UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31 ,2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From To .
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Commission File No. 0-25184
ENOVA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3056150
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(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
19850 South Magellan Drive Torrance, CA 90502
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(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (310) 527-2800
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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of May 13, 2003, there were 345,394,000 shares of Common Stock, no par value,
2,824,000 shares of Series A Preferred Stock, no par value, and 1,217,000 shares
of Series B Preferred Stock, no par value, outstanding.
1
INDEX
ENOVA SYSTEMS, INC.
Page No.
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)..................................3
Balance Sheets:
March 31, 2003 and December 31, 2002..............................3
Statements of Operations:
Three months ended March 31, 2003 and 2002........................4
Statements of Cash Flows:
Three months ended March 31, 2003 and 2002........................5
Notes to Financial Statements:
Three months ended March 31, 2003 and 2002........................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................9
Item 3. Quantitative and Qualitative Disclosure about Market Risk........15
Item 4. Control and Procedures...........................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...............................................16
Item 2. Changes in Securities and Use of Proceeds........................17
Item 3. Defaults upon Senior Securities..................................16
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................17
SIGNATURE ........................................................18
CERTIFICATIONS ........................................................19
2
PART 1. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except for share and per share data)
- --------------------------------------------------------------------------------
As of As of
March 31, 2003 December 31, 2002
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ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 894 $ 1,868
Accounts receivable, net 1,554 1,256
Inventory 1,608 1,652
Stockholder receivable 32 32
Prepaids and other current assets 95 107
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Total Current Assets 4,183 4,915
PROPERTY, PLANT AND EQUIPMENT - NET 779 811
OTHER ASSETS 480 498
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TOTAL ASSETS $ 5,442 $ 6,224
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LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITES:
Accounts payable $ 1,250 $ 1,192
Line of credit 11 14
Accrued payroll and related expense 119 240
Other accrued expenses 78 95
Bonds and notes payable 120 120
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Total Current Liabilities 1,578 1,661
ACCRUED INTEREST PAYABLE 942 889
CAPITAL LEASE OBLIGATIONS 46 55
LONG TERM DEBT 3,332 3,332
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TOTAL LIABILITIES $ 5,898 $ 5,937
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SHAREHOLDERS' (DEFICIT):
Series A convertible preferred stock - No par value; 30,000,000 shares
authorized; 2,824,000 shares issued and outstanding at 3/31/03 and
12/31/02 liquidating preference at $0.60 per share aggregating $1,695,000 1,842 1,842
Series B convertible preferred stock - No par value; 5,000,000 shares authorized;
1,217,000 shares issued and outstanding at 3/31/03 and 12/31/02 2,434 2,434
liquidating preference at $2.00 per share aggregating $2,434,000
Common Stock - No par value; 500,000,000 shares authorized; 345,394,000
and 345,194,000 shares issued and outstanding at 3/31/03 and 12/31/02 84,156 84,026
Common stock subscribed 0 130
Stock notes receivable (1,203) (1,203)
Additional paid-in capital 6,949 6,949
Accumulated deficit (94,634) (93,891)
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Total Shareholders' equity (deficit) (456) 287
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 5,442 $ 6,224
======== ========
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date. See notes to financial statements.
