000,
respectively. These operating loss carry forwards will expire in
2013 through 2032.
The provision for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (34% in 2012 and
2011) to income taxes as follows:
December December 31,
31,
2012 2011
Tax benefit computed at
34%......................................................................
............................ $ (2,800,000) $ (2,375,000)
Change in valuation
allowance................................................................
............................... 1,788,000 (2,346,000)
State tax (net of Federal
benefit).................................................................
............................ (480,000) (406,000)
Change in carryovers and tax
attributes...............................................................
................. 1,492,000 5,127,000
Net tax
benefit..................................................................
.......................................................... $ - $ -
The Company files federal income tax returns in the U.S. and in
various state jurisdictions. The Company has not been audited by
the Internal Revenue Service or any state for income taxes. The
Company reviews its recognition threshold and measurement process
for recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. The Company reviews
all material tax positions for all years open to statute to
determine whether it is more likely than not that the positions
taken would be sustained based on the technical merits of those
positions. The Company did not recognize any adjustments for
uncertain tax positions as of and during the years ended December
31, 2012 and 2011.
15. Employee Benefit Plan
The Company has a 401(k) profit sharing plan covering
substantially all employees. Eligible employees may elect to
contribute a percentage of their annual compensation, as defined,
to the plan. The Company may also elect to make discretionary
contributions. For the years ended December 31, 2012 and 2011, the
Company did not make any contributions to the plan. On February 28,
2013, the Company commenced closure of the 401(k) plan, which we
anticipate will be completed during the second quarter of 2013.
16. Geographic Area Data
The Company operates as a single reportable segment and
attributes revenues to countries based upon the location of the
entity originating the sale. Revenues by geographic area are as
follows:
2012 2011
United
States............................................................................
........................................................................... $ 142,000 $ 4,474,000
China.............................................................................
..................................................................................
...... 716,000 1,075,000
United
Kingdom...........................................................................
....................................................................... 243,000 1,070,000
Japan.............................................................................
..................................................................................
...... 2,000 3,000
Total.............................................................................
..................................................................................
....... $ 1,103,000 $ 6,622,000
17. Concentration
During the years ended December 31, 2012 and 2011, the Company's
sales were concentrated with a few large customers. Sales to two
customers comprised 63% and 20% of total revenues and two customers
accounted for 61% and 39% of gross accounts receivable,
respectively. During the year ended December 31, 2011, sales to
four customers comprised 52%, 16%, 16% and 10% of total revenues
and two customers accounted for 62% and 37% of gross accounts
receivable, respectively. The Company performs ongoing credit
evaluations of certain customers' financial condition and generally
requires no collateral from its customers. The Company's inventory
purchases are concentrated with certain key vendors that produce
components according to our engineering specifications. During the
year ended December 31, 2012, 39% of purchases were concentrated
with one vendor and during the year ended December 31, 2011, 16% of
purchases were concentrated with one vendor.
18. Subsequent Events
The Company has evaluated subsequent events and has determined
that there were no subsequent events to recognize or disclose in
these financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 December 31, 2012. Based on that evaluation, our
management, including the Chief Executive Officer and Chief
Financial Officer, concluded that as of December 31, 2012, 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.
Management's 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.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision and with the participation of management,
including the Company's Chief Executive Officer and Chief Financial
Officer, the Company conducted an evaluation of the effectiveness
of its internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
This evaluation included an assessment of the design of the
Company's internal control over financial reporting and testing of
the operational effectiveness of its internal control over
financial reporting.
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 December 31, 2012, 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 December 31, 2012.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. We were not required to have, nor have we
engaged our independent registered public accounting firm, to
perform an audit of internal control over financial reporting
pursuant to the rules of the Securities and Exchange Commission
that permits us to provide only management's report in this annual
report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting during the quarter ended December 31, 2012 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR IRMATMBJBBTJ
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