e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ending September 30, 2010
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file no. 1-33001
ENOVA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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| California
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95-3056150 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
1560 West 190th Street, Torrance, California 90501
(Address of principal executive offices, including zip code)
(310) 527-2800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As of October 31, 2010, there were 31,431,564 shares of common stock outstanding.
ENOVA SYSTEMS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
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| ITEM 1. |
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FINANCIAL STATEMENTS |
ENOVA SYSTEMS, INC.
BALANCE SHEETS
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September 30, |
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December 31, |
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2010 |
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2009 |
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(unaudited) |
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| ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
9,478,000 |
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$ |
13,078,000 |
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Short term investments |
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200,000 |
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200,000 |
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Accounts receivable, net of allowance for
doubtful accounts of $31,000 as of September
30, 2010 and December 31, 2009 |
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1,275,000 |
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1,442,000 |
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Inventories and supplies, net |
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4,509,000 |
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5,605,000 |
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Prepaid expenses and other current assets |
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351,000 |
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263,000 |
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Total current assets |
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15,813,000 |
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20,588,000 |
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Long term accounts receivable |
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215,000 |
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— |
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Property and equipment, net |
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1,260,000 |
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1,363,000 |
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Intangible assets, net |
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57,000 |
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60,000 |
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Total assets |
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$ |
17,345,000 |
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$ |
22,011,000 |
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| LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
416,000 |
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$ |
415,000 |
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Deferred revenues |
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54,000 |
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357,000 |
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Accrued payroll and related expenses |
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803,000 |
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277,000 |
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Other accrued liabilities |
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919,000 |
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1,287,000 |
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Current portion of notes payable |
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66,000 |
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68,000 |
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Total current liabilities |
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2,258,000 |
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2,404,000 |
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Accrued interest payable |
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1,135,000 |
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1,074,000 |
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Notes payable, net of current portion |
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1,290,000 |
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1,286,000 |
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Total liabilities |
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4,683,000 |
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4,764,000 |
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Stockholders’ equity: |
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Series A convertible preferred stock — no par
value, 30,000,000 shares authorized; 2,652,000
shares issued and outstanding; liquidating
preference at $0.60 per share as of September
30, 2010 and December 31, 2009 |
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530,000 |
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530,000 |
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Series B convertible preferred stock — no par
value, 5,000,000 shares authorized; 546,000
shares issued and outstanding; liquidating
preference at $2 per share as of September 30,
2010 and December 31, 2009 |
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1,094,000 |
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1,094,000 |
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Common Stock — no par value, 750,000,000 shares
authorized; 31,432,000 and 31,404,000 shares
issued and outstanding as of September 30, 2010
and December 31, 2009, respectively |
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144,075,000 |
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143,995,000 |
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Additional paid-in capital |
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8,764,000 |
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8,336,000 |
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Accumulated deficit |
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(141,801,000 |
) |
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(136,708,000 |
) |
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Total stockholders’ equity |
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12,662,000 |
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17,247,000 |
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Total liabilities and stockholders’ equity |
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$ |
17,345,000 |
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$ |
22,011,000 |
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The accompanying notes are an integral part of these financial statements.
3
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues |
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$ |
1,904,000 |
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$ |
2,890,000 |
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$ |
4,887,000 |
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$ |
4,154,000 |
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Cost of revenues |
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1,615,000 |
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2,532,000 |
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4,225,000 |
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3,724,000 |
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Gross income |
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289,000 |
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358,000 |
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662,000 |
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430,000 |
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Operating expenses |
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Research and development |
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483,000 |
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310,000 |
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1,166,000 |
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899,000 |
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Selling, general & administrative |
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1,520,000 |
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1,308,000 |
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4,548,000 |
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4,373,000 |
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Total operating expenses |
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2,003,000 |
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1,618,000 |
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5,714,000 |
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5,272,000 |
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Operating loss |
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(1,714,000 |
) |
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(1,260,000 |
) |
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(5,052,000 |
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(4,842,000 |
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Other income and (expense) |
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Interest and other income (expense) |
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(36,000 |
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(24,000 |
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(41,000 |
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(128,000 |
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Loss from non-consolidated joint venture |
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— |
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— |
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— |
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(4,000 |
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Total other income (expense) |
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(36,000 |
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(24,000 |
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(41,000 |
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(132,000 |
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Net loss |
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$ |
(1,750,000 |
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$ |
(1,284,000 |
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$ |
(5,093,000 |
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$ |
(4,974,000 |
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Basic and diluted loss per share |
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$ |
(0.06 |
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$ |
(0.06 |
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$ |
(0.16 |
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$ |
(0.24 |
) |
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Weighted average number of shares outstanding |
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31,430,000 |
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20,969,000 |
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31,417,000 |
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20,904,000 |
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The accompanying notes are an integral part of these financial statements.
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Nine Months Ended |
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September 30, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,093,000 |
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$ |
(4,974,000 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Inventory reserve |
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221,000 |
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378,000 |
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Depreciation and amortization |
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409,000 |
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463,000 |
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Loss on asset disposal |
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— |
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6,000 |
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Equity in losses of non-consolidated joint venture |
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— |
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10,000 |
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Gain from dissolution of non-consolidated joint venture |
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— |
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(6,000 |
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Issuance of common stock for director services |
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— |
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135,000 |
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Issuance of common stock for employee services |
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71,000 |
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148,000 |
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Stock option expense |
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428,000 |
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329,000 |
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(Increase) decrease in: |
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Accounts receivable |
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167,000 |
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(1,022,000 |
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Inventory and supplies |
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875,000 |
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1,742,000 |
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Prepaid expenses and other current assets |
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(88,000 |
) |
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(93,000 |
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Long term accounts receivable |
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(215,000 |
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— |
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Increase (decrease) in: |
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Accounts payable |
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1,000 |
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237,000 |
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Deferred revenues |
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(303,000 |
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109,000 |
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Accrued payroll and related expenses |
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526,000 |
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6,000 |
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Other accrued liabilities |
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(368,000 |
) |
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(531,000 |
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Accrued interest payable |
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61,000 |
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62,000 |
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Net cash used in operating activities |
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(3,308,000 |
) |
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(3,001,000 |
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Cash flows from investing activities: |
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Purchases of short-term investments |
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— |
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(200,000 |
) |
Maturities of short-term investments |
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— |
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2,000,000 |
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Proceeds from the dissolution of non-consolidated joint venture |
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— |
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137,000 |
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Purchases of property and equipment |
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(277,000 |
) |
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(111,000 |
) |
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Net cash provided by (used in) investing activities |
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(277,000 |
) |
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1,826,000 |
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Cash flows from financing activities: |
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Payments on notes payable |
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(24,000 |
) |
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(54,000 |
) |
Proceeds from the exercise of stock options |
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9,000 |
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4,000 |
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Net cash used in financing activities |
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(15,000 |
) |
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(50,000 |
) |
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Net decrease in cash and cash equivalents |
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(3,600,000 |
) |
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(1,225,000 |
) |
Cash and cash equivalents, beginning of period |
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13,078,000 |
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5,324,000 |
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Cash and cash equivalents, end of period |
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$ |
9,478,000 |
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$ |
4,099,000 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
5,000 |
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$ |
5,000 |
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Assets acquired through financing arrangements |
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$ |
26,000 |
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$ |
57,000 |
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Net assets acquired in exchange for Enova’s interest in joint venture: |
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Inventory |
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$ |
— |
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$ |
1,075,000 |
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Prepaid expenses and other current assets |
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$ |
— |
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$ |
104,000 |
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Reduction of related party payable, net of receivable |
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$ |
— |
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$ |
32,000 |
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The accompanying notes are an integral part of these financial statements.