3
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except for per share and share data)
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Three Months Ended March 31,
------------------------------
2003 2002
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NET REVENUES
Research and development contracts $ 323 $ 465
Production $ 1,016 $ 476
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1,339 941
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COST OF REVENUES
Research and development contracts $ 212 $ 372
Production $ 765 $ 330
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977 702
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GROSS MARGIN 362 239
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OTHER COSTS AND EXPENSES:
Research & development 208 275
Engineering 280 0
Selling, general & administrative 567 615
Interest and financing fees 55 55
Interest income (5) (2)
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Total other costs and expenses 1,105 943
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LOSS FROM CONTINUING OPERATIONS $ (743) $ (704)
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NET LOSS $ (743) $ (704)
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NET LOSS PER COMMON SHARE: $ (0.01) $ (0.01)
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WEIGHTED AVERAGE SHARES
OUTSTANDING 345,394,000 302,532,000
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4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Three Months Ended March 31,
----------------------------
2003 2002
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OPERATIONS
Net loss $ (743) $ (704)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and Amortization 82 38
Stock issued for Services 0 18
Change in operating assets and liabilities:
Accounts Receivable (298) 359
Inventory 44 (420)
Prepaids and other assets 3 31
Accounts payable and accrued expenses (30) 434
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Net cash used by operating activities (942) (263)
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INVESTING:
Purchases of property, plant and equipment, net of disposals (23) (174)
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Net cash used by investing activities (23) (174)
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FINANCING:
Borrowing (Repayments) on leases (9) 47
Proceeds from issuance of common stock 0 3
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Net cash provided by financing activities (9) 50
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (974) (387)
CASH AND EQUIVALENTS:
Beginning of period 1,868 1,179
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End of period $ 894 $ 792
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5
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(UNAUDITED)
(In thousands)
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Three Months Ended March 31,
---------------------------------
2003 2002
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Cash paid for interest $ -- $ --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services $ 12 $ --
6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2003 and 2002
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared from the
records of our company without audit and have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not contain all the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position at March 31, 2003 and the interim results
of operations and cash flows for the three months ended March 31, 2003 have been
included. The balance sheet at December 31, 2002, presented herein, has been
prepared from the audited financial statements of our company for the year then
ended.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. The December
31, 2002 and March 31, 2003 inventories are reported at market value.
Inventories have been valued on the basis that they would be used, converted and
sold in the normal course of business. Certain accrued expenses are based upon
an analysis of future costs expected to be incurred in meeting contracted
obligations. The amounts estimated for the above, in addition to other estimates
not specifically addressed, could differ from actual results; and the difference
could have a significant impact on the financial statements.
Accounting policies followed by us are described in Note 1 to the audited
financial statements for the fiscal year ended December 31, 2002. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted for purposes of the interim
financial statements. The financial statements should be read in conjunction
with the audited financial statements, including the notes thereto, for the year
ended December 31, 2002, which are included in the our Form 10-K Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as filed
with the Securities and Exchange Commission.
Loss per common share is computed using the weighted average number of common
shares outstanding. Since a loss from operations exists, diluted earnings per
share number is not presented because the inclusion of common stock equivalents,
consisting of Series A and B preferred stock, unexercised stock options and
warrants, would be anti-dilutive.
The results of operations for the three months ended March 31, 2003 presented
herein are not necessarily indicative of the results to be expected for the full
year.
7
NOTE 2 - Notes Payable, Long-Term Debt and Other Financing
Notes payable and long-term debt is comprised of the following (in thousands):
March 31, 2003 December 31, 2002
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(unaudited)
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Secured subordinated promissory note -
CMAC as exclusive agent for
Non-Qualified Creditors; interest at 3%
through 2001, 6% in 2002 and 2003, and
then at prime plus 3% thereafter through
the date of maturity; interest payments
are made upon payment of principal, with
principal and interest due no later than
April 2016; with an interest in a
sinking fund escrow with a zero balance
as of December 31, 2002 and March 31,
2003. The sinking fund escrow requires
the Company to fund the account with 10%
of future equity financing, including
convertible debt converted to equity,
based upon approval of the new investors
per the terms of the note. 3,332 3,332
Other 120 120
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3,452 3,452
Less current maturities 120 120
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Total $3,332 $3,332
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NOTE 3 - Subsequent Events
In April 2003, one of our customers, Advanced Vehicle Systems, Inc., filed for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. At the time
of filing, AVS had an outstanding account balance with Enova of approximately
$595,000 of which approximately $564,000 is for components delivered during the
first quarter of 2003. Enova has reached a tentative agreement with AVS to be
granted `critical vendor' status in order to receive a majority of these
payments due as AVS's various vehicle manufacturing contracts are completed, all
subject to bankruptcy court approval and the cooperation of various AVS
customers involved with Enova's AVS programs. Enova's Audit Committee chairman
is representing the Company's interest on the creditor's committee formed by the
Bankruptcy Court to administer the payment of claims. While Enova believes it
will recover a majority of the funds now owed by AVS, there are no assurances
that we may recover any or all of these amounts owed. As of March 31, 2003, we
have reserved $52,000 against these balances owed as an allowance for
uncollectible receivables. There are no assurances that we will not be required
to take additional reserves for uncollectible receivables in subsequent quarters
as we learn more during the bankruptcy proceedings.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the consolidated
interim financial statements and the notes thereto in Part I, Item I of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual report on
Form 10-K for the year ended December 31, 2002. The matters addressed in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, with the exception of the historical information presented contains
certain forward-looking statements involving risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks discussed in this
Item 2 and specifically discussed in this report under the heading "Certain
Factors That May Affect Future Results" following this Management's Discussion
and Analysis section, and elsewhere in this report.
