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 June 30 ,2003
or
(___) 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. 0-25184
ENOVA SYSTEMS, INC.
-------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3056150
- ---------- ----------
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
19850 South Magellan Drive Torrance, CA 90502
---------------------------------------------
(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 August 13, 2003, there were 345,398,000 shares of Common Stock, no par
value, 2,820,000 shares of Series A Preferred Stock, no par value, and 1,217,000
shares of Series B Preferred Stock, no par value, outstanding.
INDEX
ENOVA SYSTEMS, INC.
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)....................................3
Balance Sheets:
June 30, 2003 and December 31, 2002.................................3
Statements of Operations:
Three and six months ended June 30, 2003 and 2002...................4
Statements of Cash Flows:
Six months ended June 30, 2003 and 2002.............................5
Notes to Financial Statements:
Six months ended June 30, 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..........17
Item 4. Control and Procedures.............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................17
Item 2. Changes in Securities and Use of Proceeds..........................18
Item 3. Defaults upon Senior Securities....................................18
Item 4. Submission of Matters to a Vote of Security Holders................18
Item 5. Other Information..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18
SIGNATURE ...................................................................19
CERTIFICATIONS ..............................................................20
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
June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 999 $ 1,868
Accounts receivable, net of allowance of $358,000 and $0 respectively 993 1,256
Inventory 1,314 1,652
Stockholder receivable 8 32
Prepaids and other current assets 159 107
-------- --------
Total Current Assets 3,473 4,915
PROPERTY, PLANT AND EQUIPMENT - NET 771 811
OTHER ASSETS 455 498
-------- --------
TOTAL ASSETS $ 4,699 $ 6,224
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITES:
Accounts payable $ 1,533 $ 1,192
Line of credit 26 14
Accrued payroll and related expense 135 240
Other accrued expenses 161 95
Bonds and notes payable 120 120
-------- --------
Total Current Liabilities 1,975 1,661
ACCRUED INTEREST PAYABLE 996 889
CAPITAL LEASE OBLIGATIONS 39 55
LONG TERM DEBT 3,332 3,332
-------- --------
TOTAL LIABILITIES $ 6,342 $ 5,937
-------- --------
SHAREHOLDERS' (DEFICIT):
Series A convertible preferred stock - No par value; 30,000,000 shares
authorized; 2,820,000 and 2,824,000 shares issued and outstanding
at 6/30/03 and 12/31/02 liquidating preference at $0.60 1,842 1,842
per share aggregating $1,692,000 and $1,695,000
Series B convertible preferred stock - No par value; 5,000,000 shares authorized;
1,217,000 shares issued and outstanding at 6/30/03 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; 345,398,000
and 345,194,000 shares issued and outstanding at 6/30/03 and 12/31/02 84,161 84,026
Common stock subscribed 0 130
Stock notes receivable (1,203) (1,203)
Additional paid-in capital 6,965 6,949
Accumulated deficit (95,837) (93,891)
-------- --------
Total Shareholders' equity (deficit) (1,643) 287
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 4,699 $ 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.