5
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Three and nine months ended September 30, 2010 and 2009
1. Description of the Company and its Business
Enova Systems, Inc. (“Enova” “We” or the “Company”) changed its name in July 2000. The Company
was previously known as U.S. Electricar, Inc., a California corporation, which was incorporated on
July 30, 1976. The Company is a globally recognized leader as a supplier of efficient,
environmentally-friendly digital power components and systems products, in conjunction with
associated engineering services. The Company’s core competencies are focused on the
commercialization of power management and conversion systems for mobile and stationary
applications.
2. Summary of Significant Accounting Policies
Basis of Presentation — Interim Financial Statements
The financial information as of September 30, 2010 and 2009 and for the three and nine months
ended September 30, 2010 and 2009 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) that the Company considers necessary for a fair statement of its
financial position at such dates and the operating results and cash flows for those periods. The
year-end balance sheet data was derived from audited financial statements, and certain information
and note disclosures normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant to SEC rules or
regulations; however, the Company believes the disclosures made are adequate to make the
information presented not misleading.
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Although management believes these estimates and assumptions are adequate, actual results could
differ from the estimates and assumptions used.
The results of operations for the interim periods presented are not necessarily indicative of
the results of operations to be expected for the fiscal year. These interim financial statements
should be read in conjunction with the audited financial statements for the year ended December 31,
2009, which are included in the Company’s Annual Report on Form 10-K for the year then ended.
Fair Value of Financial Instruments
The carrying amount of financial instruments, including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value
due to the short maturity of these instruments. Short-term investments consist of certificates of
deposits. The carrying value of all other financial instruments is representative of their fair
values. The recorded values of notes payable and long-term debt approximate their fair values as
interest rates approximate market rates.
Revenue Recognition
The Company manufactures proprietary products and other products based on design
specifications provided by its customers. The Company recognizes revenue only when all of the
following criteria have been met:
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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. |
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• |
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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. |
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• |
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The Fee for the Arrangement is Fixed or Determinable — Prior to recognizing revenue, a
customer’s fee is either fixed or |
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determinable under the terms of the written contract. Fees for professional consulting
services, engineering services and equipment sales are fixed under the terms of the written
contract. The customer’s fee is negotiated at the outset of the arrangement and is not
subject to refund or adjustment during the initial term of the arrangement. |
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• |
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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. |
We recognize revenue from milestone payments over the remaining minimum period of performance
obligations.
The Company also recognizes engineering and construction contract revenues using the
percentage-of-completion method, based primarily on contract costs incurred to date compared with
total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain
cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues
when management believes that the company is responsible for the ultimate acceptability of the
project. Contracts are segmented between types of services, such as engineering and construction,
and accordingly, gross margin related to each activity is recognized as those separate services are
rendered.
Changes to total estimated contract costs or losses, if any, are recognized in the period in
which they are determined. Claims against customers are recognized as revenue upon settlement.
Revenues recognized in excess of amounts received are classified as current assets. Amounts billed
to clients in excess of revenues recognized to date are classified as current liabilities on
contracts.
Changes in project performance and conditions, estimated profitability, and final contract
settlements may result in future revisions to engineering and development contract costs and
revenue.
These accounting policies were applied consistently for all periods presented. Our operating
results would be affected if other alternatives were used. Information about the impact on our
operating results is included in the footnotes to our financial statements.
Several other factors related to the Company may have a significant impact on our operating
results from year to year. For example, the accounting rules governing the timing of revenue
recognition related to product contracts are complex and it can be difficult to estimate when we
will recognize revenue generated by a given transaction. Factors such as acceptance of services
provided, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of
our products often cause revenues related to sales generated in one period to be deferred and
recognized in later periods. For arrangements in which services revenue is deferred, related direct
and incremental costs may also be deferred.
Inventory
Inventories are priced at the lower of cost or market utilizing first-in, first-out (FIFO)
cost flow assumption. We maintain a perpetual inventory system and continuously record the quantity
on-hand and standard cost for each product, including purchased components, subassemblies and
finished goods. We maintain the integrity of perpetual inventory records through periodic physical
counts of quantities on hand. Finished goods are reported as inventories until the point of
transfer to the customer. Generally, title transfer is documented in the terms of sale.
Inventory reserve
We maintain an allowance against inventory for the potential future obsolescence or excess
inventory. A substantial decrease in expected demand for our products, or decreases in our selling
prices could lead to excess or overvalued inventories and could require us to substantially
increase our allowance for excess inventory. If future customer demand or market conditions are
less favorable than our projections, additional inventory write-downs may be required, and would be
reflected in cost of revenues in the period the revision is made.
7
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. The assessment of the ultimate realization of accounts
receivable including the current credit-worthiness of each customer is subject to a considerable
degree to the judgment of our management. If the financial condition of the Company’s customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required.
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 eighteen months from
the date of delivery, subject to standard limitations for equipment that has been altered by other
than Enova 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 eighteen month period. The warranty liability is evaluated on an ongoing
basis for adequacy and may be adjusted as additional information regarding expected warranty costs
become known.
Stock Based Compensation
We measure the compensation cost for stock-based awards classified as equity at their fair
value on the date of grant and recognize compensation expense over the service period for awards
expected to vest, net of estimated forfeitures.
See Note 10 Stock Options for further information on stock-based compensation expense.