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. Actual results
could differ significantly from those estimates under different assumptions and
conditions. The Company believes that the following discussion addresses the
Company's most critical accounting policies, which are those that are most
important to the portrayal of the Company's financial condition and results. The
Company constantly re-evaluates these significant factors and makes adjustments
where facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the necessary estimates
inherent in the preparation of financial statements. Estimates and assumptions
include, but are not limited to, customer receivables, inventories, equity
investments, fixed asset lives, contingencies and litigation. The Company has
also chosen certain accounting policies when options were available, including:
o The first-in, first-out (FIFO) method to value our inventories;
o The intrinsic value method, or APB Opinion No. 25, to account for our
stock options;
o Review of customers' receivable to determine the need for an allowance
for credit losses based on estimates of customers' ability to pay. If the
financial condition of our customers were to deteriorate, additional
allowances may be required.
These accounting policies are 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 consolidated financial statements.
GENERAL
Enova Systems, Inc., a California Corporation ("Enova" or the "Company"), was
incorporated on July 30, 1976. The Company's fiscal year ends December 31. All
year references refer to fiscal years.
Enova believes it is a leader in the development and production of commercial
digital power management systems. Power management systems control and monitor
electric power in an automotive or commercial application such as an automobile
or a stand-alone power generator. Drive systems are comprised of an electric
motor, an electronics control unit and a gear unit 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. A 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.
Stationary power systems utilize similar components to those which are in
9
a mobile drive system in addition to other elements. These stationary systems
are effective as power-assist or back-up systems, alternative power, for
residential, commercial and industrial applications.
Enova develops and produces advanced software, firmware and hardware for
applications in these alternative power markets. Our focus is digital power
conversion, power management, and system integration, for two broad market
applications - vehicle power generation and stationary power generation.
Specifically, we develop; design and produce drive systems and related
components for electric, hybrid-electric, fuel cell and microturbine-powered
vehicles. We also develop, design and produce power management and power
conversion components for stationary distributed power generation systems. These
stationary applications can employ fuel cells, microturbines, or advanced
batteries for power storage and generation. Additionally, we perform research
and development 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.
During the quarter ended March 31, 2003, we continued to develop and produce
electric and hybrid electric drive systems and components for Ford Motor Company
(Ford), Hyundai Motor Company (HMC) and several domestic and international
vehicle and bus manufacturers, including Advanced Vehicle Systems (AVS) of
Tennessee, Malaysia and Japan. Our various electric and hybrid-electric drive
systems, power management and power conversion systems are being used in
applications including Class 8 trucks, monorail systems, transit buses and
industrial vehicles. Enova has furthered its development and production of
systems for both mobile and stationary fuel cell powered systems with major
companies such as Ford, ChevronTexaco and UTC Fuel Cells, a division of United
Technologies. We also are continuing on our current research and development
programs with ChevronTexaco, HMC and the U.S. Department of Transportation (DOT)
as well as developing new programs with Hyundai Heavy Industries (HHI), the U.S.
government and other private sector companies.
This quarter, we entered into a joint venture agreement with HHI to create a
separate research and development corporation, domiciled in the U.S., which will
develop new technologies for mobile and stationary applications for both
developing markets for Enova and HHI. The new company will be initially
domiciled at our Torrance headquarters with operations intended to commence
during the second quarter of 2003.
Ford Motor Company - Fuel Cell Technology
The High Voltage Energy Converter (HVEC) development program with Ford Motor
Company for their fuel cell vehicle continues to advance on schedule. This
converter is a key component in Ford's Focus Fuel Cell Vehicle. It converts high
voltage power from the fuel cell into a lower voltage for use by the drive
system and electronic accessories. The system is completing advanced testing in
its final prototype phase prior to production. We anticipate receiving an order
for limited production in mid 2003; however, we can give no assurance at this
time that such sales will occur. For the quarter ended March 31, 2003, we billed
approximately $331,000 for this Ford program.