INCOME and EXPENSE STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------- -----------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET REVENUES
Research and development contracts $ 405 $ 978 $ 728 $ 1,443
Production $ 950 $ 496 $ 1,966 $ 972
------------- ------------- ------------- -------------
$ 1,355 $ 1,474 $ 2,694 $ 2,415
------------- ------------- ------------- -------------
COST OF REVENUES
Research and development contracts 200 782 412 1,154
Production 1,002 378 1,767 709
------------- ------------- ------------- -------------
1,202 1,160 2,179 1,863
------------- ------------- ------------- -------------
GROSS MARGIN 153 314 515 552
------------- ------------- ------------- -------------
OTHER COSTS AND EXPENSES:
Research & development 114 181 322 456
Engineering 225 0 505 0
Selling, general & administrative 966 573 1,533 1,188
Interest and financing fees 54 55 109 110
Other (income)/expense 0 45 0 45
Interest income (2) (4) (7) (6)
------------- ------------- ------------- -------------
Total other costs and expenses 1,356 850 2,461 1,793
------------- ------------- ------------- -------------
NET LOSS $ (1,203) $ (536) $ (1,946) $ (1,241)
------------- ------------- ------------- -------------
NET LOSS PER COMMON SHARE: $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 345,594,000 345,627,095 345,589,500 345,627,095
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------
2003 2002
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OPERATIONS
Net loss $(1,946) $(1,241)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and Amortization 168 123
Stock/Options issued for Services 16 (246)
Change in operating assets and liabilities:
Accounts Receivable 263 (166)
Inventory 338 (425)
Stockholder receivable 0 (8)
Prepaids and other assets (39) (1)
Accounts payable and accrued expenses 421 669
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Net cash used by operating activities (779) (1,295)
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INVESTING:
Purchases of property, plant and equipment, net of disposals (74) (230)
------- -------
Net cash used by investing activities (74) (230)
------- -------
FINANCING:
Borrowing (Repayments) on leases (16) 40
Proceeds from issuance of common stock 0 4,210
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Net cash provided by financing activities (16) 4,250
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (869) 2,725
CASH AND EQUIVALENTS:
Beginning of period 1,868 1,179
------- -------
End of period $ 999 $ 3,904
======= =======
5
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Six Months Ended June 30
------------------------
2003 2002
------- -------
Cash paid for interest $ -- $ --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services $ 12 $ 12
Conversion of Series A preferred stock to common stock $ 5 $ --
6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 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 June 30, 2003 and the interim results
of operations and cash flows for the three and six months ended June 30, 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 June 30, 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 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 and six months ended June 30, 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):
June 30, 2003 December 31, 2002
------------- -----------------
(unaudited)
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 June 30,
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
------ ------
3,452 3,452
Less current maturities 120 120
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Total $3,332 $3,332
====== ======
Note 3 - Stock-based compensation
On June 30, 2003, the Company issued 10,518,212 options from our Employee Stock
Option Plan to purchase Enova Systems common stock at an exercise price of
$0.051 per share to a number of employees in lieu of cash compensation for a
three month period. This plan was approved by the Board of Directors prior to
implementation. Under the plan, these employees receive stock options,
determined based on the discounted difference of the option exercise price of
their monthly salary reduction, which will vest over the three-month period and
be exercisable for a period of three years from the grant date. The exercise
price represents a 15% discount to the market price of $0.06 as of the date of
the grant. As such, a charge against compensation expense totaling $94,664 for
the effects of this discount will be booked over the three months commencing
June 30, 2003.
Additionally, the Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Under
APB No. 25, compensation expense is the excess, if any, of the fair value of the
Company's stock at a measurement date over the amount that must be paid to
acquire the stock.
8
As of January 1, 2003 the Company adopted the disclosure requirements of SFAS
148, Accounting for Stock Based Compensation, which amends accounting principals
Board ("APB") No. 28 by adding to the list of disclosures to be made for interim
periods.
SFAS No. 123 requires a fair value method to be used when determining
compensation expense for stock options and similar equity instruments. SFAS No.
123 permits a company to continue to use APB No. 25 to account for stock-based
compensation to employees, but pro forma disclosures of net income and earnings
per share must be made as if SFAS No. 123 had been adopted in its entirety. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized over the options' vesting period. Stock options issued to
non-employees are valued under the provisions of SFAS No. 123. Had compensation
cost for the Company's options been determined based on the methodology
prescribed under SFAS No. 123, the Company's net income and income per share
would have been as follows:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
Net loss for the quarter $(1,257) $ (536) $ (2,000) $(1,241)
Compensation expense, net of tax effect $ (61) $ (49) $ (79) $ (99)
Proforma net loss $(1,318) $ (585) $ (2,079) $(1,340)
Proforma loss per common share $ (0.01) $(0.01) $ (0.01) $ (0.01)
The fair value of each option is estimated on date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
Dividends 0% 0%
Expected volatility 88% 88%
Risk-free interest rate 4.0% 4.0%
Expected life 3 years 3 years
Note 4- 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. Under the terms of the contract, Ballard is liable for all costs
incurred by Enova which are normally associated with the production including
inventory and other development or production costs. In the second quarter of
2003, we invoiced Ballard for approximately $922,000 for work-in-process
inventory and other additional material, tooling and engineering costs for the
initial production of the drive system component. Of this amount, Ballard
remitted $580,400 during the second quarter. We anticipate receiving the
remaining balance during the third quarter, however, there are no assurances
that these remaining balances will be collected in full or part.