3. Inventory
Inventory, consisting of materials, labor and manufacturing overhead, is stated at the lower
of cost (first-in, first-out) or market and consisted of the following at:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Raw Materials |
|
$ |
4,427,000 |
|
|
$ |
6,341,000 |
|
Work In Progress |
|
|
895,000 |
|
|
|
132,000 |
|
Finished Goods |
|
|
189,000 |
|
|
|
111,000 |
|
Reserve for Obsolescence |
|
|
(1,002,000 |
) |
|
|
(979,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
4,509,000 |
|
|
$ |
5,605,000 |
|
|
|
|
|
|
|
|
8
4. Property and Equipment
Property and equipment consisted of the following at:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Computers and software |
|
$ |
589,000 |
|
|
$ |
556,000 |
|
Machinery and equipment |
|
|
879,000 |
|
|
|
795,000 |
|
Furniture and office equipment |
|
|
98,000 |
|
|
|
98,000 |
|
Demonstration vehicles and buses |
|
|
650,000 |
|
|
|
507,000 |
|
Leasehold improvements |
|
|
1,348,000 |
|
|
|
1,348,000 |
|
Construction in process |
|
|
51,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
3,615,000 |
|
|
|
3,312,000 |
|
Less accumulated depreciation and amortization |
|
|
(2,355,000 |
) |
|
|
(1,949,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
1,260,000 |
|
|
$ |
1,363,000 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $406,000 and $459,000 for the nine months ended
September 30, 2010 and 2009, respectively, and within those total expenses, the amortization of
leasehold improvements was $201,000 and $202,000 for the nine months ended September 30, 2010 and
2009, respectively. Depreciation and amortization expense was $135,000 and $143,000 for the three
months ended September 30, 2010 and 2009, respectively, and within those total expenses, the
amortization of leasehold improvements was $67,000 for each of the three months ended September 30,
2010 and 2009.
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following at:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Accrued Inventory Received |
|
$ |
162,000 |
|
|
$ |
334,000 |
|
Accrued Professional Services |
|
|
245,000 |
|
|
|
395,000 |
|
Accrued Warranty |
|
|
512,000 |
|
|
|
558,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
919,000 |
|
|
$ |
1,287,000 |
|
|
|
|
|
|
|
|
Accrued warranty consisted of the following activities during the nine months ended September
30:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Balance at beginning of year |
|
$ |
558,000 |
|
|
$ |
545,000 |
|
Accruals for warranties issued during the period |
|
|
346,000 |
|
|
|
273,000 |
|
Warranty claims |
|
|
(392,000 |
) |
|
|
(136,000 |
) |
|
|
|
|
|
|
|
Balance at end of quarter |
|
$ |
512,000 |
|
|
$ |
682,000 |
|
|
|
|
|
|
|
|
Accrued warranty consisted of the following activities during the three months ended September
30:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Balance at beginning of quarter |
|
$ |
493,000 |
|
|
$ |
530,000 |
|
Accruals for warranties issued during the period |
|
|
139,000 |
|
|
|
202,000 |
|
Warranty claims |
|
|
(120,000 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
Balance at end of quarter |
|
$ |
512,000 |
|
|
$ |
682,000 |
|
|
|
|
|
|
|
|
6. Intangible Assets
Intangible assets consist of legal fees directly associated with patent licensing. The Company
has been granted three patents. These patents have been capitalized and are being amortized on a
straight-line basis over a period of 20 years.
Intangible assets consisted of the following at:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Patents |
|
$ |
93,000 |
|
|
$ |
93,000 |
|
Less accumulated amortization |
|
|
(36,000 |
) |
|
|
(33,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
57,000 |
|
|
$ |
60,000 |
|
|
|
|
|
|
|
|
9
Amortization expense charged to operations was $1,000 and $3,000 for the three and nine months
ended September 30, 2010 and 2009, respectively.
7. Notes Payable, Long-Term Debt and Other Financing
Notes payable consisted of the following at:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Secured note payable
to Credit Managers
Association of
California, bearing
interest at prime plus 3%
(6.25% as of September
30, 2010), and is
adjusted annually in
April through maturity.
Principal and unpaid
interest due in April
2016. A sinking fund
escrow may be funded with
10% of future equity
financing, as defined in
the Agreement |
|
$ |
1,238,000 |
|
|
$ |
1,238,000 |
|
|
|
|
|
|
|
|
|
|
Secured note payable to a
financial institution in
the original amount of
$23,000, bearing interest
at 11.70%, payable in 36
equal monthly
installments of principal
and interest through
October 1, 2010 |
|
|
1,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
Secured note payable to
Coca Cola Enterprises in
the original amount of
$40,000, bearing interest
at 10% per annum.
Principal and unpaid
interest due on demand |
|
|
40,000 |
|
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
Secured note payable to a
financial institution in
the original amount of
$39,000, bearing interest
at 4.99% per annum,
payable in 48 equal
monthly installments of
principal and interest
through September 1, 2011 |
|
|
10,000 |
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
27,000 |
|
|
|
32,000 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
16,000 |
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
24,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
1,356,000 |
|
|
|
1,354,000 |
|
Less current portion |
|
|
(66,000 |
) |
|
|
(68,000 |
) |
|
|
|
|
|
|
|
Long-term portion |
|
$ |
1,290,000 |
|
|
$ |
1,286,000 |
|
|
|
|
|
|
|
|
As of September 30, 2010 and December 31, 2009, the balance of long term interest payable with
respect to the Credit Managers Association of California note amounted to $1,112,000 and
$1,054,000, respectively. Interest expense on notes payable amounted to approximately $65,000 and
$66,000 during the nine months ended September 30, 2010 and 2009, respectively. Interest expense on
notes payable amounted to approximately $22,000 during each of the three months ended September 30,
2010 and 2009.
8. Revolving Credit Agreement
The Company entered into a secured revolving credit facility with a financial institution (the
“Credit Agreement”) for $200,000, which is secured by a $200,000 certificate of deposit. The
facility expired on June 30, 2010 and was renewed for a period of 3 years and 6 months with the
same terms on July 1, 2010 with an expiration of 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 also renewed the $200,000 irrevocable
letter of credit for the full amount of the credit facility in favor of the Company’s landlord,
Sunshine Distribution LP, with respect to the lease of the Company’s corporate headquarters at 1560
West 190th Street, Torrance, California.
10
9. Stockholders’ Equity
During the nine months ended September 30, 2010 and 2009, the Company issued shares of common
stock valued at $71,000 and $283,000, respectively, to directors and employees as compensation
based upon the trading value of the common stock on the date of issuance. During the three months
ended September 30, 2010 and 2009, the Company issued shares of common stock valued at $24,000 and
$69,000, respectively, to directors and employees as compensation based upon the trading value of
the common stock on the date of issuance.