Light-Duty Drive Systems - Automobiles and Delivery vehicles
Our 90kW controller, motor and gear unit is utilized in light duty vehicles such
as midsize automobiles and delivery vehicles. As part of our corporate strategy
to outsource manufacturing, Hyundai Heavy Industries produces the Panther 90kW
drive system for Enova.
10
The City of Honolulu Hawaii has contracted with Enova to upgrade several S-10
trucks in its electric vehicle fleet. Initially, we will upgrade 3 trucks to our
Panther 90kW drive system. This program is expected to generate approximately
$100,000 for Enova and will be completed by mid 2003.
We continue to cross-sell our systems to new and current customers in the light
and medium duty vehicle markets both domestically and globally.
Heavy-Duty Drive Systems - Buses and Truck for Urban operators
A major focus of Enova's is the heavy-duty vehicle, buses and trucks, for urban
operators. Our PantherTM 120kW and PantherTM 240kW drive systems are in
production and operating above performance expectations in global markets. Sales
of our PantherTM 120kW and 240kW drive systems continue to provide increased
revenues for our company. We have entered into supplier agreements with OEMs in
Europe and Japan, as well as domestically, for sales of our heavy-duty drive
systems. Hyundai Heavy Industries has been selected as our outsource
manufacturer for the Panther 120kW controller, as well as the manufacturer of
the motor and controller for our Panther 240kW drive systems. This is a specific
strategy of Enova's to minimize capital outlays and maximize efficiencies by
utilizing proven manufacturing partners.
Eco Power Technology of Italy purchased and received 27 Panther 120kW electric
and hybrid electric drive systems last year and in early 2003 gave notice of its
intent to purchase additional systems in 2003. Eco Power is one of the largest
integrators of medium size transit buses for the European shuttle bus market,
with key customers in Turin and Genoa, Italy.
Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. of Japan continues
to procure our 120kW and 90kW drive systems for integration into their
industrial vehicle platforms. Tomoe is reviewing additional applications for our
drive system configurations.
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, has integrated into two of its buses our
hybrid electric PantherTM 120kW drive system, which utilizes a 30kW Capstone
microturbine as its power source. These buses are currently in field service and
are performing to specifications. Further, we continue to negotiate with Wrights
to purchase our 240kW drive system. Although we anticipate additional orders for
both electric and hybrid-electric 120kW drive systems during 2003, at this time
there are no assurances that such additional orders will be forthcoming.
In the high performance heavy-duty drive system area, Enova's proprietary 240kW
drive system has been successfully integrated into several heavy-duty
applications including several 38 foot transit buses and a Class 8 urban
delivery truck. We are anticipating additional orders in 2003, although no such
orders are guaranteed. One of our 240kW systems has also been integrated into a
Class 8 urban delivery truck which was displayed at the Electric Drive
Transportation Association Symposium in Hollywood Florida in December 2002. This
240kW drive system is capable of providing 3,000 ft-lbs of torque at the drive
shaft. Additionally, Enova has modified the Panther 90kW to be used in a dual
wheel motor configuration, expanding its potential market penetration with bus
and delivery vehicle manufacturers.
AVS purchased several of our Panther Dual 90kW drive systems for their 22-foot
bus for New York City and other customers. Additionally, in the first quarter,
AVS purchased two 240kW drive systems for several of their 38-foot bus programs.
In April 2003, Advanced Vehicle Systems, Inc., filed for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code. Enova has reached a tentative
agreement with AVS to be granted `critical vendor' status in order to receive a
majority of these payments due as AVS's various vehicle manufacturing contracts
are completed, all subject to bankruptcy court approval and the cooperation of
various AVS customers involved with Enova's AVS programs. Enova's Audit
Committee chairman is representing the Company's interest on the creditor's
committee formed by the Bankruptcy Court to administer the payment of claims
(refer to Part II, Item 1 below).
Additionally, we are in discussions with other bus manufacturers, industrial,
commercial and military vehicle manufacturers regarding the purchase of our
heavy-duty, high performance, 240kW drive systems in
11
2003. There are no assurances, however that these discussions will result in any
sales of the Panther 240kW or 120kW drive systems.
