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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 September 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 November 13, 2003, there were 364,085,000 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.
1
INDEX
ENOVA SYSTEMS, INC.
Page No.
--------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).................................... 3
Balance Sheets:
September 30, 2003 and December 31, 2002............................ 3
Statements of Operations:
Three and nine months ended September 30, 2003 and 2002............. 4
Statements of Cash Flows:
Nine months ended September 30, 2003 and 2002....................... 5
Notes to Financial Statements:
Nine months ended September 30, 2003 and 2002....................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk........... 18
Item 4. Control and Procedures.............................................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 18
Item 2. Changes in Securities and Use of Proceeds........................... 20
Item 3. Defaults upon Senior Securities..................................... 20
Item 4. Submission of Matters to a Vote of Security Holders................. 20
Item 5. Other Information................................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................... 20
SIGNATURE ................................................................... 22
CERTIFICATIONS .............................................................. 23
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
September 30, December 31,
2003 2002
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 746 $ 1,868
Accounts receivable, net of allowance of $597,000 and $0 respectively 1,050 1,256
Inventory 1,315 1,652
Stockholder receivable 8 32
Prepaids and other current assets 158 107
-------- --------
Total Current Assets 3,277 4,915
PROPERTY, PLANT AND EQUIPMENT - NET 716 811
INVESTMENTS in JOINT VENTURE 1,000 0
OTHER ASSETS 430 498
-------- --------
TOTAL ASSETS $ 5,423 $ 6,224
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITES:
Accounts payable $ 1,022 $ 1,192
Line of credit 122 14
Accrued payroll and related expense 125 240
Other accrued expenses 136 95
Bonds and notes payable 120 120
-------- --------
Total Current Liabilities 1,525 1,661
ACCRUED INTEREST PAYABLE 1,048 889
CAPITAL LEASE OBLIGATIONS 27 55
LONG TERM DEBT 3,332 3,332
-------- --------
TOTAL LIABILITIES $ 5,932 $ 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 9/30/03 and 12/31/02 liquidating preference at $0.60 1,837 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 9/30/03 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; 373,837,000
and 345,194,000 shares issued and outstanding at 9/30/03 and 12/31/02 85,822 84,026
Common stock subscribed 44 130
Stock notes receivable (1,203) (1,203)
Additional paid-in capital 7,045 6,949
Accumulated deficit (96,488) (93,891)
-------- --------
Total Shareholders' equity (deficit) (509) 287
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 5,423 $ 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 Nine Months Ended
September 30 September 30
----------------------------------- -----------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET REVENUES
Research and development contracts $ 626 $ 219 $ 1,354 $ 1,513
Production $ 149 $ 1,101 $ 2,115 $ 2,222
------------- ------------- ------------- -------------
$ 775 $ 1,320 $ 3,469 $ 3,735
------------- ------------- ------------- -------------
COST OF REVENUES
Research and development contracts 563 175 1,219 1,210
Production 100 972 1,623 1,800
------------- ------------- ------------- -------------
663 1,147 2,842 3,010
------------- ------------- ------------- -------------
GROSS MARGIN 112 173 627 725
------------- ------------- ------------- -------------
OTHER COSTS AND EXPENSES:
Research & development 57 165 379 622
Engineering 101 0 606 0
Selling, general & administrative 548 561 2,081 1,748
Interest and financing fees 55 55 164 165
Other (income)/expense 3 37 3 82
Interest income (1) (10) (8) (16)
------------- ------------- ------------- -------------
Total other costs and expenses 763 808 3,224 2,601
------------- ------------- ------------- -------------
NET LOSS $ (651) $ (635) $ (2,597) $ (1,876)
------------- ------------- ------------- -------------
NET LOSS PER COMMON SHARE: $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 364,085,000 345,627,095 364,085,000 345,627,095
4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2003 2002
------- -------
OPERATIONS
Net loss $(2,597) $(1,876)
Adjustments to reconcile net loss to net cash used
by operating activities:
Change in Allowance of uncollectible receivable 595 0
Depreciation and Amortization 254 186
Stock and Stock Options issued for Services 140 (178)
Change in operating assets and liabilities:
Accounts receivable (389) (176)
Inventory 337 (566)
Stockholder receivable 24 (8)
Prepaids and other assets (64) (59)
Accounts payable and accrued expenses (85) 587
------- -------
Net cash used by operating activities (1,785) (2,090)
------- -------
INVESTING:
Purchases of property, plant and equipment, net of disposals (78) (612)
Investment in joint ventures (1,000) 0
------- -------
Net cash used by investing activities (1,078) (612)
------- -------
FINANCING:
Borrowing (Repayments) on leases and notes payable (28) 33
Borrowing on line of credit 108 0
Proceeds from issuance of common stock 1,661 4,210
------- -------
Net cash provided by financing activities 1,741 4,243
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,122) 1,541
CASH AND EQUIVALENTS:
Beginning of period 1,868 1,179
------- -------
End of period $ 746 $ 2,720
======= =======
5
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30
----------------
2003 2002
----- -----
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services $ 44 $ 12
Conversion of Series A preferred stock to common stock $ 5 $ --
6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Nine Months Ended September 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 September 30, 2003 and the interim
results of operations and cash flows for the three and nine months ended
September 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 September
30, 2003 and December 31, 2002 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 reclassifications have been made
to the prior periods financials statements to conform with the current periods
presentation. 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 nine months ended September 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):
September 30, December 31,
2003 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 September 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
No additions were made to the sinking
fund with respect to the equity
investment from Hyundai Heavy
Industries, Co. Ltd (refer to Note 6)
at the investor's option 3,332 3,332
Other 120 120
------ ------
Less current maturities 3,452 3,452
Total 120 120
------ ------
$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. During the quarter ended September 30, 2003, the remaining
$78,887 was charged to compensation expense.