10. Stock Options
Stock Option Program Description
As of September 30, 2010, 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, executives and directors
for their long term contributions to the Company and to provide incentives for them to remain with
the Company. The number and frequency of equity compensation grants are based on competitive
practices, operating results of the company, and government regulations.
The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which 1,706,000 shares
were available for grant as of September 30, 2010. All stock options have terms of between five and
ten years and generally vest and become fully exercisable from one to three years from the date of
grant. As of September 30, 2010, the Company had 1,316,000 options outstanding which were comprised
of issuances under the 1996 Plan and the 2006 Plan of 73,000 and 1,243,000, respectively.
As of September 30, 2010, the total compensation cost related to non-vested awards not yet
recognized is $470,000. The weighted average period over which the future compensation cost is
expected to be recognized is 17 months. The aggregate intrinsic value represents the total pretax
intrinsic value, which is the difference between the Company’s closing stock price on the last
trading day of the third quarter of fiscal 2010 of $0.65 and the exercise price times the number of
shares that would have been received by the option holders if they had exercised their options on
September 30, 2010. This amount will change based on the fair market value of the Company’s stock.
The following table summarizes information about stock options outstanding and exercisable at
September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
| |
|
Number of Share |
|
|
Weighted Average |
|
|
Contractual Term |
|
|
Aggregate |
|
| |
|
Options |
|
|
Exercise Price |
|
|
in Years |
|
|
Intrinsic Value |
|
Outstanding at December 31, 2009 |
|
|
1,410,000 |
|
|
$ |
2.10 |
|
|
|
7.65 |
|
|
|
|
|
Granted |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
Exercised |
|
|
(28,000 |
) |
|
$ |
0.33 |
|
|
|
— |
|
|
|
|
|
Forfeited or Cancelled |
|
|
(66,000 |
) |
|
$ |
2.07 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
1,316,000 |
|
|
$ |
2.14 |
|
|
|
6.97 |
|
|
$ |
43,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010 |
|
|
823,000 |
|
|
$ |
2.47 |
|
|
|
6.65 |
|
|
$ |
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exercise prices of the options outstanding at September 30, 2010 ranged from $0.21 to
$4.35. The weighted average grant-date fair value of options granted during the nine months ended
September 30, 2009 was $0.57. There were no new options granted during the nine months ended
September 30, 2010. The Company’s policy is to issue shares from its authorized shares upon the
exercise of stock options.
11
The fair values of all stock options granted during the three and nine months ended September
30, 2010 and 2009 were estimated on the date of grant using the Black-Scholes option-pricing model
with the following range of assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the nine months ended |
|
For the three months ended |
| |
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
| |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Expected life (in years) |
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
Average risk-free interest rate |
|
|
— |
|
|
|
2 |
% |
|
|
— |
|
|
|
— |
|
Expected volatility |
|
|
— |
|
|
|
194 |
% |
|
|
— |
|
|
|
— |
|
Expected dividend yield |
|
|
— |
|
|
|
0 |
% |
|
|
— |
|
|
|
— |
|
Forfeiture rate |
|
|
— |
|
|
|
3 |
% |
|
|
— |
|
|
|
— |
|
The estimated fair value of grants of stock options to nonemployees of the Company is charged
to expense in the financial statements. These options vest in the same manner as the employee
options granted under each of the option plans as described above.
11. Concentrations
The Company’s trade receivables are concentrated with few customers. The Company performs
credit evaluations on their customers’ financial condition. Concentrations of credit risk, with
respect to accounts receivable, exist to the extent of amounts presented in the financial
statements. Three customers represented 40%, 40% and 10%, respectively, of total gross accounts
receivable at September 30, 2010, and two customers represented 77% and 11%, respectively, of total
gross accounts receivable at December 31, 2009.
The Company’s revenues are concentrated with few customers. For the three and nine months
ended September 30, 2010, two customers represented 51% and 32% of gross revenues and three
customers represented 39%, 33% and 14% of gross revenues, respectively. For the three and nine
months ended September 30, 2009, three customers represented 75%, 12% and 10% of gross revenues and
four customers represented 58%, 15%, 14% and 10% of gross revenues, respectively.
12. Recent Accounting Pronouncements
There have been no recent accounting pronouncements issued applicable to Enova Systems, Inc. other
than those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains statements indicating expectations about future
performance and other forward-looking statements that involve risks and uncertainties. We usually
use words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “future,” “intend,” “potential,” or “continue” or the negative of these terms or similar
expressions to identify forward-looking statements. These statements appear throughout this
Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or
expectation, primarily with respect to our operations and related industry developments. Examples
of these statements include, but are not limited to, statements regarding the following: our future
operating expenses, our future losses, our future expenditures for research and development and the
sufficiency of our cash resources. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual
results could differ materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us and described in our Annual Report on Form 10-K for the
year ended December 31, 2009.
The following discussion and analysis should be read in conjunction with the unaudited interim
financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form
10-Q and with the financial statements and notes thereto and Management’s Discussion and Analysis
of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for
the year ended December 31, 2009.
Overview
Enova believes it is a leader in the development and production of proprietary, commercial
digital power management systems for transportation vehicles and stationary power generation
systems. Power management systems control and monitor electric power in an
12
automotive or commercial application such as an automobile or a stand-alone power generator.
Electric drive systems are comprised of an electric motor, an electronics control unit, a gear unit
and batteries which power an electric vehicle. Hybrid systems, which are similar to pure electric
drive systems, contain an internal combustion engine in addition to the electric motor, eliminating
external recharging of the battery system. Our hybrid systems can alternatively utilize a hydrogen
fuel cell as a power source to recharge the battery system. Stationary power systems utilize
similar components to those which are in a mobile drive system in addition to other elements.
A fundamental element of Enova’s strategy is to develop and produce advanced proprietary
software, firmware and hardware for applications in these alternative power markets. Our focus is
digital power conversion, power management, and system integration, focusing chiefly on vehicle
power generation.
Specifically, we develop, design and produce drive systems and related components for
electric, hybrid-electric and fuel cell vehicles. We also develop, design and produce power
management and power conversion components for stationary distributed power generation systems.
Additionally, we perform research and development (“R&D”) to augment and support others’ and our
own related product development efforts.
Our product development strategy is to design and introduce to market successively advanced
products, each based on our core technical competencies. In each of our product/market segments, we
provide products and services to leverage our core competencies in digital power management, power
conversion and system integration. We believe that the underlying technical requirements shared
among the market segments will allow us to more quickly transition from one emerging market to the
next, with the goal of capturing early market share.