9
Note 5 - Advanced Vehicle Systems
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. During the second quarter, Enova was informed by AVS that
various vehicle manufacturing contracts which were anticipated to be completed
were terminated by AVS customers. Enova was therefore unable to obtain critical
vendor status for these contracts. Enova's Audit Committee chairman has been
appointed chairman of the creditor's committee formed by the Bankruptcy Court.
Enova believes it will recover a portion of the funds now owed by AVS; however
there are no assurances that we may recover any or all of these amounts owed. As
of June 30, 2003, we have reserved an additional $305,000 against these balances
owed as an allowance for uncollectible receivables bringing the total reserved
to date to $357,000. 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. 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
10
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 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 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 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 June 30, 2003, we continued to develop and produce
electric and hybrid electric drive systems and components for Ford Motor Company
(Ford), the City of Honolulu and several domestic and international vehicle and
bus manufacturers in Italy, the United Kingdom, 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
11
and development programs with ChevronTexaco, the U.S. Air Force 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.
Heavy-Duty Drive Systems - Buses and Truck for Urban operators
Heavy-duty drive system sales continue to be a primary strategy of Enova's. Our
PantherTM 120kW and PantherTM 240kW drive systems are developed completely
in-house and are in production and operating in global markets. Sales of our
PantherTM 120kW drive systems continue to provide revenues for our company.
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 an additional 5 Panther 120kW electric
and hybrid electric drive systems in the second quarter of 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. There are
currently approximately 30 vehicles in operation in Italy using Panther power.
For the quarter ended June 30, 2003, we billed approximately $138,000 for these
systems.
Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. of Japan continue
to procure our 120kW and 90kW drive systems for integration into their
industrial vehicle platforms. Enova's systems are currently in Tomoe's passenger
tram as well as other transportation systems. We anticipate additional orders
for these systems in 2003, however at this time; there are no assurances that
such additional orders will be forthcoming.
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. 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. 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 an 180kW, dual wheel motor configuration, expanding its potential
market penetration with bus and delivery vehicle manufacturers.
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 2003. There are no
assurances, however that these discussions will result in any sales of the
Panther 240kW or 120kW drive systems.
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, Enova selected Hyundai Heavy Industries to produce
the Enova developed Panther 90kW drive system.
12
The City of Honolulu Hawaii has contracted with Enova to upgrade several S-10
trucks in its electric vehicle fleet. During the second quarter, we commenced
the upgrade of 3 trucks to our Panther 90kW drive system. Two additional
vehicles will begin to be upgraded in the 3rd quarter of 2003. This program is
expected to generate approximately $100,000 for Enova and will be completed by
late 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.
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 late 2003; however, we can give no assurance at this
time that such sales will occur. For the quarter ended June 30, 2003, we billed
approximately $63,000 for this Ford program.
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. In the second quarter of 2003, we invoiced Ballard for approximately
$922,000 for materials purchased for the initial production of the drive system
component and other additional material, tooling and engineering costs. Of this
amount, Ballard remitted $580,400 during the second quarter. We anticipate
receiving the remaining balance during the third quarter, however, there are no
assurances that these remaining balances will be collected in full or part.
Research and Development Programs
We are aggressively pursuing several government and commercially sponsored
development programs for both ground and marine heavy-duty drive system
applications.
Our program with the U.S. Air Force and the State of Hawaii to integrate a
Panther 120kW hybrid drive system into a second 30-foot bus for the Hickman Air
Force base has been amended to develop this propulsion system as a fuel cell
hybrid. The program is scheduled to be completed in the fourth quarter of 2003.