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).
8
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.
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 Months Three Months Nine Nine
Ended Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
Net loss for the quarter $ (414) $ (635) $(2,360) $(1,876)
Compensation expense, net of tax effect $ (229) $ (49) $ (308) $ (148)
Proforma net loss $ (643) $ (684) $(2,668) $(2,024)
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 Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Dividends 0% 0% 0% 0%
Expected volatility 88% 83% 88% 83%
Risk-free interest rate 4.0% 4.0% 4.0% 4.0%
Expected life 3 years 5 years 3 years 5 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. We invoiced Ballard for
approximately $952,000 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 of 2003. In October 2003, Enova and Ballard reached a settlement on all
remaining balances due wherein Enova will receive $198,125 in cash and title to
all inventory, raw materials, tooling and equipment in its
9
possession that is associated with the program. The Company intends to sell such
in the resale markets. The Company believes that the resale market value of the
inventory and equipment will amount to at least the value of the remainder
balance of the receivable of approximately $173,000.
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 and was therefore unable to collect on
post-filing offset agreements. 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 September 30, 2003, we have reserved an additional $237,000 against these
balances owed for a total of $595,000 as an allowance for uncollectible
receivables.
Note 6 - Hyundai-Enova Innovative Technology Center
In September 2003, Enova and Hyundai Heavy Industries, Co. Ltd. (HHI) funded the
Hyundai-Enova Innovative Technology Center (HEITC) to be located at Enova's
Torrance headquarters. In connection with the Joint Venture Agreement entered
into between the two parties in March 2003, HHI purchased $1,500,000 of common
stock of Enova Systems, Inc. HHI purchased 23,076,923 shares representing a 6.2%
ownership in Enova, Inc. Of this amount, Enova invested $1,000,000 in the HEITC
for a forty percent (40%) ownership interest. HHI invested an additional
$1,500,000 for a sixty percent (60%) ownership interest in the HEITC.
Furthermore, in June of 2004, HHI will invest an additional $3,000,000 in Enova
and HEITC under the same terms as the initial investment, subject to stock price
adjustments, in accordance with the Joint Venture Agreement. The joint venture
company officially opened in November 2003 to pursue advanced research and
development in hybrid automotive and stationary applications for fuel cell
technologies.
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 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
10
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 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
11
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.
The Company has been experiencing a gradual shift to more development work as
demand for drive systems has tapered off in the second half of the year.
Management believes that this trend will continue for the remainder of 2003;
however, Enova's customer base has notified the Company of their intent to
purchase additional drive systems in early 2004.
The Company has received much greater recognition from both governmental and
private industry with regards to U.S. military applications of its hybrid drive
systems and fuel cell power management technologies and believes that current
negotiations with several parties will result in development contracts in the
fourth quarter of 2003 and beyond; however at this time; there are no assurances
that such additional contracts will be consummated.
During the quarter ended September 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 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, the U.S. Air Force and the U.S.
Department of Transportation (DOT) as well as developing new programs with
Hyundai Motor Company (HMC), the U.S. government and other private sector
companies for hybrid and fuel cell systems.
Heavy-Duty Drive Systems - Buses and Truck for Urban operators
Heavy-duty drive system sales continue to be a primary strategy of Enova. Our
Panther(TM) 120kW and Panther(TM) 240kW drive systems are developed completely
in-house and are in production and operating in global markets. Sales of our
Panther(TM) 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 components for our Panther 120kW hybrid
electric drive systems in the third quarter of 2003 for service and maintenance
of its fleet of 42 buses powered by Panther 120kw drive systems. Eco Power is
one of the largest integrators of medium size transit buses for the European
shuttle bus market, with key customers in five cities Italian cities including
Turin, Genoa, Brescia, Ferrara and Vicenza. For the quarter ended September 30,
2003, we billed approximately $75,000 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. During the quarter, Enova successfully integrated
its Panther 120kW system into a heavy-duty Isuzu dump truck. This is in addition
to the three Tomoe passenger trams currently in service in Okinawa. We
anticipate additional orders for these systems in 2003 and 2004. At this time;
however, there are no assurances that such additional orders will be
forthcoming.