Enova’s primary market focus centers on both electric series and parallel hybrid medium and
heavy-duty drive systems for multiple vehicle and marine applications. A series hybrid system is
one where only the electric motor connects to the drive shaft; a parallel hybrid system is one
where both the internal combustion engine and the electric motor are connected to the drive shaft.
We believe series-hybrid and parallel-hybrid medium and heavy-duty drive system sales offer Enova
the greatest return on investment in both the short and long term. We believe the medium and
heavy-duty hybrid market’s best chances of significant growth lie in identifying and pooling the
largest possible numbers of early adopters in high-volume applications. By aligning ourselves with
key customers in our target markets, we believe that alliances will result in the latest technology
being implemented and customer requirements being met, with an optimized level of additional time
or expense. As we penetrate more market areas, we are continually refining both our market strategy
and our product line to maintain our leading edge in power management and conversion systems for
mobile applications.
Our website, www.enovasystems.com, contains up-to-date information on our company, our
products, programs and current events. Our website is a prime focal point for current and
prospective customers, investors and other affiliated parties seeking data on our business.
Recent Developments
In February 2010, Enova was awarded an exclusive supplier contract with the U.S. General
Services Administration (“GSA”), which provides vehicles for government agencies and armed forces.
Under that contract, Enova will supply our Zero Emissions (“Ze”) all-electric walk-in step vans to
the GSA under the Cargo Vans category. Enova has partnered with Freightliner Custom Chassis
Corporation (“Freightliner”), a subsidiary of Daimler Trucks North America LLC, to integrate and
deploy the Ze technology with their MT-45 walk-in van chassis.
Also in February 2010, one of our key customers, Smith Electric Vehicles’ (“Smith”), announced
the placement of their Smith Newton product offering in the GSA Medium and Heavy Duty Vans category
with a gross vehicle weight rating (“GVWR”) of 25,500 lbs. The Smith Newton is an exclusive,
all-electric medium and heavy duty truck offering on the GSA product menu. This was augmented by
Navistar’s continued leadership in the American school bus market with its exclusive GSA contract
to supply hybrid school buses.
In March 2010, Smith was selected to receive an additional $22 million in grant funding from
the Department of Energy (“DOE”), bringing the total DOE grant funding available to Smith to $32
million toward the production of all-electric, zero emissions commercial trucks. Smith has selected
Enova as the exclusive drive system supplier for its flagship “Newton” route delivery vehicles,
which incorporates Enova’s 120kW drive system controller. The DOE grant is being used to help
offset Smith’s future vehicle development cost and to incentivize its customers to participate in a
commercial electric vehicle demonstration program.
13
In April 2010, Enova expanded its all electric Ze drive system offerings to include a Ford
F-150 utility truck and Chevrolet Express cargo van. The Ford F-150 is the highest sales volume
pick-up truck in the United States and has been integrated with a 90kW all-electric Ze drive
system. The Chevy Express cargo van is one of the top selling domestic fleet vans in its vehicle
classification and has been integrated with a 120kW all-electric Ze drive system. The all-electric
Ford F-150 is being evaluated for a series of 3rd party testing at a nationally recognized clean
vehicle testing center that started in June. Testing includes a range of dynamometer and on-road
testing programs.
In June 2010, the California Air Resources Board (“CARB”) continued the Hybrid Voucher
Incentive Program (“HVIP”) by approving the State of California’s “AB 118 Air Quality Improvement
Program Funding Plan for Fiscal Year 2010-11” for $25 million. The HVIP was designed to stimulate
the purchase of both hybrid and zero-emission commercial trucks and buses by offsetting a portion
of the incremental cost for these commercial vehicles through rebates. Currently, Navistar’s Hybrid
School Buses with Enova’s Charge Depleting systems are eligible for rebates of between $20,000 and
$30,000 depending on the weight class. The Smith Newton, which is powered by Enova’s Ze
all-electric drive system, is also eligible for a $20,000 rebate.
Also in June 2010, Enova partnered with Remy International, Inc. (“Remy”) to develop a new
electric drive system based on the new Enova Omni Controller and the patented Remy High Voltage
Hairpin (“HVH”) motor. The Omni Controller is Enova’s next-generation 200kVA-capable power inverter
for hybrid-electric and all-electric medium and heavy-duty commercial vehicles. The Remy HVH
Permanent Magnet Motor maximizes fuel efficiency and offers class leading torque and power density.
Together, the Remy/Enova electric drive system aims to increase the value proposition with more
alternative propulsion energy and thus more miles on the road.
In September 2010, Freightliner unveiled an Enova-powered all-electric walk-in van (MT-EV or
WIV) at the 2010 Hybrid Truck Users Forum (HTUF). The new, unique aerodynamic body from Morgan
Olson, is projected to have a favorable economic payback. Freightliner makes 80% of all chassis in
the parcel delivery segment. The MT-EV all-electric chassis utilizes Enova Systems’ 120kW
all-electric drive system technology. Powered by Tesla Motors’ lithium-ion batteries, the chassis
is 100 percent electric, including its HVAC system, making it the only fully featured WIV chassis
in the industry to be completely electrically powered. Freightliner is the first company within the
industry to utilize Tesla batteries for commercial applications.
Enova has incurred significant operating losses in the past. As of September 30, 2010, we had
an accumulated deficit of approximately $141.8 million. We expect to incur additional operating
losses until we achieve a level of product sales sufficient to cover our operating and other
expenses. However, the Company believes that its business outlook will improve, especially in light
of government policies being implemented in the United States, China and the United Kingdom
regarding the curbing of green house gas emissions in the future as well as intentions to provide
government incentives that may induce consumption of our products and services.
We continue to receive greater recognition from both governmental and private industry with
regards to both commercial and military application of our hybrid drive systems and fuel cell power
management technologies. Although we believe that current negotiations with above named parties may
result in additional production contracts during 2010 and beyond, there are no assurances that such
additional agreements will be realized.
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of estimates and assumptions
relating to the reporting of results of operations and financial condition in the preparation of
its financial statements in conformity with accounting principles generally accepted in the United
States of America. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Estimates and assumptions include, but are not
limited to, customer receivables, inventories, warranty costs, stock based compensation, fixed
asset lives, contingencies and litigation. There have been no material changes in estimates or
assumptions compared to our most recent Annual Report for the fiscal year ended December 31, 2009.
The following represents a summary of our critical accounting policies, defined as those
policies that we believe: (a) are the most important to the portrayal of our financial condition
and results of operations and (b) involve inherently uncertain issues which require management’s
most difficult, subjective or complex judgments.