Anticipated revenues from this program are approximately $600,000.
The all-electric Hyundai Santa Fe SUV demonstration project has been extended
for another two years for three of the vehicles. Fast-charging capabilities and
performance will be the primary focus of this continued evaluation.
Several other programs are in discussion in conjunction with the U.S. Navy, U.S.
Air Force, and several other government agencies and private corporations. We
anticipate finalizing the terms of these contracts in the third quarter of 2003
however there can be no assurances at this time that such contracts will be
realized.
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.
13
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.
The first prototype of the controller board for this system is in test and
evaluation and we are now progressing to the second phase of the program. For
the three months ended June 30, 2003, Enova has billed ChevronTexaco $152,900.
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 second quarter of 2003, UTC Fuel Cell ordered 6 additional fuel cell care
units. Sales to UTC for the three months ended June 30, 2003 totaled $17,000.
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.
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.
In the second quarter of 2003, management determined that it was necessary to
re-assess current resource allocations and overhead costs. Due to the loss of
Advanced Vehicle Systems (AVS) - please refer to Part II, Item 1, Legal
Proceedings - and an overall slowdown in heavy-duty drive system purchases,
management analyzed current processes and budgets for potential targets for cost
reduction. Management therefore implemented several cost reduction programs
including personnel reductions, work-week modifications and other cost reduction
endeavors to achieve these goals. Personnel levels have been reduced to 32
employees currently from 45 at December 31, 2002. As another element of this
workforce reorganization, full-time salaried employees had their compensation
packages modified wherein they would receive a portion of their salaries over a
three-month period as stock options in lieu of cash compensation. As a result of
these changes, we have reduced monthly cash outlays by approximately $150,000
without impact to our current operations.
During the six months ended June 30, 2003, we spent $779,000 in cash on
operating activities to fund our net loss of $1,946,000 resulting from factors
explained in the following section of this discussion and analysis. Accounts
receivable decreased by $263,000 from December 31, 2002 balances due to the
write-down of AVS receivables (refer to Part II, Item 1 below) and payments from
other customers against outstanding balances. Inventory decreased by $338,000
from December 31, 2002 to June 30, 2003 primarily due to charges against cost of
sales for those inventories related to the terminated Ballard program which were
billed to them.
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Current liabilities increased by a net of $420,000 from December 31, 2002 to
June 30, 2003 as a result of additional power management and conversion
component inventory purchases and payables due Hyundai Autonet in connection
with the termination of the Ballard program which represented approximately
$280,000 of this increase.
Capital lease obligations decreased by $16,000 during the six months ended June
30, 2003 from December 31, 2002, also due to scheduled payments of these
liabilities.
Interest accruing on notes payable increased by $109,000 for the six months
ended June 30, 2003 from December 31, 2002 per the terms of our notes payable.
The operations of the Company during the second 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.
RESULTS OF OPERATIONS
Net revenues for the three months ending June 30, 2003 were $1,355,000 as
compared to $1,474,000 for the corresponding period in 2002. Net production
sales for the quarter ended June 30, 2003 increased by $454,000 or 91% compared
to the same period in 2002. The increase in production revenues is attributable
primarily due to the sales of work-in-process inventory, equipment and other
costs in connection with Ballard Power Systems termination of the LVDS30
program. Net research and development sales are a result of additional
engineering services for the ChevronTexaco fuel reformer process controller and
development work on the Ford HVEC program. R&D revenues decreased to $405,000
from $978,000 for the quarter ended June 30, 2003 or 59% as a result of a shift
to more production programs.
Cost of sales for the three months ended June 30, 2003 increased to $1,202,000
compared to cost of sales of $1,160,000 for the same three-month period in 2002
representing a gross margin on revenues of approximately 14% in the second
quarter of 2003. The reduction in gross margins in the second quarter was caused
by the revenues generated from Ballard being primarily contractually mandated
costs on work-in-process, raw materials and equipment which did not contain
margins per the terms of the termination agreement.