12
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, has integrated our hybrid electric
Panther(TM) 120kW drive system into two of its buses with utilizing a 30kW
Capstone microturbine as their power source. These buses have been in field
service in several major cities throughout the United Kingdom and are performing
to specifications. Wrights has indicated to Enova that they intend to purchase
production drive systems in early 2004. At this time; however, 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 and 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.
The City of Honolulu has contracted with Enova to upgrade several S-10 trucks in
its electric vehicle fleet. During the third quarter, we completed the upgrade
of 3 trucks to our Panther 90kW drive system. Two additional vehicles are
currently being upgraded. In the quarter ended September 30, 2003, this program
generated $81,000 in revenues.
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. Enova received a purchase order for 36
production system in the third quarter for delivery in the first quarter of 2004
valued at approximately $410,000.
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.
For the quarter ended September 30, 2003, we billed approximately $296,000 for
this program.
13
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.
Enova has commenced development for Hyundai Motor Company on fuel cell power
management and conversion components for Hyundai's latest Santa Fe fuel cell
vehicle. For the quarter ended September 30, 2003, Enova billed approximately
$37,000 for this program. Enova has entered into a development contract with
Hyundai Motor Company for their next generation Santa Fe fuel cell vehicle. This
program will continue through the second quarter of 2004 and is estimated to
generate approximately $400,000 in revenues for Enova.
Several other programs are in final negotiations or discussion in conjunction
with the U.S. Navy, U.S. Air Force, and several other government agencies and
private corporations. We anticipate commencing work on these contracts in the
fourth quarter of 2003. There can be no assurances at this time, however, 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.
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.
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 performed above the
customer's expectations. We are now completing the second phase of this program.
For the three months ended September 30, 2003, Enova has billed ChevronTexaco
$223,000.
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 sources. We anticipate that we may require
additional outside financing within the next six months to meet research,
development and general operations expenditures through 2004.
In the third quarter of 2003, management continued to re-assess current resource
allocations and overhead costs. Due to the loss of the Advanced Vehicle Systems
(AVS) programs - please refer to Part II, Item 1, Legal Proceedings - and an
overall slowdown in heavy-duty drive system purchases, Enova's management
analyzed current processes and budgets for potential targets for cost reduction.
As a result of this analysis, management implemented several cost reduction
programs including personnel reductions, work-week modifications and other cost
reduction endeavors to achieve these
14
goals. Personnel levels have been reduced to 30 employees from 45 at December
31, 2002. In early October 2003, management discontinued its modified
compensation plan for full-time salaried employees [See Note 3]. These employees
have had their prior pay levels re-instated. The company continues to realize a
reduction in monthly cash outlays of approximately $120,000 compared with the
monthly average for the first six months without impact to our current
operations.
During the nine months ended September 30, 2003, we spent $1,122,000 in cash on
operating activities to fund our net loss of $2,597,000 resulting from factors
explained in the following section of this discussion and analysis. Accounts
receivable increased by $389,000 from December 31, 2002 balances as the Company
billed for development contracts and production sales and also awaited final
settlement on the Ballard receivables. Inventory decreased by $337,000 from
December 31, 2002 to September 30, 2003 primarily due to charges against cost of
sales for those inventories related to the terminated Ballard program which were
billed to them and from other sales of production systems.
Current liabilities decreased by a net of $92,000 from December 31, 2002 to
September 30, 2003 due primarily to reductions of outstanding vendor payables
primarily due Hyundai Heavy Industries in connection with additional power
management and conversion component inventory and Hyundai Autonet for materials
associated with the terminated Ballard/Ford Th!nk city program.
Capital lease obligations decreased by $28,000 during the nine months ended
September 30, 2003, from December 31, 2002, also due to scheduled payments of
these liabilities.
Interest accruing on notes payable increased by $159,000 for the nine months
ended September 30, 2003 from December 31, 2002 per the terms of our notes
payable. During the month of July 2003, interest accruing on the CMAC note of
$3.3M changed to a rate of prime plus 3% which will continue through the date of
maturity of the note in 2016.
The operations of the Company during the third 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 September 30, 2003 were $775,000 as
compared to $1,320,000 for the corresponding period in 2002. Net production
sales for the quarter ended September 30, 2003 decreased to $149,000 from
$1,101,000 in the same period in 2002. The decrease in production revenues is as
result of several major customers delaying orders to late 2003 or early 2004.