Cash and cash equivalents — Cash consists of currency held at reputable financial institutions.
Short-term, highly liquid investments with an original maturity of three months or less are
considered cash equivalents.
Inventory — Inventories are priced at the lower of cost or market utilizing first-in, first-out
(“FIFO”) cost flow assumption. We maintain a perpetual inventory system and continuously record
the quantity on-hand and standard cost for each product, including
14
purchased components, subassemblies and finished goods. We maintain the integrity of perpetual
inventory records through periodic physical counts of quantities on hand. Finished goods are
reported as inventories until the point of transfer to the customer. Generally, title transfer is
documented in the terms of sale.
Inventory reserve — We maintain an allowance against inventory for the potential future
obsolescence or excess inventory. A substantial decrease in expected demand for our products, or
decreases in our selling prices could lead to excess or overvalued inventories and could require
us to substantially increase our allowance for excess inventory. If future customer demand or
market conditions are less favorable than our projections, additional inventory write-downs may
be required, and would be reflected in cost of revenues in the period the revision is made.
Allowance for doubtful accounts — We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments. The assessment of
the ultimate realization of accounts receivable including the current credit-worthiness of each
customer is subject to a considerable degree to the judgment of our management. If the financial
condition of the Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Stock-based Compensation — Stock-based compensation expense is calculated in accordance with
FASB ASC 718, “Share-Based Payment” (“FASB ASC 718”) for all share-based payment awards made to
employees and directors. The Company measures the compensation cost for stock-based awards
classified as equity at their fair value on the date of grant and recognizes compensation expense
over the service period for awards expected to vest, net of estimated forfeitures.
This pronouncement requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including employee stock options to
be based on estimated fair values.
Revenue recognition — The Company is required to make judgments based on historical experience
and future expectations, as to the reliability of shipments made to its customers. These
judgments are required to assess the propriety of the recognition of revenue based on ASC 605 and
related guidance. The Company makes these assessments based on the following factors: i)
customer-specific information, ii) return policies, and iii) historical experience for issues not
yet identified.
The Company manufactures proprietary products and other products based on design specifications
provided by its customers. Revenue from sales of products are generally recognized at the time
title to the goods and the benefits and risks of ownership passes to the customer which is
typically when products are shipped based on the terms of the customer purchase agreement.
Revenue relating to long-term fixed price contracts is recognized using the percentage of
completion method. Under the percentage of completion method, contract revenues and related costs
are recognized based on the percentage that costs incurred to date bear to total estimated costs.
Changes in job performance, estimated profitability and final contract settlements may result in
revisions to cost and revenue, and are recognized in the period in which the revisions are
determined. Contract costs include all direct materials, subcontract and labor costs and other
indirect costs. General and administrative costs are charged to expense as incurred. At the time
a loss on a contract becomes known, the entire amount of the estimated loss is accrued. The
aggregate of costs incurred and estimated earnings recognized on uncompleted contracts in excess
of related billings is shown as a current asset, and billings on uncompleted contracts in excess
of costs incurred and estimated earnings is shown as a current liability.
These accounting policies were applied consistently for all periods presented. Our operating
results would be affected if other alternatives were used. Information about the impact on our
operating results is included in the footnotes to our financial statements.
Several other factors related to the Company may have a significant impact on our operating
results from year to year. For example, the accounting rules governing the timing of revenue
recognition related to product contracts are complex and it can be difficult to estimate when we
will recognize revenue generated by a given transaction. Factors such as acceptance of services
provided, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of
our products often cause revenues related to sales generated in one period to be deferred and
recognized in later periods. For arrangements in which services revenue is deferred, related direct
and incremental costs may also be deferred.
15
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2010 compared to Three and Nine Months Ended September
30, 2009
Third Quarter of Fiscal 2010 vs. Third Quarter of Fiscal 2009
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
As a % of Revenues |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
%Change |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
$ |
1,904,000 |
|
|
$ |
2,890,000 |
|
|
|
-34 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
1,615,000 |
|
|
|
2,532,000 |
|
|
|
-36 |
% |
|
|
85 |
% |
|
|
88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross income |
|
|
289,000 |
|
|
|
358,000 |
|
|
|
-19 |
% |
|
|
15 |
% |
|
|
12 |
% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
483,000 |
|
|
|
310,000 |
|
|
|
56 |
% |
|
|
25 |
% |
|
|
11 |
% |
Selling, general & administrative |
|
|
1,520,000 |
|
|
|
1,308,000 |
|
|
|
16 |
% |
|
|
80 |
% |
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,003,000 |
|
|
|
1,618,000 |
|
|
|
24 |
% |
|
|
105 |
% |
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(1,714,000 |
) |
|
|
(1,260,000 |
) |
|
|
36 |
% |
|
|
-90 |
% |
|
|
-44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense) |
|
|
(36,000 |
) |
|
|
(24,000 |
) |
|
|
50 |
% |
|
|
-2 |
% |
|
|
-1 |
% |
Loss from non-consolidated joint venture |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(36,000 |
) |
|
|
(24,000 |
) |
|
|
50 |
% |
|
|
-2 |
% |
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,750,000 |
) |
|
$ |
(1,284,000 |
) |
|
|
36 |
% |
|
|
-92 |
% |
|
|
-44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Nine Months of Fiscal 2010 vs. First Nine Months of Fiscal 2009
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
As a % of Revenues |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
%Change |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
$ |
4,887,000 |
|
|
$ |
4,154,000 |
|
|
|
18 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
4,225,000 |
|
|
|
3,724,000 |
|
|
|
13 |
% |
|
|
86 |
% |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross income |
|
|
662,000 |
|
|
|
430,000 |
|
|
|
54 |
% |
|
|
14 |
% |
|
|
10 |
% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,166,000 |
|
|
|
899,000 |
|
|
|
30 |
% |
|
|
24 |
% |
|
|
22 |
% |
Selling, general & administrative |
|
|
4,548,000 |
|
|
|
4,373,000 |
|
|
|
4 |
% |
|
|
93 |
% |
|
|
105 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,714,000 |
|
|
|
5,272,000 |
|
|
|
8 |
% |
|
|
117 |
% |
|
|
127 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(5,052,000 |
) |
|
|
(4,842,000 |
) |
|
|
-4 |
% |
|
|
-103 |
% |
|
|
-117 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense) |
|
|
(41,000 |
) |
|
|
(128,000 |
) |
|
|
-68 |
% |
|
|
-1 |
% |
|
|
-3 |
% |
Loss from non-consolidated joint venture |
|
|
— |
|
|
|
(4,000 |
) |
|
|
-100 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(41,000 |
) |
|
|
(132,000 |
) |
|
|
-69 |
% |
|
|
-1 |
% |
|
|
-3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,093,000 |
) |
|
$ |
(4,974,000 |
) |
|
|
2 |
% |
|
|
-104 |
% |
|
|
-120 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sum of the amounts and percentages may not equal the totals for the period due to the effects
of rounding.