Ballard Power Systems
Our development and production program with Ballard Power Systems for low
voltage 30kW electric drive system components for use in Ford's Global Th!nk
City was terminated by Ford and Th!nk Nordic in early 2003, as previously
reported. Ford Motor Company announced that they have sold the program and its
assets to Kamkorp, Ltd, a United Kingdom company. Currently, approximately
$450,000 of current inventory is materials purchased for the initial production
of the drive system component. There are other additional material, tooling and
engineering costs which may become due to our suppliers as a result of the
termination of this program of approximately $300,000. Under the terms of our
agreement with Ballard and Ford, we believe full reimbursement for these costs
is warranted at termination. We have billed Ballard for these amounts; however
no final determination or agreement on the total reimbursement from Ballard to
Enova has been made.
Research and Development Programs
The U.S. Air Force and the State of Hawaii have contracted with Enova to
integrate a Panther 120kW hybrid drive system into a second 30-foot bus for the
Hickman Air Force base.
In conjunction with the State of Hawaii, the all-electric Hyundai Santa Fe SUV
demonstration project has completed its second year of testing and evaluation.
The vehicles are meeting specifications with the results of the project, thus
far, meeting the expectations of the State of Hawaii, Hyundai and Enova.
All of these programs are funded in conjunction with the Hawaii Electric Vehicle
Development Project, the U.S. DOT and the State of Hawaii. Development programs
with these agencies have generated revenues of $77,500 for the quarter ended
March 31, 2003.
We intend to establish new development programs with the Hawaii High Technology
Development Corporation in mobile and marine applications as well as other state
and federal government agencies as funding becomes available.
Stationary Power Applications
Enova continues to attract new partners and customers from both fuel cell
manufacturers and petroleum companies. It is our belief that utilizing our power
management systems for stationary applications for fuel cells will open new
markets for our Company. There are no assurances, however, that we will
successfully develop such applications or that any such applications will find
acceptance in the marketplace.
We are currently designing a process controller for ChevronTexaco Technology
Ventures (CTTV) for their fuel reformer for a stationary fuel cell application.
Due to the milestones met and technologies developed thus far in the initial
development on this contract, we are in discussions with CTTV regarding
developing other components for this application in the areas of power
management and power processing; however, we can make no assurances that these
discussions will lead to future contracts at this time. For the three months
ended March 31, 2003, Enova has billed ChevronTexaco $95,000.
Our Fuel Cell Care (FCU) units are being delivered to UTC Fuel Cells, a division
of United Technologies Corp., for use in their stationary fuel cell systems. In
the first quarter of 2003, UTC Fuel Cell ordered 24 additional fuel cell care
units. Sales to UTC for the three months ended March 31, 2003 totaled $52,000.
We believe the stationary power market will play a key role in our future. We
continue to pursue alliances with leading manufacturers in this area. There are,
however, no assurances that this market will develop as anticipated or that such
alliances will occur.
12
LIQUIDITY AND CAPITAL RESOURCES
We have experienced cash flow shortages due to operating losses primarily
attributable to research, development, marketing and other costs associated with
our strategic plan as an international manufacturer and supplier of electric
propulsion and power management systems and components. Cash flows from
operations have not been sufficient to meet our obligations. Therefore, we have
had to raise funds through several financing transactions. 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. We anticipate that we may require additional
outside financing within the next six months to meet research, development and
general operations expenditures through 2003.
During the three months ended March 31, 2003, we spent $942,000 in cash on
operating activities to fund our net loss of $743,000 resulting from factors
explained in the following section of this discussion and analysis. Accounts
receivable increased by $350,000 from December 31, 2002 balances due to
increased heavy-duty system sales primarily to AVS and additional engineering on
the Ford HVEC program. This increase in accounts receivable was reduced by
approximately $52,000 as a result of an allowance for doubtful accounts in
connection with AVS sales (refer to Part II, Item 1 below) for a net increase of
$298,000. Inventory decreased by $44,000 from December 31, 2002 to March 31,
2003 as inventories for products such as our 120kW and 240kW drive system were
sold to AVS and other bus manufacturers.
Current liabilities decreased by a net of $83,000 from December 31, 2002 to
March 31, 2003 as a result of payment of several expense accruals including
year-end payrolls and other accrued expenses and payables.