The Company has been experiencing an increase in development contract activity
which has offset this decline in production revenues. Research and development
revenues nearly tripled to $626,000 from the same period in 2002. Net research
and development sales are a result of additional engineering services for the
ChevronTexaco fuel reformer process controller and the HEVDP Hickam fuel cell
bus program.
Cost of sales for the three months ended September 30, 2003 decreased to
$663,000 compared to cost of sales of $1,147,000 for the same three-month period
in 2002. The decrease in cost of sales is directly attributable to lower sales
volumes for the quarter.
15
Internal research, development and engineering expenses decreased in the three
months ended September 30, 2003 to $57,000 as compared with $165,000 in the same
period in 2002. Due to an increase in externally funded development programs and
the decrease in the Company's workforce, Enova has allocated less of its own
funds to new product development. Enova continues to allocate increased
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. The Company is utilizing external
funding, however, for a greater percentage of these development costs.
Selling, general and administrative expenses, net of additional reserves for
uncollectible accounts receivable of $237,000 [see Note 5] decreased $250,000 to
$311,000 for the three months ended September 30, 2003 from the previous year's
comparable period. The decrease is a direct result of management's cost
reduction strategies which the Company is striving to maintain in order to reach
breakeven in 2004, although management cannot assure that breakeven will be
attained.
Interest and financing fees remained the consistent at approximately $55,000 for
the third quarter of 2003 and 2002.
We incurred a loss from continuing operations of $651,000 in the third quarter
of 2003 compared to a loss of $635,000 in the third quarter of 2002. Without the
additional allowance for uncollectible receivables of $237,000, the net loss
would be $418,000 for the third quarter of 2003. As noted above, this decrease
was primarily due to aggressive cost reduction strategies implemented by
management and workforce restructurings. 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.
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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 $96,488,000 at September 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 nine months ended September 30, 2003 and 2002, we had
losses from continuing operations of $2,597,000 and $1,876,000 respectively on
sales of $3,469,000 and $3,735,000, 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.
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
17
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 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 September 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 September 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 September 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 were terminated by AVS customers and was
therefore unable to collect on post-filing offset agreements. 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
18
funds now owed by AVS; however there are no assurances that we may recover any
or all of these amounts owed. As of September 30, 2003, we have reserved an
additional $237,000 against these balances owed for a total of $595,000 as an
allowance for uncollectible receivables.
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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 under the 1996 Employee Stock
Option Plan to several employees in connection with a workforce reorganization
plan during the second quarter of 2003 which vested during the third quarter of
2003. Our board of directors adopted the 1996 Employee Stock Option Plan in
October 1996 which was subsequently approved by our shareholders in May, 1997.
The underlying shares for these options were registered via a Form S-8 on
January 28, 2000 with the Securities and Exchange Commission. The proceeds from
the exercise of these options will be used for general operations.
In September 2003, the Company issued 23,076,923 shares of common stock to
Hyundai Heavy Industries Co., Ltd. in exchange for $1,500,000 in cash.
$1,000,000 of the proceeds from this issuance were used to fund Enova's
$1,000,000 joint venture interest in the Hyundai-Enova Innovative Technology
Center as previously noted, with the balance of the $500,000 in proceeds to be
used for general operations and working capital. The Company relied upon
Regulation D, Rule 506 promulgated by the Securities and Exchange Commission as
the exemption from registration for the issuance of these shares.
During the nine months ended September 30, 2003, the Company has issued or
accrued common stock of Enova Systems to the non-executive board directors in
accordance with the September 1999 Board of Directors compensation package for
outside directors. For each meeting attended in person, each outside director is
to receive $1,000 in cash and $2,000 of stock valued on the date of the meeting
at the average of the closing ask and bid prices; for each telephonic Board
meeting, each outside director is to receive $250 in cash and $250 of stock
valued on the date of the meeting at the average of the closing ask and bid
prices; for each meeting of a Board committee attended in person, the committee
chairperson is to receive $500 in cash and $500 of stock valued on the date of
the meeting at the average of the closing ask and bid prices. As of January
2002, this package was amended to include like compensation of $500 in cash and
$500 in stock to all committee members in attendance at each committee meeting.
During the nine months ended September 30, 2003, 555,556 shares of common stock
were issued to the Board of Directors at prices ranging from $0.07 to $0.09 per
share for full board meetings and committee meetings during that period. As of
September 30, 2003, 2,639,918 shares had been issued under the above
compensation plan for Directors.
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:
31.1* Certification of the Chief Executive Officer / Acting Chief
Financial Officer, dated November 14, 2003 (This certification
required as Exhibit 31 under
20
Item 601(a) of Regulation S-K is filed as Exhibit 99.1
pursuant to SEC interim filing guidance.)
32.1* Written Statement of the Chief Executive Officer / Acting
Chief Financial Officer, dated November 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
None
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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: November 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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