Computations of percentage change period over period are based upon our results, as rounded
and presented herein.
Revenues. Revenues in the current year benefited from U.S. government grant programs,
resulting in increased sales for fulfillment of initial orders from Smith Electric Vehicles and
Navistar Inc. The increase in revenue for the nine months ended September 30, 2010 compared to 2009
was mainly due to the delivery of eighty electric drive systems to Smith Electric Vehicles, sixteen
of our hybrid drive systems to Navistar and continued shipments to First Auto Works (“FAW”).
Revenues decreased in the third quarter of 2010 compared to the third quarter of 2009 mainly due to
the delivery of a large order for 200 hybrid drive systems to FAW in the third quarter of 2009.
Although we have seen indications for future production growth, there can be no assurance there
will be continuing demand for our products and services.
Cost of Revenues. Cost of revenues consists of component and material costs, direct labor
costs, integration costs and overhead related to manufacturing our products as well as inventory
valuation reserve amounts. Cost of revenues increased in the first nine months of the 2010 compared
to the same period in the prior year primarily due to the increase in revenue and decreased for the
three months ended September 30, 2010 compared to the same period in the prior year primarily due
to the decrease in revenue. The
16
improvement in the cost of revenue percentage is primarily attributable to our continuing
focus on manufacturing and inventory processes that resulted in tighter control over production
costs.
Gross Income. The change in gross margin is primarily attributable to increased efficiencies
and tighter control over production costs in 2010 compared to 2009. Additionally, we recorded a
lower inventory charge in 2010 compared to 2009. We continue to focus on key customer production
contracts, maturity of our supply chain, and efficiencies gained through increased in-house
manufacturing and inventory processes that have resulted in tighter controls over production costs.
As we make deliveries on higher volume production contracts in the fourth quarter of 2010, we
expect to achieve continued benefit from these initiatives, although we may continue to experience
variability in our gross margin.
Research and Development (“R&D”). R&D costs were higher as we devoted increased engineering
personnel resources to the development of our next generation motor control unit and charger,
continued testing of our EV vehicles, new battery technologies and electric motors, as well as
engine off capability for our post transmission parallel hybrid drive system. We also continued to
allocate necessary resources to the development and testing of upgraded proprietary control
software, DC-DC converters and digital inverters as well as other power management firmware.
Selling, General, and Administrative Expenses (“S, G & A”). S, G & A is comprised of
activities in the executive, finance, marketing, field service and quality departments, and
non-cash charges for depreciation and options expense. The Company implemented a series of cost
savings measures in response to the severe sales environment through the first quarter of 2009 and
has selectively increased expenditures in support of key strategic marketing and customer service
initiatives in 2010. S, G & A increased in the third quarter and first nine months of 2010
compared to the third quarter and first nine months of 2009 primarily due to an increase in
customer service costs as headcount was increased in support of our domestic and international
customers and an increase in stock-based compensation related to a larger number of outstanding
equity option grants.
Interest and Other
Income (Expense). Interest and other income decreased during the nine
months ended September 30, 2010 as compared to the same period in 2009 as a result of the Company
having a larger average investable cash balance in 2010 after our equity raise in December 2009 and a
non-recurring cost of $88,000 to settle a vendor dispute that was recorded in the second quarter of
2009.
Loss from Non-Consolidated Joint Venture. A loss of $4,000 was recorded in the nine month
period ended September 30, 2009, reflecting the pro-rata share of gains/losses attributable to the
dissolution of the joint venture and the forty percent investment interest in the Hyundai-Enova
Innovative Technology Center (“ITC”). The joint venture partners, Hyundai Heavy Industries, Enova
and ITC, mutually agreed to the dissolution of ITC, which was completed on April 6, 2009. No such
gains or losses were realized during the three or nine months ended September 30, 2010.
Net Loss. The increase in the net loss for both the three and nine months ended September 30,
2010 compared to the same period in 2009 was mainly due to increase in R&D and S, G &A costs
incurred in support of our strategic initiatives. Additionally, the net loss per share for the
nine months ended September 30, 2010 compared to the same period in 2009 decreased due to the
increase in the number of shares outstanding following our equity issuance in December 2009.
Comparability of Quarterly Results. Our quarterly results have fluctuated in the past and we
believe they will continue to do so in the future. Certain factors that could affect our quarterly
operating results are described in Part I, Item 1A-Risk Factors contained in our Form 10-K for
2009. Due to these and other factors, we believe that quarter-to-quarter comparisons of our results
of operations are not meaningful indicators of future performance.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced cash flow shortages due to operating losses primarily attributable to
research and development, marketing and other general and administrative costs associated with our
strategic plan as an international developer and supplier of electric drive and power management
systems and components. Cash flows from operations have not been sufficient to meet our
obligations. Therefore, we have had to raise funds through several financing transactions. We
expect that the extent of our capital needs will phase out once we reach a breakeven volume in
sales or develop and/or acquire the capability to manufacture and sell our products profitably. Our
operations during the nine months ended September 30, 2010 were financed by product sales as well
as from working capital reserves.
The Company has a secured revolving credit facility with a financial institution (the “Credit
Agreement”) for $200,000 which
17
expired on June 30, 2010 and was renewed on July 1, 2010 for a term of 3 years and 6 months
for the same amount and credit terms. The Credit Agreement is secured by a $200,000 certificate of
deposit (“CD”). The interest rate is the certificate of deposit rate plus 1.25% with interest
payable monthly and the principal due at maturity. As of September 30, 2010, the renewed Credit
Agreement was fully drawn as the financial institution has issued a $200,000 irrevocable letter of
credit in favor of our landlord, Sunshine Distribution LP, with respect to the lease of the
Company’s new corporate headquarters at 1560 West 190th Street, Torrance, California.
Net cash used in operating activities was $3,308,000 for the nine months ended September 30,
2010, an increase of $307,000 compared to $3,001,000 for the nine months ended September 30, 2009.