Capital lease obligations decreased by $9,000 during the three months ended
March 31, 2003 from December 31, 2002, also due to normal reductions of these
liabilities.
Interest accruing on notes payable increased by $53,000 for the three months
ended March 31, 2003 from December 31, 2002 per the terms of our notes payable.
The operations of the Company during the first quarter of fiscal 2003 were
financed primarily by the funds received on engineering contracts and sales of
drive system components as well as cash reserves provided by equity financings.
It is management's intention to continue to support current operations through
sales of products and engineering contracts, as well as to seek additional
financing through private placements and other means to increase inventory
reserves and to continue internal research and development.
The future unavailability or inadequacy of financing to meet future needs could
force the Company to delay, modify, suspend or cease some or all aspects of its
planned operations this year.
13
RESULTS OF OPERATIONS
Net revenues for the three months ending March 31, 2003 increased to $1,339,000
from $941,000 for the corresponding period in 2002, representing an increase of
42%. Net production sales for the quarter ended March 31, 2003 increased by
$540,000 or over 113% compared to the same period in 2002. The increase in
revenues is attributable to increased product sales of PantherTM 240kW and Dual
90kW drive systems, engineering services for the ChevronTexaco fuel reformer
process controller and development work on the Ford HVEC program.
Cost of sales for the three months ended March 31, 2003 increased to $977,000
compared to cost of sales of $702,000 for the same three-month period in 2002
representing a gross margin on revenues of approximately 27% in the first
quarter of 2003. An increase in revenues for the comparable period, as noted
above, accounted for a majority of the increase in costs of sales over the
periods reported. Additionally, adjustments of approximately $195,000, for
inventory sold but not booked in prior periods, increased costs of sales and
reduced gross margins in the first quarter. Without these one-time adjustments,
the gross margin on revenues would be approximately 42%.
Internal research, development and engineering expenses increased in the three
months ended March 31, 2003 to $488,000 as compared with $275,000 in the same
period in 2002. Enova allocated increased personnel to the development of its
diesel generation motor as well as other internally funded programs such as its
high voltage drive system components and the 18kW on-board charger.
Additionally, Enova is enhancing its product line to maintain its competitive
advantage in the digital power management.
Selling, general and administrative expenses decreased $48,000 to $567,000 for
the three months ended March 31, 2003 from the previous year's comparable
period. We continue to attempt to reduce general and administrative expenses
wherever possible.
Interest and financing fees remained the same at $55,000 in the first three
months of 2003 and 2002.
We incurred a loss from continuing operations of $743,000 in the first quarter
of 2003 compared to a loss of $704,000 in the first quarter of 2002. The
increase was primarily due to additional one-time costs of revenues incurred in
connection with an inventory adjustment, as previously noted. Without this
adjustment, the net loss from operations would be approximately $548,000. We
will continue to review all costs and develop methods in our efforts to produce
our systems more efficiently by utilizing contract manufacturers where
applicable.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements concerning our existing and
future products, markets, expenses, revenues, liquidity, performance and cash
needs as well as our plans and strategies. Forward-looking statements may be
identified by the use of terminology such as "may," "anticipate," "estimate,"
"plans," "expects," "believes," "will," "potential" and by other comparable
terminology or the negative of any of the foregoing. These forward-looking
statements involve risks and uncertainties and are based on current management's
expectations and we are not obligated to update this information. Many factors
could cause actual results and events to differ significantly from the results
anticipated by us and described in these forward looking statements including,
but not limited to, the following risk factors.
Net Operating Losses. We experienced recurring losses from operations and had an
accumulated deficit of $94,634,000 at March 31, 2003. There is no assurance,
however, that any net operating losses will be available to us in the future as
an offset against future profits for income tax purposes.
Continued Losses. For the three months ended March 31, 2003 and 2002, we had
losses from continuing operations of $743,000 and $704,000 respectively on sales
of $1,339,000 and $941,000, respectively.
14
Nature of Industry. The mobile and stationary power markets, including electric
vehicle and hybrid electric vehicles, continue to be subject to rapid
technological change. Most of the major domestic and foreign automobile
manufacturers: (1) have already produced electric and hybrid vehicles, and/or
(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. In
addition, the stationary power market is still in its infancy. A number of
established energy companies are developing new technologies. Cost-effective
methods to reduce price per kilowatt have yet to be established and the
stationary power market is not yet viable.