Internal research, development and engineering expenses increased in the three
months ended June 30, 2003 to $339,000 as compared with $181,000 in the same
period in 2002. As noted in the first quarter of 2003, Enova continues to
allocate increased engineering resources to the development of its diesel
generation motor, upgraded proprietary control software, enhanced DC-DC
converters and advanced digital inverters and other power management firmware.
Selling, general and administrative expenses increased $393,000 to $966,000 for
the three months ended June 30, 2003 from the previous year's comparable period.
The majority of this increase was due to i) the additional allowance of $305,000
for uncollectible receivables from AVS (reference Part II, Item 1 below) and ii)
additional costs associated with the workforce and compensation reductions
15
as noted elsewhere in this Form 10-Q. Without these non-recurring charges,
general and administrative expenses for the current quarter would have been
comparable to those of the same quarter in 2002.
Interest and financing fees remained the consistent at approximately $55,000 for
the second quarter of 2003 and 2002.
We incurred a loss from continuing operations of $1,203,000 in the second
quarter of 2003 compared to a loss of $536,000 in the second quarter of 2002. As
noted above, this increase was primarily due to non-recurring costs in
connection with the AVS receivables and the workforce restructuring. 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 $95,837,000 at June 30, 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 six months ended June 30, 2003 and 2002, we had losses
from continuing operations of $1,946,000 and $1,241,000 respectively on sales of
$2,694,000 and $2,415,000, respectively.
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.
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), an evaluation was carried out by the Company's President, Chief
Executive Officer and acting Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of the end of
the quarter ended June 30, 2003. Based upon that evaluation of these disclosure
controls and procedures, the President, Chief Executive Officer and acting Chief
Financial Officer concluded that the disclosure controls and procedures were
effective as of the end of the quarter ended June 30, 2003 to ensure that
material information relating to the Company was made known to him particularly
during the period in which this quarterly report on Form 10-Q was being
prepared.
Changes in internal controls over financial reporting.
There was not any change in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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 of which approximately $564,000 is for components delivered during the
first quarter of 2003. During the second quarter, Enova was informed by AVS that
various vehicle manufacturing contracts which were anticipated to be completed
were terminated by AVS customers. Enova was therefore unable to obtain critical
vendor status for these contracts. Enova's Audit Committee chairman has been
appointed chairman of the creditor's committee formed by the Bankruptcy Court.
Enova believes it will recover a portion of the funds now owed by AVS; however
there are no assurances that we may recover any or all of these amounts owed. As
of June 30, 2003, we have reserved an additional $305,000 against these balances
owed as an allowance for uncollectible receivables bringing the total reserved
to date to $357,000. 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.
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Item 2. Changes in Securities and Use of Proceeds
As discussed in Note 3 to the financial statements and in the Liquidity and
Capital Resources section, we issued stock options to several employees in
connection with a workforce reorganization plan during the second quarter of
2003. The proceeds from the exercise of these options will be used for general
operations.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
99.1* Certification of the Chief Executive Officer / Acting Chief
Financial Officer, dated August 14, 2003 (This certification
required as Exhibit 31 under Item 601(a) of Regulation S-K
is filed as Exhibit 99.1 pursuant to SEC interim filing
guidance.)
99.2* Written Statement of the Chief Executive Officer / Acting
Chief Financial Officer, dated August 14, 2003 (This
certification required as Exhibit 32 under Item 601(a) of
Regulation S-K is furnished in accordance with Item
601(b)(32)(iii) of Regulation S-K as Exhibit 99.3 pursuant
to SEC interim filing guidance.)
* - attached herewith
(b) Reports on Form 8-K
The Company filed a report on Form 8-K under Items 7 and 9 dated May
28, 2003, reporting the announcement of the Company's earnings for the
first quarter of 2003.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2003
ENOVA SYSTEMS, INC.
(Registrant)
/s/ Carl D. Perry
- --------------------------------------------------------------------------------
By: Carl D. Perry, President, Chief Executive Officer and Acting Chief Financial
Officer
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