The increase in 2010 was primarily due to a realization of revenue associated with a decrease in
the deferred revenue liability and a decrease in inventory and inventory reserve charge. Non-cash
items include expense for stock-based compensation, depreciation and amortization, and issuance of
common stock for employee services. Stock compensation to our directors was changed effective in
2010 from the issuance of common stock to the issuance of stock options. This resulted in a
decrease in the issuance of common stock for director services from $135,000 to $0 and an increase
in stock options expense from $329,000 to $428,000 in the first nine months of 2010 compared to the
first nine months of 2009. We continued to conserve cash resources by maintaining our reduced
employee headcount and restrictions on administration and operating expenditures. As of September
30, 2010, the Company had $9,478,000 of cash and cash equivalents.
Net cash used in investing activities for capital expenditures was $277,000 for the first nine
months of 2010 compared to net cash provided of $1,826,000 for the first nine months of 2009. In
2009, in conjunction with the reduction of our credit facility, we redeemed a certificate of
deposit for $2,000,000 for use in operating activities and renewed the certificate of deposit at a
reduced amount of $200,000.
Net cash used in financing activities totaled $15,000 for the first nine months of 2010,
compared to net cash used in financing activities of $50,000 for the first nine months of 2009.
This decrease was attributed to proceeds from the exercise of stock options and lower payments on
notes payable in the first nine months of 2010 compared to the same period in 2009.
As of September 30, 2010, net accounts receivable was $1,275,000, a 12% decrease from the
balance at December 31, 2009 of $1,442,000. The decrease in the receivable balance was primarily
due to our collection of receivables from customers during the third quarter of 2010 and a decrease
in sales in the third quarter of 2010 compared to the same period in 2009.
Inventory decreased by $1,096,000 when comparing the balances at September 30, 2010 and
December 31, 2009, which represents a 20% decrease in the inventory balance between the two dates.
The decrease resulted from net inventory activity including receipts totaling approximately
$2,026,000 and normal consumption of approximately $3,122,000, net of
write-offs, due to sales and R&D activities
during the first nine months of 2010.
Prepaid expenses and other
current assets increased by a net $88,000, or 33%, to $351,000 at
September 30, 2010 from the December 31, 2009 balance of $263,000. The increase was due to a
deposit of $179,000 made on a purchase order to Hyundai Heavy Industries for electric motors with
deliveries expected in the fourth quarter of 2010.
Long term accounts receivable increased to $215,000 at September 30, 2010 compared to $0 at
December 31, 2009. The Company agreed to defer collection of accounts receivable as requested by a
customer for the term of the Company’s warranty guarantee. The Company has remedied all past and
current warranty claims and anticipates full collection of the receivable.
Property and equipment decreased by $103,000, net of depreciation, at September 30, 2010, when
compared to the December 31, 2009 balance of $1,363,000. In the first nine months of 2010, the
Company recognized depreciation expense of $406,000 and recorded additions to fixed assets totaling
$277,000.
Accounts payable increased in the first nine months of 2010 by $1,000 to $416,000 from
$415,000 at December 31, 2009. The increase is considered immaterial.
Deferred revenues decreased by $303,000 to a balance of $54,000 at September 30, 2010 compared
to a $357,000 balance at December 31, 2009. This balance is anticipated to be realized into revenue
in the fourth quarter of 2010 and is associated with prepayment on purchase orders from several
different customers.
Accrued payroll and related expenses increased by $526,000, or 190%, to $803,000 at September
30, 2010 compared to a balance of $277,000 at December 31, 2009. The change is primarily due to the
accrual of a management estimate of 2010 employee incentive bonuses.
18
Other accrued liabilities decreased by $368,000, or 29%, to $919,000 at September 30, 2010
from the balance of $1,287,000 at December 31, 2009, primarily due to payments for accrued
professional services and inventory, as well as a net decrease in the accrued warranty balance as
costs for warranty repairs were greater than warranty accruals for sales during the nine months
ended September 30, 2010.
Accrued interest payable was $1,135,000 at September 30, 2010, an increase of 6% from the
balance of $1,074,000 at December 31, 2009. The increase is due to interest related to our debt
instruments, primarily the secured note payable in the amount of $1,238,000 to the Credit Managers
Association of California.
Our ongoing operations and anticipated growth will require us to make necessary investments in
human and production resources, regulatory compliance, as well as sales and marketing efforts. We
anticipate that our current cash balance and projected cash inflow as mentioned in the Recent
Development section above regarding our capital raise will be adequate to meet our working capital
and capital expenditure needs for at least the next 12 months. If we require additional capital
resources to grow our Company, we may seek to sell more equity securities. The sale of equity
securities could result in dilution to our stockholders. We may not be able to obtain financing
arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to
obtain additional financing when needed, we may be compelled to delay or curtail our plans to
develop our business, which could have a material adverse effect on our operations, market position
and competitiveness.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures which are designed to provide
reasonable assurance that information required to be disclosed in the Company’s periodic Securities
and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to its principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended, the
Company carried out an evaluation, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures for the period covered by this report. Based on that evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that the Company’s internal control
over disclosure controls and procedures was effective as of September 30, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2010 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are subject to a number of lawsuits, investigations and disputes (some of which involve
substantial amounts claimed) arising
19
out of the conduct of our business, including matters relating to commercial transactions. We
recognize a liability for any contingency that is probable of occurrence and reasonably estimable.
We continually assess the likelihood of adverse outcomes in these matters, as well as potential
ranges of probable losses (taking into consideration any insurance recoveries), based on a careful
analysis of each matter with the assistance of outside legal counsel and, if applicable, other
experts.
Given the uncertainty inherent in litigation, we do not believe it is possible to develop
estimates of the range of reasonably possible loss in excess of current accruals for these matters.
Considering our past experience and existing accruals, we do not expect the outcome of these
matters, either individually or in the aggregate, to have a material adverse effect on our
consolidated financial position. Because most contingencies are resolved over long periods of time,
potential liabilities are subject to change due to new developments, changes in settlement strategy
or the impact of evidentiary requirements, which could cause us to pay damage awards or settlements
(or become subject to equitable remedies) that could have a material adverse effect on our results
of operations or operating cash flows in the periods recognized or paid.
ITEM 1A. Risk Factors
There have been no other material changes from the risk factors as previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
ITEM 2. Unregistered Sales of Equity and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Removed and Reserved
Not applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
a) Exhibits
| 31.1 |
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.* |
| |
| 31.2 |
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| |
| 32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 12, 2010
ENOVA SYSTEMS, INC. (Registrant)
/s/ Jarett Fenton
By: Jarett Fenton, Chief Financial Officer
21
EXHIBIT INDEX
| 31.1 |
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002. |
| |
| 31.2 |
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
22