Our current products are designed for use with, and are dependent upon, existing
technology. As technologies change, and subject to our limited available
resources, we plan to upgrade or adapt our products in order to continue to
provide products with the latest technology. We cannot assure you, however, that
we will be able to avoid technological obsolescence, that the market for our
products will not ultimately be dominated by technologies other than ours, or
that we will be able to adapt to changes in or create "leading-edge" technology.
In addition, further proprietary technological development by others could
prohibit us from using our own technology.
Changed Legislative Climate. Our industry is affected by political and
legislative changes. In recent years there has been significant public pressure
to enact legislation in the United States and abroad to reduce or eliminate
automobile pollution. 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.
Extensions, modifications or reductions of current federal and state
legislation, mandates and potential tax incentives could also adversely affect
our business prospects if implemented.
Because vehicles powered by internal combustion engines cause pollution, there
has been significant public pressure in Europe and Asia, and enacted or pending
legislation in the United States at the federal level and in certain states, to
promote or mandate the use of vehicles with no tailpipe emissions ("zero
emission vehicles") or reduced tailpipe emissions ("low emission vehicles").
Legislation requiring or promoting zero or low emission vehicles is necessary to
create a significant market for electric vehicles. The California Air Resources
Board (CARB) is continuing to modify its regulations regarding its mandatory
limits for zero emission and low emission vehicles. Furthermore, several car
manufacturers have challenged these mandates in court and have obtained
injunctions to delay these mandates.
Our products 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURE
Within the 90-day period prior to the filing of this report, an evaluation was
carried out by Carl Perry, the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, Mr. Perry concluded that these disclosure
controls and procedures were effective. No significant changes were made in the
Company's internal controls or in other factors
15
that could significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We may from time to time become a party to various legal proceedings arising in
the ordinary course of business.
In April 2003, one of our customers, Advanced Vehicle Systems, Inc., filed for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. At the time
of filing, AVS had an outstanding account balance with Enova of approximately
$595,000 for components delivered during the first quarter of 2003. Enova has
reached a tentative agreement with AVS to be granted `critical vendor' status in
order to receive a majority of these payments due as AVS's various vehicle
manufacturing contracts are completed, all subject to bankruptcy court approval
and the cooperation of various AVS customers involved with Enova's AVS programs.
While Enova believes it will recover a majority of the funds now owed by AVS,
there are no assurances that we may recover any or all of these amounts owed. As
of March 31, 2003, we have reserved $52,000 against these balances owed as an
allowance for uncollectible receivables. There are no assurances that we will
not be required to take additional reserves for uncollectible receivables in
subsequent quarters as we learn more during the bankruptcy proceedings.
Item 2. Changes in Securities and Use of Proceeds
Pursuant to the Joint Venture Agreement with HHI as described above, we have
agreed to sell equity to HHI as more fully described in our 8-K filed with the
SEC on March 24, 2003 and as set forth in the Stock Purchase Agreement
referenced therein and attached hereto as Exhibit 10.25.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
16
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
10.24* Joint Venture Agreement (redacted**) to form advanced
research and development corporation, dated as of March 18,
2003, by and between the Registrant and Hyundai Heavy
Industries Co. Ltd.
10.25* Securities Purchase Agreement dated as of March 18,
2003, by and between the Registrant and Hyundai Heavy
Industries Co. Ltd.
99.1* CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
* - attached herewith
** - Certain information has been redacted as part of a
confidential treatment request filed separately with the SEC.
(b) Reports on Form 8-K
The Company filed on March 24, 2003, a Form 8-K describing the
equity to be sold to HHI pursuant to Enova's Joint Venture
Agreement entered into with HHI during the quarter ended March
31, 2003.
17
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: May 15, 2003
ENOVA SYSTEMS, INC.
(Registrant)
/s/ Carl D. Perry
- --------------------------------------------------------------------------------
By: Carl D. Perry, Chief Executive Officer and Acting Chief Financial Officer
18
CERTIFICATIONS
I, Carl D. Perry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enova Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Carl D. Perry
- --------------------------------------------------------------------------------
By: Carl D. Perry, Chief Executive Officer and Acting Chief Financial Officer
19